CENVAT Credit Scheme – SK Patodia

CENVAT Credit Scheme

Value Added Tax (VAT) concept was developed to avoid cascading effect of taxes. VAT mechanism allows setting off of taxes already paid on procurements resulting in levy of tax restricted to the value added. Thus VAT mechanism acts as transparent tax collection and with better administration, resulting in reduction in tax evasion and effective tax compliance.

Modified Value Added Tax (MODVAT) was introduced in 1986 to allow credit / set off on specified inputs used in manufacture of excisable goods. The scheme was expanded and credit of duty paid on capital goods was also brought under the scheme in the year 1994. The scheme was renamed CENVAT Credit scheme in the year 2000.

The Central Government introduced the levy of tax on services from the year 1994. With amendment to Section 94(2) of Finance Act, 1994 in the year 2002, giving powers to Central Government to make rules relating to credit of Service tax, Central Government introduced Service Tax Credit Rules, 2002 vide Notification no. 14/2002 dated 01.08.2002. This scheme was similar to CENVAT scheme but was limited only on credit on input service used in providing taxable output services.

The CENVAT credit scheme allows a manufacturer as well as a service provider to avail credit of duty of excise paid on inputs or capital goods and service tax paid on input services. Such credit could be utilized for payment of duty of excise on final products or service tax on the taxable output services provided by them.

This could be illustrated by a flowchart as under:

Credit of duty is eligible only on the goods which qualify as capital goods or inputs and credit of service tax is eligible only on services which qualify as input services.

The Basic Conditions for Taking Cenvat Credit are as Follows:

  • There should be ‘manufacture’ or provision of taxable output service
  • Inputs (Goods) should be used in or in relation to manufacture of final product or for provision of taxable output servi
  • Input Service should be utilised for manufacture of final product or provision of taxable output servic
  • Cenvat Credit is available for taxes and duties specified in rules 3(1)
  • No Credit is available if Final product is exempt from duty or tax
  • If Capital Goods is used partially for manufacture of exempted goods and taxable goods then in such case full Cenvat Credit is allowed. Whereas in case of input & input services it is proportionately allow
  • Credit is availble on the basis of specified documents only
  • Cenvat Credit should be taken within 12 months from date of issue of any duty paying document

(time limit is only for ‘taking credit’, Credit can be utilised at any time without any time limit)

The Conditions for Allowing CENVAT CREDIT, as Specified in Rule 4 are as Follows:

  • Cenvat Credit on inputs is avilable as soon as inputs are received in the factory of manufacturer or premises of the provider of output service
  • Cenvat Credit of goods can be taken upto 50% in the financial year in which capital goods are received and balance in subsequent years
  • SSI units can avail entire 100% Cenvat Credit on Capital Goods in first year itself
  • Cenvat Credit of input services is allowed on receipt of invoi However, if payment is not made to service receiver within three months, the Cenvat Credit is required to be reversed.
  • Cenvat Credit of capital goods is allowable even if the capital goods are aquired on lease, hire purchase or loan. However, assesse should not claim depreciation on the excise portion of value of capital good
  • Inputs and capital goods can be sent outside for job work but should be brought back within 180 d
  • Cenvat Credit is available on jigs, fixtures, moulds and dies even if sent to job worker for production of goods on behalf of manufactu
  • If inputs or capital goods before being put to use are written off fully or partially, the manufacturer or service provider is required to pay an amount equal to Cenvat Credit taken in respect of such inputs or capital good
  • Additional custom duty of 4% u/s 3(5) (Note: Cenvat credit of this duty can not be utilised against service tax liability)