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Budget 2014: Cenvat Credit Rules Need Fixing

Published on Mon, Jul 07,2014 | 22:03, Updated at Mon, Jul 07 at 22:03Source : 

By: Anjlika Chopra, Director & Ankur Bansal, Manager, Deloitte India

With all eyes set on the upcoming Union Budget 2014-15 that would be presented by Narendra Modi led Government on July 10, 2014, manufacturing and service industries are hopeful that certain indirect-tax issues presently troubling their business operations would be addressed. One such major issue is the revision in the basic structure of the Cenvat Credit Rules, 2004 (‘CCR Rules’), so as to ensure smooth flow of Cenvat credit of tax paid on various inputs, input services and capital goods.

Initially, the notification of the Cenvat credit scheme was whole-heartedly welcomed by various manufacturing and service sector assessees operating in India, as these assessees could avail benefit of this scheme and set-off the tax/ duty paid on inputs, input services and capital goods procured by them against their output tax/ duty liability and thereby, reduce the cascading effect of tax. Till date, the rationale behind notification of the CCR Rules remains the same i.e. reducing the cascading effect of tax by providing Cenvat credit of tax paid at the input stage; however, the general text of the CCR Rules and the innumerable amendments made thereto have made the implementation of this simple and straight-forward rationale a rather difficult task. As a result, most assessees seeking to avail the benefit of CCR Rules are not only unsuccessful in this venture, but also get caught up in blocking huge amounts in litigation proceedings, which clearly, cannot be the intention of a beneficial taxing scheme like the Cenvat credit scheme!

Amongst the various provisions in the CCR Rules, it is the definitions of ‘input’ and ‘input services’ that warrant a review, in order to align them with the main objective of the rules. The need for review arises due to the fact that exclusive portion of these definitions has the effect of denying Cenvat credit of tax/ duty paid on certain common procurements such as construction material, services availed by employees etc., that form a major portion of the cost incurred by the manufacturers and service providers. Moreover, considering that, most of the goods and services on which Cenvat credit is restricted are used, directly or otherwise, in the manufacturing or service activities of the companies, the rationale behind the exclusion of these procurements is neither clear nor seems justified.

The ill-effects of these restrictive definitions may be better understood by considering the example of a manufacturer seeking to establish a new factory in order to further expand its business operations. In this case, a major portion of the cost incurred, would be on procurement of goods and services that would be used for making the structure of the capital goods required in the factory. However, these goods and services have been expressly excluded from the purview of ‘input’ and ‘input services’ respectively and hence, the manufacturer would not be able to claim Cenvat credit of the tax/duty paid on these procurements, even though the same would be a pre-requisite for carrying out the manufacturing activities of the company. Another apparent exclusion from the ambit of inputs/ input services is vehicle running expenses like petrol/ diesel or rental charges paid towards utilization of motor vehicles in carrying out day-to-day activities for smooth functioning of business, which in no way can be termed as services not utilized towards business activity. Thus, these Cenvat credit restrictions not only result in increase in the cost incurred by the assessees in their business operations, but also conflict with the main objective of the CCR Rules.

It would also be significant to note that the introduction of the negative list regime of service tax has widened the scope of services that are exigible to service tax. As a result, assessees are liable to pay service tax on most services received/provided by them, irrespective of the category of taxable service. However, the present Cenvat credit regime has not kept pace with the widening service tax ambit!

Thus, the upcoming Union Budget has a lot to take care of, as far as streamlining the basic structure of the CCR Rules is concerned.  We hope that the budget effectively revives the CCR Rules and allows for Cenvat credit to be taken without any restriction on all services/inputs/capital goods on which tax has been paid, so that an accessible and tax-friendly business mechanism is created in India!


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