Changes in CENVAT Credit Rules, 2004 in Budget 2011

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From: Parthiv Mehta <parthivtmehta@gmail.com>


A number of changes have been brought about in CENVAT Credit Rules, 2004 (Notification 3/2011-CE (NT) dated 01.03.2011). The changes in CENVAT Credit Rules are guided, inter-alia, by the following considerations:

1. Describe the scope of eligible inputs and input services more clearly so as to minimize disputes in their interpretations;
2. Eliminate distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes;
3. Provide a practical scheme for the segregation of CENVAT credits used in respect of final products and output services where they are partially exempted with condition that no such credits shall be taken;
4. Liberalize the provisions in certain areas to meet the legitimate demands of business;

Details ofimportant changes made in CENVAT Credit Rules, 2004 related to Service Providers are given in the following paragraphs.

I. Expansion in the Scope of Exempted Services:-
W.e.f. 01.04.2011, exempted services also includes:-

1. taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. In simple terms that part of taxable services whose abatement has been claimed will be treated as exempted service. For example if a cab operator has rendered taxable services of Rs. 10 Crore and has claimed abatement under Notification 01/2006 then abated portion of the turnover i.e. 6 Crore (10 Crore*60% ) will be treated as exempted service.
2. Trading Activity. Value of exempted service would be equal to difference between sale price and purchase price (provided under Explanation inserted under Rule 6 of CENVAT Credit Rules, 2004)

II. Input Services:-

Definition of input services has been substituted by new one. New definition will be applicable from 01.04.2011.

In nutshell following four changes are made vide new definition:-

1. CENVAT Credit of services related to Setting up of Business will not be allowed w.e.f. 01.04.2011:-The word "setting up" has been deleted. Due to the deletion of this word CENVAT Credit of input services used for setting up of business will not be available to the service provider. In brief earlier we were claiming CENVAT Credit of services procured prior to commencement of operations. Now after 01.04.2011 CENVAT Credit of such services will not be available to service provider.
2. Scope of input services has been restricted by deleting the phrase "activities relating to business such as":-The phrase "activities relating to business such as" has been deleted. Earlier due to this phrase we always says definition of input services is wide enough to cover, in addition to services used for providing output services, all services relating to business. Meaning thereby service of any nature if used for business purposes is eligible for CENVAT Credit. Therefore w.e.f. 01.04.2011 CENVAT Credit of only services covered under specified activities is eligible under inclusive part.
3. Services of business exhibition and legal service has been included in the inclusive part.
4. CENVAT of specified services will be available in specified cases:-Certain services have been specified in respect of CENVAT Credit will available if these are used for providing specified services. These cases are:-

1. Denial of CENVAT Credit in relation to Construction Sector:-CENVAT Credit of Architect Service, Port Service, Other Port Service, Airport Service, Commercial or Industrial Construction Service, Construction of Complex Service, and Work Contract Service (herein after referred as specified services) will not be allowed if these services are used for

1. construction of building or civil structure of a part thereof, or
2. Laying of foundation or making structure for support of capital goods

However, CENVAT Credit will be allowed if these services are used for providing specified services mentioned above. This can be easily understood with the help of diagram provided in Annexure-A.

2. Services related to Motor Vehicles:-
   CENVAT Credit of General Insurance Service, Rent-a-Cab Service, Authorised Service Station Service, Supply of tangible goods services related to motor vehicle will be allowed only when motor vehicle is used by following service providers:-

1. Courier Service,
2. Tour Operator Service,
3. Rent-a-Cab Service,
4. Cargo Handling Service,
5. Transport of Goods by Road,
6. Outdoor Caterer Service,
7. Pandal or Samiana Service

3. Services used for personal use or consumption of employees:-CENVAT Credit of services used for personal use or consumption of employees will not be allowed. A list of specific services has also been given by way of example in the definition. These specific services are:-

1. Outdoor Catering,
2. Beauty Treatment,
3. Health Service,
4. Cosmetic and plastic Service,
5. Membership of Club,
6. Health and fitness Center,
7. Life Insurance and Health Insurance,
8. Travel Benefits extended to employees on vacation

III. Amendment in Rule 6:-

1. In case assessee is not maintaining separate books of accounts then w.e.f. 01.04.2011, he can opt any one of the following option:-

1. Pay an amount equal to 5% of exempted services.
2. Pay proportionate amount on the basis of turnover of last F.Y.
3. Maintain separate books of accounts used for taxable activities and exempted activities and adopt proportionate method for input services used for exempted activities. In brief, for inputs use same method as provided in Rule 6(2) and for input services adopt proportionate method.

2. Valuation for Rule 6(3) & 6(3A) in case assessee is paying service tax at specified rates:-
   
   The value in respect of services of air travel agent or services in relation to purchase or sale of foreign currency services or Rule 6(7C) of Service Tax Rules and paying tax at specified rates and those who has opted work contract composition scheme, will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption e.g. in case assessee has opted composition scheme in respect of output services of Rs. 10 Crore then value should be 10 Crore* 4.12%/10.3%.
3. Valuation for Rule 6(3) & 6(3A) in case of trading activity:-
   The value of trading service shall be the difference between the sale price and purchase price of goods.
4. Rule 6(5) which provide 16 services in respect of which CENVAT Credit is fully allowed even if these are also used for providing exempted services, has been deleted w.e.f. 01.04.2011.
5. Rule 6 not apply in case of services provided to SEZ:-
   Rule 6(6A) has been amended to include provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations. Therefore w.e.f. 01.03.2011 provision of Rule 6 will not apply in case of services provided to SEZ units or developer for authorized operations in SEZ.
6. Special Provisions for Banking Company or Financial Institutions and Life Insurance or Management of ULIP Service:-
   A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers.
   
   In nutshell, these specified assessee's will firstly claim CENVAT Credit of all eligible inputs and input services and thereafter will have pay 50% or 20%, as the case may be, of CENVAT Credit availed. Also nothing has been mentioned for CENVAT Credit on capital goods, therefore no need to reverse CENVAT Credit taken on capital goods.
   
   Annexure-A 

With Warm Regards

Atul Kumar GuptaFCA, AICWA
Former Chairman-NIRC of ICAI
Former Chairman-NIRC of ICWAI
Author-Introduction to "Service Tax"
Mobile No. : 9810103611

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Regards,
Parthiv Mehta