GUEST COLUMN

 

Union Budget 2016 - Rule 6 of CENVAT Credit

 

By

CA Pratik Shah - Partner, SKP Business Consulting LLP

CA Jigar Doshi - Partner, SKP Business Consulting LLP

CA Anuradha Mantri - Executive, SKP Business Consulting LLP

 

In continuation of our article series on CENVAT Credit Rules, 2004 (CCR), amendments proposed in the Budget 2016, we plan to decode the finer nuances of Rule 6 of CCR through this article. Rule 6 of CCR provides for reversal of credit in respect of inputs and input services used in manufacture of exempted goods or for provision of exempted services. This rule has been redrafted with the objective of simplifying and rationalizing the same without altering the established principles of reversal of such credit.

 

Let’s analyse these changes (as applicable from 1 April 2016) in the following paras:

 

Rule sub rule 6(1) of CCR is being amended to first state the existing principle that CENVAT Credit shall not be allowed on such quantity of input and input services as is used in or in relation to manufacture of exempted goods and exempted service.

 

Rule 6(2) of CCR is being amended to provide that a manufacturer who exclusively manufactures exempted goods for their clearance up to the place of removal or a service provider who exclusively provides exempted services shall pay (i.e. reverse) the entire CENVAT credit and effectively not be eligible for Credit of any inputs and input services used.

 

Rule 6(3) of CCR provides two options for reversal of CENVAT Credit when manufacturer manufactures both goods (taxable and exempt) and provider of output services provides both services (taxable and exempt):-

 

a.    Pay an amount equal to 6% of value of the exempted goods and 7% of value of the exempted services, subject to a maximum of the total CENVAT Credit taken

b.    Pay an amount as determined under sub-rule (3A)

 

SUB-RULE (3A)

Now, sub-rule (3A) provides that no CENVAT Credit of inputs or input services used exclusively in manufacture of exempted goods or for provision of exempted services shall be available. However, full CENVAT Credit of input or input services used exclusively in final products excluding exempted goods or output services excluding exempted services shall be available.

 

Credit left thereafter is common CENVAT Credit and shall be attributed towards exempted goods and exempted services by multiplying the common Credit with the ratio of value of exempted goods manufactured or exempted services provided to the total turnover of exempted and non exempted goods and exempted and non-exempted services in the previous financial year. Final reconciliation and adjustments are provided for after close of financial year by 30th June of the succeeding financial year, as provided in the existing rule.

 

PROCEDURAL SIMPLIFICATION

A new sub-rule (3AA) is being inserted to provide that a manufacturer or a provider of output service who has failed to follow the procedure of giving prior intimation, may be allowed by a Central Excise officer, competent to adjudicate such case, to follow the procedure and pay the amount prescribed subject to payment of interest calculated at the rate of fifteen per cent Per Annum

 

A new sub-rule (3AB) is being inserted as transitional provision to provide that the existing rule 6 of CCR would continue to be in operation upto 30.06.2016, for the units who are required to discharge the obligation in respect of financial year 2015-16.

 

BANKS, FI’S AND NBFC’S

Sub-rule (3B) of rule 6 is being amended so as to allow banks and other financial institutions to reverse CENVAT Credit in respect of exempted services on actual basis in addition to the option of 50% reversal.

 

CAPITAL GOODS

It is provided that if the capital goods are used for the manufacture of exempted goods or provision of exempted service for two years from the date of commencement of commercial production or provision of service, no CENVAT Credit shall be allowed on such capital goods. Similar provision is being made for capital goods installed after the date of commencement of commercial production or provision of service.

 

SHIPPING LINE

It is also provided that that credit taken on inputs and input services used in providing a service by way of “transportation of goods by a vessel from customs station of clearance in India to a place outside India” shall not be required to be reversed by the shipping lines. Presently this service qualifies as an “exempted service”, however, the same being excluded from the definition of “exempted service” by amending rule 2(e) of CCR.

 

SUMMARY

It is commendable that Finance Bill, 2016 has recognized anomalies in the said rules in due time and have made an effort to simplify the same. Amendments in Rule 6 (3B) of CCR for instance will help many Banks to optimize their input credits as they will now have an option to select between usage of Rule 6(3B) or not. Similarly changes in Rule 2(e) of CCR shall also augur well with those engaged in the business of shipping line. However there is an ambiguity with regard to what would constitute an exempt service for Rule 6 since as per the explanation inserted in Rule 6(1) exempt service would also include any activity which is not a ‘service’ as per Section 65B (44) of Finance Act, 1994. Accordingly it could be construed that exclusions given in meaning of the term ‘service’ such as transaction in money, transfer of goods by way of gift, services provided by employee to employer, etc may be considered as exempt service and quantum of the same should be considered for reversing credit. The same would adversely affect the credit pool as the businesses having investments, deposits with banks, Advances given, etc may have to consider the value for the purpose of computing exempt service and applying reversal. It should be noted that aforesaid impact is not clarified/discussed in the Tax Research Unit (TRU) letter issued on 29th February 2016 and hence an immediate clarity on the same should be given as the provisions are applicable from 1st April 2016.

 

Please click here to view Part-I of this article

 

Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose, it doesn’t constitute professional advice or recommendation.