R S Sharma : Credit Rules butchered in Budget 2011-12
CENVAT Credit Rules have been butchered and slaughtered as there is a sea change in definition of “input service” which restricts a free hit by manufacturers and service providers. FM has stated in Budget Speech that CENVAT Credit scheme provisions have been modified to achieve a more realistic balance between input credits and output tax and harmonising the provisions of the scheme across goods and services; but the amended provisions may open a Pandora’s Box of litigation for manufacturers and service providers who were hitherto enjoying credit on all activities related to business.
The definition of “input service” under CENVAT Credit Rules, 2004 has been amended vide Central Excise Non-Tariff Notification No.3/2011 .The new definition of “input service” has silently deleted the following terms:
( i ) setting up of factory
( ii ) activities relating to business,
( iii ) such as
Therefore, the credit is no more admissible on services used in setting up of factory and activities related to business. Further, the deletion of the term “such as” has been done with intention to disallow credit on all other activities which are not specifically covered within the definition and scope of “input service”.
Further, the definition of “input service” provides a negative list of services on which credit will not be admissible to a manufacturer or service provider. The negative list includes the services of Architects, Port Service, Other Port service, service provided in Airport, commercial or industrial construction service, construction of complex service and works contract service, in so far as they are used for construction of a building or a civil structure or a part thereof; or laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the above said specified services; and services of general insurance, renting of cab service, repair and maintenance of vehicles service and service in relation to supply of tangible goods including machinery, equipment and appliances for use , in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; and services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.
The new additions in the definition of “input service” are:
( i ) business exhibition
( ii ) legal services
The availment of credit on Mobile and phone service was a settled issue as it was an activity related to business; but post amendment this has become a questionable issue. One to one co-relation of input service with manufacturing/output service has not been the norms in the past but henceforth each and every activity of input service will be required to be justified as there is no general term like “activities related to business” which gave a cover to all services for qualifying as “input service”
Another painful amendment is omission of sub-rule(5) of Rule 6 in CENVAT Credit Rules and henceforth 100 per cent credit of specified services cannot be availed on common input services. Further, trading has been notified as “exempted service”
which will attract the reversal provisions of Rule 6 based on turnover of trading in case of availment of credit on common services.
The Rules are always amended for simplification of laws but they always lead to more and more complication and litigation. I am already handling over 100 matters relating to dispute on eligibility of credit under “input service”. Post Budget; I expect this number to triple in next couple of months. Consultants are already greatful to FM for bringing 130 commodities under excise net; they will also always remain indebted to FM for the amendments as their billing is going to shoot in 2011-12 thanks to Budget provisions.