Important features of Changes/Amendments made

Important features of Changes/Amendments made

 in Budget -2011-12 pertaining to Excise, Service Tax and Cenvat Credit

 

I Central Excise Duty.

1.1 The interest payable, under section 11AA and 11AB of CEA’44 on delayed payment of excise duty on clearances from the date due till the date of actual date of payment (as against the existing provision of payment from the first date of the month succeeding the month in which the duty ought to have been paid)   is increased to 18% per annum in lieu of 13% which exists upto 31-03-2011. Hiked rate of interest is effective from 01-04-2011.

1.2.1 A new category has been created from the cases involving extended period of limitation (fraud, collusion, willful mis-statement etc,).  A lower rate of mandatory penalty of 50%  of the duty  is proposed instead of 100% of the duty.  This is applicable to those cases where it is noticed during the verification or investigation or audit that the duty has not been levied, short levied, not paid or short paid or erroneously refunded and the related accounting records contains proper entries of these transactions.

1.2.2Even in the cases where the issuance of show cause notice under the provisions of section 11AC invoking the extended period of limitation (fraud, collusion, willful mis-statement etc,) is contemplated, the penalty equivalent to 50% of the duty can be remitted subject to the view/opinion of the Central Excise Officer that the details of the transactions in respect of which above show cause notice is contemplated have been properly entered in the books of accouts/specified records by the assessee.

1.2.3The facility of compounding the penalty amount is confined only to the above new category.  If the assessee chargeable with duty (for extended period) pays the duty in full or part alongwith interest before the issuance of show cause notice, the penalty shall stand reduced to 1% per month but not exceeding 25% of the duty. 

1.2.4However, if the assessee pays the duty along with interest within 30 days of theissuance of adjudication order, the penalty would be 25% of the duty.

1.3  A new section 11E is being inserted in the Central Excise Act to create a first charge on the property of a defaulter for recovery of Central Excise dues subject to the provisions of the Companies Act, Recovery of Debt due to Bank and Financial Institution Act, 1993 and

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This implies that after the dues, if any, owing under these provisions, dues under the Central Excise Act shall have a first charge.

 

1.4 The first schedule to the Central Excise Tariff is being amended to carry out following changes, with immediate effect i.e, from 01-03-2011:

1. The process of repacking from bulk to retail packs, labeling or relabeling of containers or adoption of any other process to render the product marketable shall be a process amounting to manufacture.
2. The process of conversion of ore into concentrates shall be a process amounting to manufacture.
3. The process of refining of gold dore bars shall be a process amounting to manufacture.
4. The process of galvanisation shall be a process amounting to manufacture.

 

II.Service Tax

1. Following two new services are proposed:

 A.   Services by Air Conditioned restaurants having license to serve liquor.

 A.1 Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.

 

A.2 In certain restaurants the owners get into revenue-sharing arrangements with another   person, who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.

 

A.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services it does not represent the full of value of all services rendered by the restaurants.

 

A.4 The new levy is directed at services provided by high-end restaurants that are air

Conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

 

A.5 It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year the conditions for the levy shall be met.

 

A.6 The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter-alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant notification will be issued when the levy is operationalized after the enactment of the Finance Bill.

 

B.   Short-term accomodation in hotels/inns/clubs/guest houses etc,.

 

B.1 Short term accommodation is provided by hotels, inns, guest houses, clubs and others and at camp-sites. This service is proposed to be taxed where the continuous period of stay is less than 3 months.

 

B.2 Actual levy will be restricted to accommodation with declared tariff of Rs 1,000 per day or higher by an exemption notification. Once this requirement is met, tax will be chargeable irrespective of the fact that actually the amount charged from a particular customer is less than Rs 1,000. The tax will also be charged on the gross amount paid or payable for the value of the service.

 

B.3 Finance Minister has announced 50% abatement from the value of service. Details of the exemption will be announced at the time when the levy is operationalized after the enactment of the Finance Bill.

 

2. Expansion of scope of following existing services:

 

1.Authorized Service Station’s Services [section 65 (105) (zo)]:

The existing service is being substituted with a new definition to cover:

a) Services provided by any person i.e. whether authorized service station or otherwise;

b) All motor vehicles, other than vehicles used for goods transport and three-wheeler auto-rickshaws; and

c) Repair, re-conditioning or restoration - which are already taxable – and services of decoration and any other related services.

 

2. Life Insurance business [section 65 (105) (zx)]:

 

2.1 Life insurance companies provide services relating to risk cover and managing investment for the policy holders. The former is already subjected to service tax. The latter is now being brought into the tax net. Similar services rendered by way of ULIP are already subject to service tax since 2008.

 

2.2 When the entire premium is only for risk cover the same shall continue to be taxed even in the revised definition. However in the case of other schemes, a significant portion of the premium is used towards investment, while the rest is allocated towards various overheads and mortality. IRDA in its circular Ref: IRDA/ACT/CIR/VIP/171/2010 dated November 21, 2010 has made it mandatory for the insurance companies to share this break-up with the policy holders in the case of “Variable Insurance Policies” under the heads: premium received, deductions towards mortality, commission and expenses, interest added and closing balance. Thus amounts relating to deductions for mortality, commission and expenses are not available for investment. After the enactment of the new levy, it is proposed to amend the Service Tax Rules to give the option to pay tax at the standard rate on that portion of the premium that has not been invested and is so indicated in any of the documents given to the policy holder. Where the break-up is not indicated in any document issued to the policy holder, option will be given to pay tax @ 1.5% of the gross amount of premium.

 

3. Commercial Training or Coaching Service [section 65 (105) (zzc)]:

 

3.1 The levy in its present form keeps outside its purview unrecognized education which is imparted by an institute that issues any certificate or diploma or degree or any educational qualification recognized by law. Thus two identical courses may be treated differently merely because one of the institutes also conducts another course that is recognized by law. This anomaly is proposed to be corrected by subjecting all such unrecognized education to tax.

3.2 In the Finance Bill the definition of “commercial training coaching centre” has been amended. Suitable exemption will be given after the enactment of the Finance bill to preschool coaching and training and to coaching or training relating to educational qualifications that are recognized by law.

 

4. Club or Association [section 65 (105) (zzze)]:

 

4.1 Services provided by a club or association to its members are already subjected to tax since 2005. When a member avails the facilities for his guest, he is already covered by the existing definition as the services are paid for by the member and not by the guest.

However a number of clubs or associations allow non-members to use their facilities in their own capacity for a separate charge. Clubs also entertain members of other affiliated clubs. Such services are proposed to be brought within the revised definition.

 

5. Business Support Service [section 65 (105) (zzzq)]:

 

5.1 The scope of the service is being expanded to include operational or administrative assistance of any kind. The scope will cover all support activities for others on a contract fee, that are ongoing business support functions that businesses and organizations commonly do for themselves but sometimes find it economical or otherwise worthwhile to outsource.

 

5.2 The words “operational and administrative assistance” have wide connotation and can include certain services already taxed under any other head of more specific description.

The correct classification will continue to be governed by Section 65A.

 

6. Health services [section 65 (105) (zzzzo)]:

 

6.1 The existing service is being substituted with a new description as follows:

 

a) Services provided by a clinical establishment having the facility of central air-conditioning in whole or any part of the establishment and more than 25 beds for in-patient treatment at any time of the year; and

b) Services provided by a clinical establishment in relation to diagnostic tests of any  kind or investigative services with the help of a laboratory or medical equipment c) Service provided by doctors, who are not employees, from the premises of a clinical establishment.

 

6.2 The head will not cover an establishment under the ownership or control of government or a local authority including Primary Health Centre and ESIC hospital. Autonomous medical institutes set-up by the government by a special act of parliament are also outside the levy.

 

6.3 Only such doctors will be covered who provide services from the specified premises of a clinical establishment in a capacity other than as employee of such establishment.

 

6.4 Finance Minister has announced 50% exemption from the value of this service. The exemption notification will be issued when the new levy is enacted.

 

6.5 Parliament has already passed The Clinical Establishment (Registration and Regulation) Bill, 2010. The Act will apply to such States as have given their consent for the same. The Act prescribes registration of all Clinical Establishments and maintenance of prescribed records and other reporting requirements. These can be referred to the extent they are relevant for the purpose of this levy.

 

7. Money changing services [section 65 (105) (zm and zzk)]:

 

7.1 There is no change in the scope of the levy of these services. However the following changes have been made in the actual collection of tax:

 

a) A new rule (2B) has been introduced in the Service tax (Determination of Value)  Rules, 2006 prescribing the value of the service in terms of Section 67 of the Act.

 

The value shall be as follows:

(i) The difference between the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency for that day multiplied by units of currency exchanged;

(ii) If RBI reference rate is not available the value shall be 1% of the value of money exchanged in Indian rupees;

(iii) When both the currencies are not Indian rupees, 1% of the lesser of the amounts receivable if the two currencies are converted at RBI reference rate.

b) The rate of composition under rule 6(7B) has been lowered from 0.25% to 0.1% of the gross amount of money exchanged. However, the proviso relating to paying tax on billed charges has been deleted. Thus now the assessee will have the option to pay tax @0.1% of gross amount exchanged or else at standard rated on the value of service in terms of rule 2B, as mentioned above.

 

3. Changes in penalties and compliance.

 

Many numbers of changes are being introduced in order to:

ü  encourage voluntary compliance and self correction wherever deviations/omissions  took place unintentionally;

ü  reduced penalties would be considered if the transactions are captured fully and truthfully in records and further abated if timely admission and payment is made, and

ü  intentional and unrecorded violations/deviations should be dealt with severely with no concession whatsoever with a sole motto of voluntary compliance.

 

All these changes are being considered only to respect the honest tax payers and to stop deriving benefit by carrying surreptious activities of unscrupulous business persons/entities .  It is very much advisable to keep the department informed about the changes in the decisions taken, relating to taxes and duties, before the department comes to know while conducting any audit or investigation or verification.

 

Ø  Maximum penalty for delay in filing of return under section 70 is proposed to be increased from Rs.2,000/- to Rs.20,000/-. The penalty of Rs.20,000/- would attract only when the delay is beyond 40 days.  For the delays below 40 days, the earlier provisions of Rs.500/- for first 15 days, Rs.1000/- for 16 to 30 days and Rs.2000/- to 31 to 40 days of delay.

Ø  The interest to be paid on delayed remittances of service tax is being enhanced from 13% to 18% per annum.  But for those service providers whose turnover in the preceding year or any year covered in the show cause notice is below Rs. 60/- lakhs, the applicable interest rate is 15% per annum only.

Ø  The beneficial provisions of section 73 (1A) and both the provisos of section 73 (2) are proposed for deletion. As a result, the benefit of reduced penalty shall not be available in cases of fraud, mis-statement, suppression, collusion etc. in the ordinary course. However, revised benefit will be available under the new sub-section 4A of section 73 in situations where the true and complete account of transactions is otherwise available in the specified records and the assessee during the course of audit, verification or investigation pays the tax dues, together with interest and the reduced penalty. It is clarified that the assessee can also avail this benefit on his own also. The extent of penalty is being further reduced to 1% per month of the tax amount for the duration of default not exceeding 25% of the tax amount.

Ø  The penalty for failure to pay tax as per the provisions of Fin.Act, a penalty of Rs.200/- per day of delay or 2% of the service tax amount, whichever is higher is payable under section 76.  Now, the penalty under this section is being reduced to half.

Ø  The existing penalty for violations of various provisions attract levy of penalty of Rs.5000/- or Rs.200/- per day of delay, whichever is higher under section 77.  The penalty of Rs.5000/- is being enhanced to Rs.10,00/- while retaining all other provisions of section 77.

Ø  Penalty under Section 78 is being reduced from upto twice the amount of tax to an amount equal to the tax. Moreover, in situations where the taxpayer has captured the true

and complete information in the specified records, penalty shall be 50% of the tax amount. The latter penalty (only) shall be further reduced to 25% if the tax dues are paid within a period of one month together with interest and reduced penalty.

For assessees with turnover upto Rs.60 lakh the period of one month shall be increased to ninety days.

Ø  Where the transactions are not captured properly in  the specified records in those cases where suppression, fraud etc, are present, such cases would attract levy ofpenalty equal to the service tax amount under section 78.

Ø  Provisions relating to prosecution are proposed to be re-introduced and shall apply in the following situations:

(i) Provision of service without issue of invoice;

(ii) Availment and utilization of Cenvat credit without actual receipt of inputs or input services;

(iii) Maintaining false books of accounts or failure to supply any information or submitting false information;

(iv) Non-payment of amount collected as service tax for a period of more than six months.

 

4. Changes in Service Tax Rules, 1994

 

  Following changes in Service Tax Rules are being made which are effective from 01-04-2011.

v A provision is being inserted that when an invoice has been issued or a payment received for a service, which is not subsequently provided, the assessee may take the credit of the service tax earlier paid when the amount has been refunded by him to the recipient or by the issue of credit note, as the case may be.

v The amount of adjustment of excess amount paid by an assessee is being enhanced from Rs. 1 lakh to Rs. 2 lakhs retaining other condition such as intimation to the jurisdictional Superintendent within 15 days from the date of such adjustment is made. (Rule 6 (4B).

v A new sub-rule 6A has been introduced in rule 6 to provide that if an amount of service tax has been self-assessed but not paid, the same shall be recoverable alongwith interest under section 87 of the Act. Thus, there shall be no need to resort to the requirements of section 73 for the recovery of such self-assessed amounts.

v The composition rate in sub-rule 7B of rule 6 applicable to in relation to purchase or sale of foreign currency, including money changing, has been reduced from 0.25% to 0.1% and the Proviso has been deleted. Thus, in the case of these services, option of paying service tax on billed charges will not be available.

 

5. Point of Taxation Rules,2011

 A new set of rules have been framed, keeping in view the roll out of GST in near future, determining the point in time when the services shall be deemed to be provided for levy of service tax.  The general rule will be that the time of provision of service will be the earliest of the following dates:

 i.  Date on which the service is provided or to be provided.

 ii.  Date of Invoice.

iii.  Date of payment.

 

These provisions will come into effect from 1^st April,2011.

 

The Service Providers should remit tax based on the above earliest date as against the present system of considering the date of receipt of payment  for discharge of service tax liability.

 

A provision is being made to adjust the amount of tax paid on receipt of payment and service is not finally provided.

 

6. Amendments of Export of Service Rules,2005.

 

Certain services are being rearranged in order to catch up the increasing trend of providing destination based services in respect of B2B services and Origin based levy on B2C services.

(i) Service provided by builders in respect of Preferential location etc, [section

65(105)(zzzzu)] is being added to sub-rule 1(i) and will thus be considered as exported, subject to compliance with other conditions, if the immovable property is situated outside India.

 

(ii)  Rail travel agent [ 65(105)(zz)] and health check-up or preventive care [65(105)(zzzzo)] are being added to sub-rule 1(ii) and will thus be considered as exported, subject to compliance with other conditions, when they are performed outside India; and

 

(iii) Services of credit rating agency [65(105)(x)], market research agency [65(105)(y)], technical testing and analysis [65(105)(zzh)], transport of goods by air [65(105)(zzn)], goods transport agency [65(105)(zzp)], opinion poll [65(105)(zzs)] and transport of goods by rail [65(105)(zzzp)] are being deleted from sub-rule 1(ii) and thus the additional condition of performance outside India will stand removed. Thus they will be considered as exported, subject to compliance with the relevant conditions, if the recipient is located abroad.

 

7. Amendments to Import of Services - Taxation of Services(Provided from Outside India and Received in India) Rules, 2006.

 

Corresponding changes, as indicated in respect of Export of Services Rules, 2005, have been carried out by way of rearrangement of the stated services under respective subclauses of rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

The changes will, inter-alia, make certain services taxable if the recipient of the service is located in India even when the service is performed outside India. In order to avoid inconvenience in respect of certain services, exemption has been granted vide notification 8/2011-ST to services of transportation of goods by air or road or rail provided to a person located in India when the goods are transported from a place outside India to a destination outside India. Exemption has also been given vide notification 9/2011-ST to the transportation of goods by air service to the extent air freight is included in the customs value of goods in order to avoid taxing this service twice.

 

8. Amendments to Service Tax (Determination of Value) Rules,2006.

 

A new rule (2B) has been inserted vide Notification 2/2011-ST to prescribe the value of service rendered in relation to money changing. This amendment shall come into force on 01.04.2011.

 

 An explanation has been added after rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 clarifying that for the purpose of telecommunication service [Section 65(105)(zzzx)] the value shall be the gross amount paid by the person to whom the service is provided by the telegraph authority. Thus in case of service provided by way of recharge coupons or prepaid cards or the like, the value shall be the gross amount charged from the subscriber or the ultimate user of the service and not the amount paid by the distributer or any such intermediary to the telegraph authority. This amendment shall come into force on 01.03.2011.

 

9. Amendments to Works Contract (Composition Scheme for Payment of Service Tax) Rules,2007.

 

A new sub-rule (2A) is being added in rule 3 in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide Notification 1/2011-ST so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning & installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme.

 

10.     Exemptions:

Notification 26/2010-ST dated 22-6-2010 is being amended by Notification 4/2011-ST and the service tax applicable in respect of „Transport of passengers by air service” is being revised as follows:

(a) Domestic (economy) : From Rs.100 to Rs.150

(b) International (economy) : From Rs.500 to Rs.750

(c) Domestic (other than economy) : Standard rate of 10%

10.2 Exemption is being given to services rendered to an exhibitor participating in an exhibition held outside India (Notification No. 5/ST-2011).

 

10.3 Exemption from service tax is being provided to „Works contract service‟ when rendered for the construction of residential complexes or completion and finishing services of a new complex under Jawaharlal Nehru Urban Renewable Mission (JNURM) and “Rajiv Awaas Yojana” (Notifications No. 6/ST-2011).

 

10.4 Exemption has been given to the taxable service of general insurance when provided under “Rashtriya Swashya Bima Yojna” (Notifications No. 7/ST-2011).

 

10.5 Exemption from service tax is being provided to works contract service rendered within a port, or other port or airport in specified areas (Notifications No. 10&11/ST-2011).

 

10.6 An exemption of 25% from the taxable value is being provided in respect of services   rendered in relation to “transport of coastal goods” and goods transported through “national waterways” or “inland water” (Notification No.16/ST-2011).

 

10.7 Exemptions with retrospective effect have been given by the Finance Bill:

 

(a) To an association or chamber representing commerce or industry in respect of membership fee under the „Club or Association Service‟ for the period from 16.06.2005 to 31.03.2008; and

(b) To inter-state or intra-state transportation of passengers, in a vehicle bearing contract carriage and tourist vehicle permit for the period from 01.04.2000 to 06.07.2009

These changes will come into effect on the dates mentioned in the respective notifications or when the bill is enacted and notified, as the case may be.

 

11.Small scale sector

 

 Finance minister has announced in his budget speech that individual and sole proprietorassessees with a turnover upto Rs 60 lakhs shall not be subject to audit.

 

Interest rate for all assessees (including firms and corporates) upto a turnover of Rs 60 lakhs shall be 3% less than the prescribed rate viz, 15% per annum.

 

 The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for assessees with turnover of Rs.60/-lakhs.

 

12. SEZ Refunds:

Notification No. 17/2011-ST has been issued superceding notification 9/2009-ST dated 03.03.2009. The new notification has the following unique features:

 

(a) Criteria for the determination of “wholly consumed” services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed” services.

 

(b) No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed” within SEZ, including services liable to tax on reverse charge basis under section 66A.

 

(c) Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover.

 

(d) Suitable rule has been introduced in Cenvat Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations.

 

 

III.CENVAT CREDIT RULES.

 

3.1  The definition of “input”  contained Rule 2 (k)  is totally revised. The new definition would be as under (with effect from 01-04-2011):

”(k) “input” means–

(i) all goods used in the factory by the manufacturer of the final product; or

(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or

(iii) all goods used for generation of electricity or steam for captive use; or

(iv) all goods used for providing any output service;

but excludes-

(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;

(B) any goods used for-

(a) construction of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods, except for the provision of any taxable service specified in sub-clauses (zn), (zzl), (zzm),

(zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act;

(C) capital goods except when used as parts or components in the manufacture of a final

product;

(D) motor vehicles;

(E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and

(F) any goods which have no relationship whatsoever with the manufacture of a final product.

Explanation. – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;‟

The earlier definition included all such goods which are directly or indirectly in relation to the manufacture of the final products used were deemed as ‘input’ materials and credit was allowed.  Now this is removed.

This revised definition would allow credit on all input materials which are used in the factory by the manufacturer of final products. It is clear that it excludes those which are specified in the definition and all such goods which do not have any relationship to the manufacture of final products/output service provider.

Further, any goods including accessories cleared alongwith the final product i.e, mandatory spares and goods used for providing ‘warranty replacements’ have also been included in the above revised definition and there is no necessity to reverse the cenvat credit availed.

Any goods used for generation of electricity or steam for captive consumption also included in the term ‘input’.

But any goods used for the construction of a building or a civil structure or laying of foundation or making of structure for support of any capital goods have been denied to be eligible as input.

Further, any goods used primarily for personal use or consumption of any employee including food articles, goods used in guest house, residential colony, club or a recreational facility or a clinical establishment  etc, have been expressly excluded from the definition. When any of these goods are used directly in the manufacture of final product or provision of output service, they will constitute as ‘input’.

 

3.2 The definition of ‘Input Services’ has also been revamped to impart clarity and to achieve coherence between goods and services so that service related to any of the goods excluded from the definition of ‘input’  are also excluded .  For e.g, goods used for construction have been excluded from the term ‘input’ and relative service viz, construction services, works contract services  etc which are used for construction have also been removed out from definition of ‘input service’. (with effect from 01-04-2011).

3.3 Cenvat credit of duty paid on capital goods used outside the factory for generation of electricity for the captive use within the factory has been permitted. (with effect from 01-04-2011).

3.4 Ship Breaking units have been allowed the cenvat credit not exceeding 85% of Addl.Duty of customs paid at the time of importation of ships for breaking  (with effect from 01-03-2011).

3.5 A manufacturer or Service Provider has to pay an amount equivalent to the Cenvat Credit taken in respect of inputs or capital goods in respect of these inputs/capital goodswritten off partially, before being put to use as against the existing provision of payment only when the value is written off fully (with effect from 01-03-2011).

3.6 Services relating to Motor Vehicles i.e, rent – a cab, use of tangible goods, insurance or repair of vehicles shall not constitute an ‘input service’ except in respect of output services where credit on motor vehicle is permitted as “Capital Goods” .

3.7 Any service meant primarily for the personal use or consumption of employeeswill not constitute an input service (with effect from 01-04-2011).

3.8 About 130 excisable goods which were hitherto exempted from excise duty has been withdrawn and brought to concessional excise duty of 1% advalorem subject non-availment of cenvat credit on inputs and input services (with effect from 01-03-2011).

3.9 Cenvat Credit Rule 3 has been amended restricting the allowing of cenvat credit of the duty paid on items that are being subjected to the levy of 1%  and would not be available to a manufacturer or service provider who buys/purchases them.  And also the manufacturer of these goods cannot discharge the duty of 1% by utlising the available Cenvat Credit.  This 1% duty has to be paid in cash, invariably (with effect from 01-03-2011).

3.10 The definition of Exempted service is amended to include taxable services which are partially exempted with the condition that cenvat credit is not availed on inputs and input services. It is further amplified that exempted services also include “Trading” (with effect from 01-04-2011).

3.11Especially the branded readymade garments and madeups were exempted from central excise duty on the condition that no credit of duty on inputs is availed by the manufacturer.  As the definition under Rule 2 of CCRs is amended to include ‘ every person who gets the goods falling under chapters 61,62,or 63 produced or manufacture on job work basis’ and will be liable to pay Central Excise duty at 10% (with effect from 01-03-2011).

3.12 Credit is allowed on capital goods used outside the factory for generation of electricity for captive consumption within in the factory by an amendment to Rule 4 (2)(a) of CCRs (with effect from 01-04-2011).

3.13 A proviso under Rule 4(7) of CCRs is added to allow reversal of proportionate credit by the manufacturer/service receiver who has received back the payment, either partially or fully, which has been returned by the Service provider/manufacturer (with effect from 01-04-2011).

3.14 The obligation of a manufacturer and output service provider specified in Rule 6 of Cenvat Credit Rules has been revamped as under (with effect from 01-04-2011):

• The nomenclature of Rule 6 has been changed to “Obligation of a manufacturer or producer of final products and a provider of taxable service”.
• The sub rule 1 is sufficiently amplified as “input used in or in relation to the manufacture of exempted goods or for provision of exempted services, or input service used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services” as against “input or input service which is used in the manufacture of exempted goods or for provision of exempted services”.
• The sub rule 2 has been amended to allow credit on inputs and input services which are used in the manufacture of or provision of services which are dutiable .  For this the manufacturer or output service provider should maintain separate accounts for the input materials and input services used in the manufacture/provision of output service, which are exempted and as well as dutiable.  
• The sub rule 3 which contemplates the reversal of 6% amount on the value of taxable service, for not maintaining separate accounts in respect of dutiable and exempted services by an output service provider has been reduced to 5%, on par with the amount payable by a manufacturer of final products.
• As the option to maintain separate accounts only in respect of input and not together with input services has been given, allocation of credit for the purpose of reversal as per formula given in Rule 6(3) can be done only so far as credits on input services are concerned.
• A proviso under sub rule (3) has been inserted to clarify that if any duty of excise is paid on exempted goods, then the same will be reduced from the amount of 5% payable by the manufacturer or service provider in case of not maintaining separate accounts.
• A second proviso has been inserted under sub rule (3) to clarify that in case of partially exempted services, which is normally by way of abatement, on the condition that no cenvat credit of inputs and input services used for providing such taxable services shall be taken, an amount of 5% to be paid only on the exempted portion of the value of service.
• As an abundant caution explanation III has been added to sub rule (3) making it clear that cenvat credit cannot be availed on any goods and services that are not “inputs or input services”.
• A sub rule (3B) has been inserted stipulating the Banking/Financial Institutions including Non-Banking Financial companies or other body corporates to pay 50% of the Cenvat credit availed on inputs and input services in that month.
• Another sub rule (3C) has been inserted stipulating Life Insurance or Management of ULIPS, to pay 20% of the cenvat credit availed on inputs and input services availed during that month.
• A new sub rule (3D) has been inserted to clarify that even if an amount of 5% is paid by the manufacturer or service provider, who has availed any exemption notification on the condition of non-availment of cenvat credit, not maintained separate accounts, the said amount will be treated as if no cenvat credit was availed and accordingly, the benefit exemption notification would be available to the assessee inspite of payment of 5% of the amount stipulated in Rule 3 of CCRs.
• Explanations I, II and III have been added after sub rule 3D   to explain as under:

§  Section 3 has been added to determine the value under Central Excise Act alongwith section 4 and 4A.

§  In case of taxable services if assessee avails option under Rule (7), (7B) or (7C) of Service Tax Rules,1994 or Works Contract (Composition Scheme for payment of Service Tax) Rules,2007, then the value for the purpose  of sub rule (3) and (3A) would be the option availed by the assessee.

§  In respect of Trading, which is an exempted service, the difference between the purchase value and sale value would be reckoned as the value of goods traded.

§  The amounts stipulated in sub rules (3), (3A), (3B) and (3C) can be paid from Cenvat credit account by debit.

§  In case the amount payable under sub rules (3), (3A), (3B) or (3C) is not paid, the same would be recovered under Rule 14 of CCRs,2004.

§  As the concept of proportionate allocation is introduced, sub rule (5) allowing full credit of seventeen specified services used for manufacture of excisable goods and exempted goods and for providing taxable and exempted services has been omitted.

3.15 A new sub rule 6A has been inserted to allow provision of services without payment of Service Tax to a unit in SEZ or to a Developer in SEZ for their authorised operationswithout requirement of reversing the cenvat credit.

3.16 An amendment is made, with effect from 01-03-2011, to the proviso under sub rule (7) under Rule 9 stipulating the SSI units who are under SSI exemption notification to file their quarterly returns within 10 days after the close of the quarter instead of 20 days to which the quarterly return relates.

3.17 Service Tax leviable under section 66A (Import of Services) has been added in the list of eligible credits under Rule 3 with retrospective effect from 18-04-2006 by contemplating a retrospective amendment in the Finance Bill.

.   .   .

 

K.Prakash Babu

Advocate/Tax Consultant

Mobile:+919490167486

Email id: bab@akasamconsulting.com

M/S.Akasam Consulting Pvt.Ltd,

Masab Tank, Hyderabad.