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  • 1.CENVAT CREDIT RULES ANDPLACE OF PROVISION OF SERVICE RULES12/20/20131

2. CONCEPT OF VALUE ADDED TAX STRUCTURE Single and double entry system of accounting :Distinguish Two Nails Theory : MatchNo entity based exemptions initially, now SEZ can be billed without charging Tax.Provision of refund for embassies and exporters. 3. CONCEPT OF CREDIT Credit is hard currency : immediately availableCredit affects bottom lines: Credit lost is money lostCredit affects purchase decisionsCredit is a business boosterWrong Credit : Large Penalty 4. Step Towards Integration In the budget 2004-2005 the idea to extend credit of service tax and excise duty across goods and services was mooted. Zero charge by subcontractor - credit same category - credit under different categories present system. The CENVAT Credit Rules, 2004 came into force from 10-9-2004, and have replaced the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002.12/20/20134 5. Who is eligible to credit Credit is available to the Provider of OUTPUT Service. Thus bare liability to pay service tax as recipient of service does not entitle one to be eligible to CENVAT credit. But credit not available unless input, Capital Goods or Input service has been used for provision of output service. Tax deposited under reverse charge mechanism can be claimed as credit where applicable. 12/20/20135 6. Who is eligible to credit effective 1-07-2012 With introduction of negative list Cenvat Credit Rules define Output Service as: output service means any service provided by a provider of service located in the taxable territory but shall not include a service,1. specified in section 66D (Negative List) of the Finance Act; or 2. where the whole of service tax is liable to be paid by the recipient of service. 12/20/20136 7. Who is eligible to credit effective 1-07-2012 Thus credit is available only to the Output service provider and that too only if he is in taxable territory, the services provided are not in negative list and 100% reverse charge is not applicable on the respective output services.12/20/20137 8. What is available as credit Basic Excise Duty (Except on Specified goods taxed @1% ad valorem) Special and additional excise duty in specified cases service tax Education Cess & SHE paid on: Inputs Capital Goods AND Input Services Received by the provider of output service 12/20/20138 9. What are inputs For the purpose of an Output service provider inputs are: All goods used for providing output service. The definition is specific and crisp. There would be goods which are used by the service provider but use of such goods would not be specifically in providing output service. In exclusionary clause certain goods are not eligible as inputs:12/20/20139 10. What are not inputs 1. LDO, HSD, Petrol, 2. any goods used for a) construction or execution of works contract 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 service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act; (Declared Services)12/20/201310 11. What are not inputs Thus works contract service and construction service providers would be eligible to claim credit for inputs used for rendering of service. There are nine declared services and only two are eligible for credit of inputs on construction related activity.12/20/201311 12. What are not inputs Nine declared services. a) renting of immovable property; b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completioncertificate by the competent authority. c) temporary transfer or permitting the use or enjoyment of any intellectual property right; d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software; e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods; g) activities in relation to delivery of goods on hire purchase or any system of payment by installments; h) service portion in the execution of a works contract; i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. 12/20/201312 13. What are not inputs 3. Motor Vehicles Though credit in specified situations is available in category of capital goods. No credit shall however be available for Motor Vehicles in the category of inputs. 4. 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; The term such as indicates the vast application of this definition. This list can be really large.12/20/201313 14. Capital Goods Following items are eligible for CENVAT credit as Capital goods" if they are used for providing output service:(A)(i) all goods falling under Chapter 82 (Tools, Implements, Cutlery) , Chapter 84 (Nuclear Reactors, Boilers, Machinery etc.), Chapter 85(Electrical Mach. Sound Recorders, etc.), Chapter 90 (Optical, Photographic, Medical, Surgical apparatus etc.), heading No. 6805 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act; (ii) pollution control equipment; 12/20/201314 15. (iii)components, spares and accessories of the above; (irrespective of the entry they fall in. Components are revenue expense in books but are eligible in capital goods category) (Components / spares of other capital goods mentioned in iv to vii below are not eligible and there is no logical answer to exclude them. However spares in appropriate cases may be eligible as inputs) (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; and (vii) storage tank, (viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers 12/20/201315 16. Tariff heading 8702 /8703 /8704 /8711 apply to all passenger cars and motor bikes. Thus motor vehicles falling in other than the stated category shall be eligible as capital goods if they are used for providing output service. Dumpers and Tippers shall be capital goods for all categories of output service providers. Motor vehicles which are excluded from capital goods as above have been separately allowed as capital goods as per following provision:12/20/201316 17. B. motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used forii. providing an output service of renting of such motor vehicle; or iii. transportation of inputs and capital goods used for providing an output service; or iv. providing an output service of courier agency C. motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service ofii. transportation of passengers; or iii. renting of such motor vehicle; or iv. imparting motor driving skills 12/20/201317 18. Thus following conditions must cumulatively be satisfied: 1. Must satisfy definition of motor vehicle as per Motor Vehicles Act 1988. 2. Must be registered in the name of provider of output service 3. Must be used for providing specified services. Use of vehicle for any other purpose will deny eligibility. 4. Components and accessories are also treated as eligible capital goods.12/20/201318 19. What is input service The definition has three parts: 1. Specific 2. Inclusive 3. Prohibitive In specific part: Input service means any service used by provider of output service for providing an output service. In other words, service not used for providing output is not eligible for credit. Thus there would be services used by service provider but not all of them are used for providing output service. Some such services are eligible to credit in the inclusive part : 12/20/201319 20. What is input service 1.2. 3. 4. 5. 6. 7. 8.Inclusive Part: Services used in relation to modernization, (setting up is excluded w.e.f. 1-4-11) renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, Advertisement or sales promotion, Market Research, Procurement of inputs, Accounting, Auditing, Financing, Recruitment12/20/201320 21. What is input service 9. Quality control, 10. Coaching and training, 11. Computer networking 12. Credit rating, 13. Share registry 14. Security, 15. Business Exhibition 16. Legal Service 17. Inward transportation of inputs or capital goods Item 5-14 were illustrations of activities relating to business- such as. This phrase was replaced by specific services thereby narrowing the scope of input service. 12/20/201321 22. What is input service1. 2. 3. 4. 5. 6. 7.Service used for providing an output service restricts the input service to direct inputs. The list of indirect inputs as suggested in inclusive part has been narrowed down. Thus many services would apparently not form part of this list and may thus be not eligible for credit: Telecommunication Services Management Consultancy Office Maintenance / facility management Repair & Maintenance of office equipment (AMC) Hiring of equipment Insurance Event Management12/20/201322 23. What is NOT input service Prohibitory Part: 1. Construction related specified services when used under specified circumstances. 2. Moto