LEARNING

OUTCOME
Making aware of the CENVAT
Credit concept

VAT:

WHAT IS CENVAT?
Tax on Value Added

Value Added = Value of Final Output

- Value of Inputs used.

Imposed on - every stage of

Manufacture/
Sale.

Each time only Value Added by

Manufacturer/ Seller subject to
tax.

CENVAT
Value Addition by way of
manufacture/ provision of Output
Service.
Value Addition TAXED by using
Credit Method.

CENVAT CREDIT?
Allowed on:
Eligible duties - paid on eligible
inputs/ capital goods.
Service Tax paid eligible input
services.
Applies only on :
Manufacturer or
Output service provider

CENVAT CREDIT?
Governed by:
CENVAT Credit Rules, 2004
Available on :
Capital Goods defined in Rule (2a)
Inputs defined in Rule (2k)
Inputs services defined in Rule (2 l)

WHY NEED OF CENVAT CREDIT?

TO REMOVE CASCADING EFFECT OF

DUTY

TAX ON TAX

EXAMPLE:
1) Buys raw material Rs. 224
(Rs. 24 Excise Duty)
2) Avail services worth Rs.112
(Rs.12 Service Tax)
3) Incurs expenses: Rs.300
manufacturing final product
4) Wants to earn profit - Rs. 50
5) Excise duty 12 %

Solution:
Cenvat Credit: (Rs. 24 + Rs. 12 = Rs.
36)
Cost of manufacture: 200 + 100 + 300 =
Rs.600
Sale Price = Cost + Profit: 600 + 50 =
Rs.650
Excise Duty = 650 * 12% = Rs. 78
Net Excise Duty Payable = 78- 36 = Rs.42
COST TO CONSUMER: 650+78 = Rs. 728

Cenvat Credit: NIL

Cost of manufacture: 224 + 112 + 300 =
Rs.636
Sale Price = Cost + Profit: 636 + 50 =
Rs.686
Excise Duty = 686 * 12% = Rs. 82.32
COST TO CONSUMER: 686+82.32 =
Rs.768.32
Aforesaid - lead to cascading effect:
i.e. Input Credit Rs. 36 was again subject
to DUTY

COST TO CONSUMER: 686+82.32 =

Rs.768.32
Aforesaid - lead to cascading effect:
i.e.
Input Credit Rs. 36 was again
subject to DUTY @ 12%: Rs. 4.32
Consumer bearing extra cost:
Rs.40.32
(Rs. 36 + Rs. 4.32)

CAPITAL GOODS (Rule 2a)

1. All goods falling under 1st Schedule Tariff Act:
. Chapter 82: tools, hand tools, knives etc.
. Chapter 84: nuclear reactors, boilers, etc.
. Chapter 85: electrical machinery
. Chapter 90: measuring, testing &
checking machines.
. Sub-heading 6805: grinding wheels & the
likes
. Sub-heading 6804: Abrasive powder used
in textile/ paper etc.

CAPITAL GOODS (Rule 2a)

2. Pollution control equipment
3. Components, spares, accessories of
goods specified in (1& 2)
4. Storage tanks
5. Motor Vehicles and their
components/ spares (other than
mentioned in 8702, 8703, 8704, 8711)
6. Tubes, pipes and fittings thereof
7. Moulds and dies, jigs & fixture.

 AC, Refrigerator & computers:

Capital Goods?
- Yes, if used in factory not in offices.
Whether Capital Goods must
be used in manufacture
- No, Use within factory is sufficient
or
outside factory generation of
electricity captive consumption

How Credit is taken on Capital Goods?

Allowed on Receipt of capital Goods
In factory/ by output service provider
Manner:
- up to 50% credit 1st Year of acquisition
- balance is allowed in 2nd / subsequent
years
- SSI: Turnover is Rs.400 lakh: 100%
credit 1st Year.

How Credit is taken on Capital Goods?

Example:
1) Consignment of inputs received: 1,000 kg
2) Excise duty paid: Rs.10,000
3) While unloading, 50 Kg.- damaged and
not usable
4) Eligibility of Cenvat Credit.
Solution:
) Inputs lost before issuing
manufacturing
) No relation with manufacture
) Available Cenvat Credit: Rs.9,500

How Credit is taken on Capital Goods?

Example:
1) Consignment of inputs received: 500
pieces
2) Excise duty paid: Rs.2,500
3) Issued to production line, fire broke, 200
pieces destroyed- lying on floor
4) Eligibility of Cenvat Credit.
Solution:
) Inputs lost during manufacture process
) Relation with manufacture
) Available Cenvat Credit: Rs.2,500

How Credit is taken on Capital

Goods?
Example:
1) Inputs received
2) Excise duty paid: Rs.20,000
3) Assessee used 60%, (40% cannot
due to change in design provision
for obsolete good)
4) Eligibility of Cenvat Credit.
Solution:
) Reverse Cenvat Credit: Rs.8,000

INPUT GOODS (Rule 2k)

All goods - used in the factory
manufacturer.
Any goods including accessories

Cleared from factory

value of which is included in Final product
Goods used for providing - free warrantyfinal product

INPUT GOODS (Rule 2k)

All goods used for generation:
electricity/ steam for captive
consumption.
All goods used for providing
output services.

EXCLUDING:
Light Diesel Oil, High Speed Oil or motor
spirit.
Any good- used for:
- construction of building/ civil structure
- laying foundation- support capital good.
Motor vehicle (refer Pg No. 385)
Any good- used in: Primarily for PERSONAL
USE/ CONSUMPTION- of any employee.
- Guest house/ residential colony
- food items
- club/ recreational facilities.

EXCLUDING:
Capital goods except when used as
component/ part - manufacture
Any good whatsoever no relation
with manufacture final product
E.g. furniture/ stationery used in factory
hand gloves used by workmen

Considered as Input goods

CASE STUDY: Maruti Suzuki Ltd.

V/s CCE (2009)
Case:
Eligibility of Cenvat Credit on fuel used
for generation of electricity, sold
outside to sister units, vendors, etc.

CASE STUDY: Maruti Suzuki Ltd. V/s

CCE
Facts:
Manufacturer - Automobiles
Set- gas turbines electricity
generations
Using Naptha fuel
Used captive and partly supply to joint
ventures- charge
Claiming Credit whole inputs

CASE STUDY: Maruti Suzuki Ltd. V/s CCE

Decision:
Generation of electricity ancilliary activity
Captive input otherwise NOT
Electricity generation NOT used relation
to manufacture within the factory
Hence, CANNOT Claim credit electricity
supplied to sister concern/ joint ventures

Example:
Determine eligible amount of CENVAT.
1. Pollution control system 25,000
2. Spares for pollution control system 5,000
3. Equipment used in office 12,000
4. Storage tank 10,000
5. Paints used for painting machinery 6,000
6. Packing material4,000
7. Lubricating oils 8,000
8. High speed diesel oil.7,000

Solution:
1. Pollution control system Capital Goods
12,500
2. Spares for pollution control system Capital Goods
2,500
3. Equipment used in office Not Eligible
NIL
4. Storage tank Capital Goods
5,000
5. Paints used for painting machinery
Input
6,000
6. Packing material Input 4,000
7. Lubricating oils Input 8,000
8. High speed diesel oil. Not Eligible
NIL
__________________________________________________
Total Cenvat credit Admissible
38,000
__________________________________________________

Example:
Determine eligible amount of CENVAT.
1. Raw Materials
52,000
2. CG- Used in electricity generation(CC)
1,00,000
3. Motor Spirit
40,000
4. Inputs used- Construction of Bldg.
1,00,000
5. Dairy & bakery products- consumedemployees 5,000
6. Motor Vehicle falling under tariff-heading 8704
4,50,000

Example:
Determine eligible amount of CENVAT.
1. Raw Materials
52,000
2. CG- Used in electricity generation(CC)
50,000
3. Motor Spirit
NIL
4. Inputs used- Construction of Bldg.
NIL
5. Dairy & bakery products- consumed- employees
6. Motor Vehicle falling under tariff-heading 8704
__________________________________________________
Total Cenvat credit Admissible
1,02,000
__________________________________________________

NIL
NIL

INPUT SERVICE (RULE 2 l)

Services
For Output Service: any service provided for
Output Service
Manufacturer of final product: any services
used
Directly/ Indirectly - in or in relation to:
i.
Manufacture of final products and
ii.
Clearance of final product from place of
removal

INPUT SERVICE (RULE 2 l)

Services

Included
18 Services
Five Ms

Excluded

Inclusive Services:
1. Any modernization/ repairs of factory premises.
2. Advertisement or sales promotion
3. Market research
4. Accounting
5. Auditing
6. Financing
7. Computer networking
8. Security
9. Legal services
10.Quality control

Excluded Services:
1. Rule 2(l)(A):
Services related to construction of building or civil
structure OR
Laying foundation or making structures support
capital goods

.
.
.
.

Architect Services
Port services
Airport services
Works contract services

Excluded Services:
2. Rule 2(l)(B):
Services related to Motor Vehicle
provided by way of
Renting of a cab
Supply of tangible goods
In so far as they relate to vehicle which is
not Capital Good
Motor Vehicle considered - CAPITAL GOOD
only in case od specified services.

2. Rule 2(l)(BA):
Services related to Motor Vehicle
provided by way of
Repair and maintenance
servicing
general insurance business.
In so far as they relate to vehicle which is
not Capital Good
Exception in respect of:
To manufacturer of vehicle manufactured by him
General insurance company vehicles insured by
him

Excluded Services:
3. Rule 2(l)(C):
Services related to primarily for Personal Use/
Consumption of any employee

Outdoor catering
Beauty treatment
Health services
Membership of club, health & fitness center
Life insurance
Travel benefits extended to employees

 W.e.f. 01-04-2011:
Service Tax payable on accrual basis
Not receipt basis
Cenvat Reversal - if payment not made
Service Provider within 03 months
Input Service Distributor: Read page no.
381