Re: Service Tax- Change in CENVAT Credit Rules 2004.

Attention is invited to our Circular No. FD/HOA&T/02/2005 dated 24.1.2005 wherein

detailed guidelines as per CENVAT Credit Rules 2004 were communicated. The extract
of relevant paras which are relevant for availment of CENVAT Credit are as under:
“Where the Bank maintain separate records for taxable, non-taxable and exempted
services in respect of receipt, utilization and balance of input service meant for use in
providing taxable and exempted output service, it can take credit of quantum of input
services which is intended for use in providing taxable services. However, where no
separate records is maintained by the bank it can only claim credit of 20% of the amount
of service tax payable on taxable output service. Thus to take full advantage of input
credit against output services the maintenance of separate records is necessary. Therefore
the branches are advised to maintain separate records to take full advantage of the input
credit of service tax.

The branches must maintain separate record/register indicating the serial number and date
of documents on which service tax is paid, Service Tax Registration No., name of the
input service provider, description and value of input services, service tax credit paid,
service tax credit utilized for payment of service tax.”

It is observed that field functionaries are not maintaining separate records and are
availing CENVAT Credit to the extent of 20% of the output services.

CENVAT Credit Rules 2004 have been amended as per Clause 85 of the Finance Bill
2008 to change the procedure in relation to availment of CENVAT Credit. Rule 6 is
being amended to provide the following options to a provider of output services, using
common inputs or input services for providing taxable as well as exempted services and
opting not to maintain separate accounts, namely:-
(i) shall pay 8% on amount of the value (to be determined in accordance with
section 67 of the Finance Act 1994) of the exempted service; OR

(ii) shall pay (reverse) the CENVAT credit attributable (to be worked out in a
manner prescribed in the rule) to the inputs and input services used for
providing exempted service,
(The above changes have been made effective from 1.4.2008).

The method of availing 20% CENVAT Credit (where no separate account is

maintained) has been discontinued w.e.f. 1.4.2008.

As per provisions of rule 6(3) of CENVAT Credit Rules, 2004, every assessee, opting not
to maintain separate accounts for taxable service and non-taxable services, has now two
options to avail CENVAT Credit i.e. (i) pay 8% on amount of the value of the exempted
service, or (ii) follow the procedure mentioned under Rule 6(3A) to pay (reverse) the
credit attributable to turnover of non-taxable services.
Apart from this, a declaration has to be filed by the branches to the Department to opt for
this scheme.

In view of the above, it has been decided that Bank should opt for the option (ii) as the
same is comparatively beneficial for the Bank. Accordingly, the following action points
have emerged:

Procedure for availing option (ii) (i.e. opting to reverse the credit attributable to
non-taxable turnover)

Step 1 : Information to be furnished to Jurisdictional Superintendent before opting

for this scheme.

A declaration has to be filed by the branch to the Revenue Department to opt for this
scheme. The details to be furnished under the new scheme are:

(i) Name, address and registration No. of provider of output service i.e. of
branch;
(ii) Date from which the option under this clause is exercised or proposed to be
exercised i.e. 1st April 2008;
(iii) Description of taxable services;
(iv) Description of exempted services;
(v) CENVAT Credit or inputs and input services lying in balance as on the date of
exercising the option under this condition.

Aforesaid particulars have to be submitted immediately to the concerned Superintendent

of Service Tax.

Step 2: Provisional CENVAT Credit to be taken by Branch on monthly basis.

Branch shall calculate the eligible amount of monthly CENVAT Credit in respect of
input services and avail the same on provisional basis in the ratio of value of taxable and
exempted services provided in the preceding year as per audited figures. Branch shall
avail such provisional credit (estimated credit) while discharging its monthly Service Tax
liability.

• Calculation of claim of CENVAT on Input services.

Calculation of ratio for Value of taxable services in

calculating estimated CENVAT = preceding Financial Year_________ X 100
Credit i.e. estimated % Total value of services (exempted +
taxable in preceding year)
Provisional (Estimated) CENVAT Credit to be taken on Monthly Basis.

Total Total CENVAT CENVAT in CENVAT in

Estimated on input services respect of respect of 16
admissible = during relevant - services X Estimated + services
Credit on year including prescribed in % prescribed in
Input credit received Rule 6 (5) of Rule 6 (5) of
services. from CENVAT Credit CENVAT
Administrative Rules, 2004. Credit Rules,
Office (ISD). 2004.

Note: Rule 6 (5) of CENVAT Credit Rules, 2004 provides that in respect of specified
“16” services, Rule 6 (3) i.e. the Rule for reversal of CENVAT Credit shall not be
applicable. In other words, 100% CENVAT Credit can be availed in respect to the
specified “16” services given as under:-

1. Consulting Engineer
2. Architect
3. Interior Decorator
4. Insurance Auxiliary Services
5. Maintenance or Repair
6. Foreign Exchange Broker other than Banking & Financial Institution with NBFC
& Body Corporate.
7. Intellectual property service other than copy right.
8. Management Consultant
9. Real Estate Agent
10. Security Agency
11. Technical Testing & Analysis Agency
12. Scientific or Technical Consultancy
13. Banking & Other Financial Services
14. Erection, Commissioning or Installation
15. Technical Inspection or Certification
16. Construction services in respect of Commercial or Industrial Buildings or Civil
Structures.

For example: During the financial year 2007-08, if a branch has earned an income of
Rs.8,50,000/- from services exempted from Service Tax and Rs.1,50,000/- from taxable
services on which Service Tax is applicable, then ratio for calculating estimated
CENVAT Credit to be availed will be worked out as under:-

1,50,000X100 ____= 15%

(8,50,000+1,50,000)

On the basis of above, branch has to avail CENVAT Credit equivalent to 15% of the
CENVAT available i.e., [Credit of duty on inputs / Service Tax paid on Input Services] or
while making the payment of Service Tax for each month during the Financial Year
2008-09. The remaining 85% of CENVAT is to be booked either as expenditure or to be
capitalized in the cost of asset as the case may be.

Further, if any Service Tax is paid, on availment of aforesaid 16 specified services, then
100% CENVAT credit is to be availed on such Service Tax paid on such services in
addition to 15% as discussed in above example.

Information to be given in Half Yearly Returns.

Branches shall provide the following details in its Half Yearly Service Tax Return for
each month.
(a) In respect of Input services

Particular Month
Total CENVAT Credit eligible to be availed on input XXXXX
services

Less : CENVAT Credit reversed on provisional basis of XXXXX

input services.
Total CENVAT Credit availed on provisional basis XXXXX

Illustration: Continuing with the ratio in above example (i.e. 15% taxable services and
85% exempted services), above said proposition is illustrated as under:

Data for a given Month say April, 08

Value of taxable output Services Rs. 13000
Service Tax @ 12.36% Rs. 1606.80
Value of exempted output Services Rs. 87,000
Duties and taxes paid:
Total Service Tax paid on input Services (including on 16 input Rs. 6,000
services specified in rule 6(5)) used both for providing both taxable
services and exempted services
Service Tax paid on 16 input services specified in rule 6(5) commonly Rs. 2,000
used for providing taxable and non-taxable services

iii) Total CENVAT for April, 08 will be Rs. 2,600 (Rs. 600 + Rs. 2,000) as calculated
hereunder.
Estimated Credit on Input services to be
= 6,000 - 2,000 X 15% + 2,000
taken by assessee for relevant month.
Note: Though the value of non-taxable services provided during April, 08 is 13% of the
value of total services, yet CENVAT is to be claimed @ 15% i.e., ratio determined on the
previous year’s turnover i.e., F.Y. 2007-08.

Information to be given in Half Yearly Returns

Assessee shall provide the following details in its half yearly service tax return for each
month.

(a) In Respect of Input Services

Particular Month (Rs.)

Total CENVAT Credit Availed on input Services 6,000

Less: CENVAT Credit reversed on provisional basis on input services. 3,400

Total CENVAT Credit availed on provisional basis 2,600

Step 3: Calculation of ‘Total Estimated CENVAT Credit’ availed by branches

during the year and ‘Total Actual Admissible CENVAT Credit’ during the year.
At the end of Financial Year, branches shall calculate the ‘Total Actual Admissible
Credit’ and ‘Total Estimated Credit’.

Total Estimated Credit = “Estimated credit on input services”

(claimed during the relevant Financial Year)
Total Actual Admissible Credit = Total Actual Admissible Credit on input
services.
• Calculation of claim of Actual CENVAT on Input Services.
Calculation of ratio for Value of taxable services in Relevant
calculating actual CENVAT = Financial Year_________________ X 100
Credit i.e. Actual % Total value of services (exempted +
taxable in relevant year.

• Total Actual Annual CENVAT Credit.

Total Total CENVAT CENVAT in CENVAT in
Actual on input services respect of respect of 16
admissible = during relevant - services X Actual + services
Credit on year including prescribed in % prescribed in
Input credit received Rule 6 (5) of Rule 6 (5) of
services. from CENVAT Credit CENVAT
Administrative Rules, 2004. Credit Rules,
Office (ISD). 2004.
Illustration:

Total Estimated Credit = Rs. 7200 i.e., (Rs.48,000*15%) + Rs. 24,000 = Rs.31,200/- (claimed
during the relevant financial year)
(For the sake of easy calculation, monthly CENVAT available assumed to be Rs.6,000/-, out of
which, monthly CENVAT from 16 specified services is assumed to be Rs. 2,000/-)

Total Actual admissible Credit = Rs.6240 (Rs.48000*13%) + Rs.24,000 = Rs. 30240

Calculation of Claim of CENVAT on Input Services (Actual taxable services assumed to

be 13%)
Calculation of Ratio for 13000
calculating actual CENVAT = 1,00,000 X 100
Credit i.e. Actual %

Total CENVAT

Total Actual admissible

= 72000 - 24000 X 13% + 24000
Credit on Input Services

Step 4: Adjustment/payment of excess/short CENVAT Credit availed by branches.

Branches shall pay the CENVAT Credit on or before 30th June of succeeding Financial
Year if total estimated credit taken is MORE than total actual admissible credit. Interest
@ 24% per annum shall be payable if there is delay in payment i.e. branches which make
payment of differential CENVAT after the due date i.e. 30 th June.

Branches shall at their own take the additional CENVAT Credit if total estimated credit
taken by them is LESS than total actual admissible credit.

1. In the Present Case, we assumed that the ratio of taxable value of service and
exempted value of service is 15:85 on the basic of preceding Financial Year but
at the end of the relevant Financial Year, the ratio comes out to be 13:87 ( i.e. the
value of the taxable services is Rs.13,000 and the value of exempted services is
Rs.87,000 ) . Accordingly total estimated CENVAT credit taken by us during the
year is 15% of total CENVAT available i.e. Rs. 7200 + Rs.24,000 but total actual
admissible credit comes out to be 13% i.e. Rs. 6240 + Rs. 24,000, so the branch
is liable to pay additional CENVAT of Rs. 960/- up to 30th June in order to avoid
the interest @ 24% p.a.

Step 5: Information to be furnished to Jurisdictional Superintendent after making

aforesaid payment/adjustment.

Branches shall inform to the Jurisdictional Superintendent of Central Excise within a

period of 15 days from the date of additional payment or adjustment as explained in step
4 above. Information given by the branches shall contain the following particulars,
namely:

(i) Details of CENVAT Credit attributable to exempted goods and exempted

services, month wise, for the whole Financial Year, determined provisionally
and calculated as per step 2 &3 above.

(ii) CENVAT Credit attributable to exempted goods and exempted services for
the whole Financial Year, determined as per step 3 above.

(iii) Amount short paid/determined as per step 4, along with the date of payment of
the amount short paid,

(iv) Interest payable and paid, if any, on the amount short paid, if payment is made
after 30th June of succeeding Financial Year.

(v) Adjustment of CENVAT Credit if assessee had claimed the less CENVAT
Credit on estimated basis.

All the concerned are advised to note these guidelines for strict compliance to avoid any
punitive action.

For A.K.Batra & Associates

Chartered Accountants

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