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CENVAT

Introduction
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Cenvat has its origin in the system of VAT (Value added tax). Value added tax means that the tax is payable only on commodities and on the services rendered. A comprehensive form of VAT covers the value added at all the three levels, that is manufacturing, whlesaling and retailing.

Cascading Effect
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Taxation of inputs, like raw materials, components and other intermediaries had a number of limitations. In production process, raw material passes through various processes stages till a final product emerges. Thus, output of the first manufacturer becomes input for second manufacturer and so on. When the inputs are used in the manufacture of product `A', the cost of the final product increases not only on account of the cost of the inputs, but also on account of the duty paid on such inputs.

Cascading Effect
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As the duty on the final product is on ad valorem basis and the final cost of product `A' includes the cost of inputs, inclusive of the duty paid, duty charged on product `A' meant doubly taxing raw materials. In other words, the tax burden goes on increasing as raw material and final product passes from one stage to other because, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect or double taxation.

Cascading Effect
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This very often distorted the production structure and did not allow the correct assessment of the tax incidence. Therefore, the Government tried to remove these defects of the Central Excise System by progressively relieving inputs from excise and countervailing duties. An ideal system to realize this objective would have been to adopt value added taxation (VAT). However, on account of some practical difficulties it was not possible to fully adopt the value added taxation.

Disadvantages of Cascading effect


Computation of exact tax content difficult y Varying tax burden y Discouraging Ancillarisation y Increases cost of production y Concessions on basis of use isnt possible
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MODVAT
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Government evolved a new scheme, `MODVAT' (Modified Value Added Tax). MODVAT Scheme which essentially follows VAT Scheme of taxation. i.e. if a manufacturer A purchases certain components(raw materials) from another manufacturer B for use in its product. B would have paid excise duty on components manufactured by it and would have recovered that excise duty in its sales price from A. Now, A has to pay excise duty on product manufactured by it as well as bear the excise duty paid by the supplier of raw material B. Under the MODVAT scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. It amounts to excise duty only on additions in value by each manufacturer at each stage.

MODVAT
The modvat scheme is regulated by Rules 57A to 57U of the Central Excise Rules and the notifications issued there under (The Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002). y Modvat Scheme ensures the revenue of the same order and at same time the price of the final product could be lower. Apart from reducing the costs through elimination of cascade effect, and bringing in greater rationalization in tax structure and also bringing in certainty in the amount of tax leviable on the final product, this scheme will help the consumer to understand precisely the impact of taxation on the cost of any product and will, therefore, enable consumer resistance to unethical attempts on the part of manufacturers to raise prices of final products, attributing the same to higher taxes.
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CENVAT credit rules 2004


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Subsequently, MODVAT scheme was restructured into CENVAT( Central Value Added Tax) scheme. A new set of rules 57AA to 57AK , under The Cenvat Credit Rules, 2004, were framed and whatever restrictions restrictions were there in MODVAT Scheme were put to an end and comparatively, a free hand was given to the assesses. Under the Cenvat Scheme, a manufacturer of final product or provider of taxable service shall be allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product.

Definitions under the rules


"capital goods" means:(A) the following goods, namely:(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act; (ii) pollution control equipment; (iii) components, spares and accessories of the goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; and (vii) storage tank, used(1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or (2) for providing output service; (B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act;

Input" meansmeans(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production; (ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service; Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;

Availment of Cenvat credit


What is Cenvat Credit y Cenvat Credit is a pool of duties and taxes paid on inputs, capital goods and input services as specified in Rule 3(1) of Cenvat Credit Rules. y Procurement of goods from EOU y In respect of inputs / capital goods procured from EOU unit, Cenvat credit is available equal to CVD and special CVD paid and education cess and SAH education cess w.e.f. 7-9-2009 (earlier, it was allowable as per a complicated formula) Rule 3(7)(a) of Cenvat Credit Rules.
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Utilisation of Cenvat credit


Utilisation for any eligible purpose y Cenvat credit is a pool. The credit in this pool can be utilised for payment of any excide duty on excisable final product and service tax on taxable output service. The credit can also be used for payment of certain amounts [Rule 3(4) of Cenvat Credit Rules] Credit only of inputs and services received upto end of month y Credit can be utilised only of inputs and input services received upto end of the month [First proviso to Rule 3(4) of Cenvat Credit Rules] (even if excise duty/service tax is payable at a later date) Inter-changeability of credit of various duties y Credit of Basic excise duty, CVD, Special CVD and service tax can be utilised for payment of any duty on final product or service tax on output services, except duty payable u/s 85 of Finance Act on pan masala and certain tobacco products [provisos to Rule 3(4) of Cenvat Credit Rules] Restrictions on interchangeability y Cenvat Credit of education cess, NCCD and additional excise duty paid on inputs under section 85 of Finance Act (and corresponding CVD on imported inputs) can be utilised only for payment of corresponding duty on final product i.e. the credit is not inter-changeable. Credit of special CVD y Credit of special CVD (present rate is @ 4%) u/s 3(5) of Customs Tariff Act can be utilised by manufacturer but not by service providers [thirdproviso to Rule 3(4) of Cenvat Credit Rules] Credit of education cess and SAHE cess y Credit of education cess paid on input goods and paid on input services is inter-changeable. Similarly, credit of SAH Education cess paid on input goods and paid on input services is inter-changeable.

Duty paying document for availing Cenvat credit


Eligible duty/tax paying document y Cenvat credit can be availed on basis of eligible duty documents as specified in Rule 9(1). y Invoice of Manufacturer, Bill of Entry, Supplementary Invoice, Dealers Invoice and GAR-7 challan when service receiver is liable to pay service tax are major eligible documents. Transit Invoice y Credit can be availed on basis of transit invoice i.e. on basis of invoice of manufacturer when goods purchased through dealer and name of ultimate buyer is shown as consignee. No time limit for availing Cenvat credit y There is no time limit for availing Cenvat credit can be taken even after 3/4 years y Credit cannot be denied on account of minor defects y There is ample case law that Cenvat credit cannot be denied for minor defects in duty paying document. Endorsement of duty paying document y Duty/tax paying document need not be in name of the manufacturer using the input/input services for manufacture/provision of taxable output service. It is sufficient if these are endorsed in his name with certificate that endorser has not availed Cenvat credit. Burden of proof y Person taking credit must take reasonable steps while availing Credit. Burden of proof of admissibility of Cenvat credit is on him [Rule 9(5) of Cenvat Credit Rules]

Dealers Invoice for Cenvat

First stage and second stage dealer can issue Cenvatable Invoice y Cenvat credit can be availed on basis of Invoice issued by dealer registered with Central Excise [Rule 9(1) of Cenvat Credit Rules] y First stage and second stage dealer registered with Central Excise can issue Cenvatable Invoice. First stage dealer means dealer purchasing goods from manufacturer or his depot or consignment agent. They have to submit quarterly return to department within 15 days from close of quarter [Rule 9(8) of Cenvat Credit Rules] Optional refund of 4% special CVD y If the first stage dealer claims refund of special CVD of 4%, the buyer cannot avail Cenvat credit. (This is not compulsory on dealer. It is optional). Transit Invoice y Transit Invoice is also permissible. In such case, dealer need not be registered, if name of ultimate buyer is shown as consignee in the invoice issued by manufacturer. Cenvat credit of CVD and special CVD on imported goods y Cenvat credit can be availed in respect of imported goods purchased through dealer, by either issuing dealers invoice or by endorsement of Bill of Entry.

Records and returns under Cenvat


Records of Cenvat credit y Manufacturer/service provider is required to maintain records of inputs and capital goods, records of credit received and utilised. [Rule 9(5) of Cenvat Credit Rules] Return of Cenvat credit availed and utilised y Returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-7 is to be submitted [Rule 9A of Cenvat Credit Rules] Revised return y Revised return of Cenvat credit can be submitted within 60 days [Rule 9(11) of Cenvat Credit Rules] Returns by dealers, input service distributor y Dealer/service provider/input service distributor is also required to submit returns [Rule 9(6) and 9(10) of Cenvat Credit Rules]

Other provisions relating to Cenvat


SSI to reverse Cenvat at end of year y SSI unit can opt out of Cenvat at end of the year. He has to reverse Cenvat credit on inputs in stock as on 31st March [Rule 11(2) of Cenvat Credit Rules] SSI can take Cenvat of duty on inputs in stock y When he starts payment of duty during financial year after exemption is over, he can avail Cenvat credit of duty paid on inputs in stock Simultaneous exemption y Simultaneous exemption and availment of Cenvat is permissible by SSI only in specified cases. Cenvat credit to exporter y Exporter of final product or taxable services can avail Cenvat credit on inputs and input services. He can claim refund of Cenvat credit if he cannot utilise the Cenvat credit for payment of duty on sale made within India on payment of duty [Rule 5 of Cenvat Credit Rules]

Other provisions relating to Cenvat


Refund of credit of input services y Merchant exporter can claim refund of specified input services used while exporting final product. Transfer, amalgamation of undertaking y If undertaking is transferred, merged or shifted, Cenvat credit can be transferred [Rule 10 of Cenvat Credit Rules] . Penalty for improper Cenvat credit y Penalty can be imposed for wrongfully taking or utilising Cenvat credit [Rules 15 and 15A of Cenvat Credit Rules] Accounting for Cenvat and stock valuation y Accounting for Cenvat should be as per guidance note issued by ICAI. y Inventory valuation should be as per AS-2 which requires exclusion of Cenvat credit. However, for income tax purposes, Cenvat credit has to be added in valuation in view of section 145A of Income Tax Act.

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