Changes in POT and Cenvat Credit – 2012

Puneet Agrawal, B. Com (H), CA, LLB

PartnerATHENA LAW ASSOCIATES

1

Words of Hon’ble Finance MinisterMr. Pranab Mukherjee

“The life of a Finance Minister is not easy. Various players, including policy makers, politicians, agriculturists and business houses, participate in the making of the economy. When everything goes well with the economy, we all share in the joy. However, when things go wrong, it is the Finance Minister who is called upon to administer the medicine. Economic policy, as in medical treatment, often requires us to do something, which, in the short run, may be painful, but is good for us in the long run. As Hamlet, the Prince of Denmark, had said in Shakespeare’s immortal words, “I must be cruel only to be kind”.”

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Point of Taxation Rules

Point of Taxation Rules

Is it determining the taxable event for levy of Service Tax?

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Beginning para of POT Rules

“In exercise of the powers conferred under clause (a) and clause (hhh) of subsection (2) of section 94 of the Finance Act, 1994, the Central Government hereby makes the following rules for the purpose of collection of service tax and determination of rate of service tax,”

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Point of Taxation Rules

• Section 94(2)(a) and Section 94(2)(hhh) of the Finance Act

“(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely :-– (a) collection and recovery of service tax under sections 66 and

68;– [(hhh) the date for determination of rate of service tax and the

place of provision of taxable service under section 66C”

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Point of Taxation Rules

• Answer is No– Section 66 of the Finance Act

» Charge of service tax: There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

– Section 68» Payment of service tax: (1) Every person providing taxable

service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

• Also see new amended Rule 6(3) of the Service Tax Rules

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Point of Taxation RulesCCE, Hyderabad V. Vazir Sultan Tobacco Co. Ltd. 83 ELT 3 (SC)• The Apex Court interpreted the Section 3(1) of the Central Excise Act as

was exist which says :– “(1) There shall be levied and collected in such manner as may be prescribed duties of

excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the First Schedule.”

• The Court held that:– Para 7: It is evident that the words “in such manner as may be prescribed” qualify the

word “collected” and not the word “levied”. While the levy is created by Section 3 itself, the collection of the duty is left to be regulated by the Rules made under the Act as the expression “prescribed” is defined in clause (g) of Section 2 to mean prescribed by Rules made under the Act.

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Point of Taxation Rules• Consequential amendment in Service Tax Rule, 1994

• Rule 5B is inserted:– “Date of determination of rate: The rate of tax in case of services provided, or

to be provided, shall be the rate prevailing at the time when the services are deemed to have been provided under the rules made in this regard.“

Now deleted w.e.f. 01.07.12• Amended Rule 6(1) shall be read as under:

– The service tax shall be paid to the credit of the Central Government,(i)by the 6th day of the month…………….; and (ii) by the 5th day of the month, in any other case,immediately following the calendar month in which the “service is deemed

to be provided as per the rules framed in this regard” (“payments are received, towards the value of taxable services”)

Notification 3/2011-ST effective from 01.04.2011

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Amendment in Rule 6(3) also clarifies that point of taxation rule is not to determine the taxable event

• When service is ultimately not provided(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason, the assessee may take the credit of such excess service tax paid by him, if the assessee.-

(a) has refunded the payment or part thereof, so received alongwith the service tax payable thereon for the service to be provided by him to the person from whom it was received; or (b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.

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New section 67A• The rate of service tax, value of a taxable service and rate of

exchange, if any, • shall be the rate of service tax or value of a taxable service or

rate of exchange, as the case may be, in force or as applicable • at the time when the taxable service has been provided or

agreed to be provided

• Seems to be the enabling provision• The underlined portion shall derive its meaning from the time

determined as per POT rules• Rule 5B has therefore been amended

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Rule 5

• Where service is taxed for the first time, no tax payable to the extent – the invoice has been issued and payment received before

such service became taxable;– If payment has been received before service became

taxable and invoice issued within 14 days of the date when service became taxable

• Where services provided prior to the service being taxable – no ST

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Excess payment upto Rs 1,000

• Rule 3 of POT Rules read with R 4A of ST Rules– • For excess amount upto Rs. 1,000 POT may be the issue of

invoice itself• Invoice not required to be issued if amount received is upto

Rs. 1,000 in excess of the amount indicated in the Invoice.

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Raising of invoice

• Invoice should be raised within 30 days (earlier 14 days) from the date of completion of service or receipt of payment.

• POT shall be determined based upon raising of invoice if issued within the said 30 days

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Point of Taxation RulesRule 4 - Determination of point of taxation in case of change in rate of

tax. The effect of this be summarised as under:

WEE – Whichever is earlier

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Relevant Rules

Date - Before change in rate (assume 10%)

Date – after change in rate (assume 12%)

Effect

4(a)(i) Service provided Raised InvoicePayment received [WEE]

12%

4(a)(ii) Service providedInvoice issued

Payment received 10%

4(a)(iii) Service providedPayment received

Invoice raised 10%

4(b)(i) invoice raised Service providedpayment received

12%

4(b)(ii) Raised InvoicePayment received [WEE]

Service provided 10%

4(b)(iii) Payment received Service providedInvoice raised

12%

Rule 2A inserted to clarify Date of payment

2A. Date of payment.— For the purposes of these rules, “date of payment” shall be the earlier of the dates on which the payment is entered in the books of accounts or is credited to the bank account of the person liable to pay tax:

Provided that — (A) the date of payment shall be the date of credit in the bank account when —

(i) there is a change in effective rate of tax or when a service is taxed for the first time during the period between such entry in books of accounts and its credit in the bank account; and (ii) the credit in the bank account is after four working days from the date when there is change in effective rate of tax or a service is taxed for the first time; and (iii) the payment is made by way of an instrument which is credited to a bank account,

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Rule 4 contd…

• Change in effective rate includes change in portion of value on which ST payable

• If it is a case of change in rate, the tax shall apply relatable to the period as per rule 4

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Rule 6 deleted

• Till 31.03.2012 – continuous services covered under R. 6

• W.e.f. 01.04.12 – R. 12 deleted and continuous services put in R. 3

• Rate change as on 01.04.12 – rule 6 alone applicable – savings section in CE Act applicable to ST

• Rate change as on 01.07.12 – on account of change in composition rate – R. 4 shall apply

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Special POT for specified services

Individuals and partnership firms (including LLP) • If aggregate value of taxable services is less than Rs. 50 lakh in

the previous financial year, the service provider shall have the option to pay tax on receipt basis on taxable services upto Rs. 50 lakhs in the current financial year.

• The special rule for specified service providers namely CA/CS/CWA, Consulting engineer, architect, interior decorator, scientific or technical consultant and legal consultant to pay service tax on receipt basis has been removed. They would not have option to pay tax on receipt basis unless covered above.

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Point of Taxation in case of exports

• Point of taxation in case of export of services – If payment is received within period specified by RBI or period as extended by it, then no service tax need to be paid.

• Now exports not taxable – therefore deleted

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Best judgment

Determination of Point of taxation on best judgment basis - In case the point of taxation cannot be determined as per the rules, the Central excise Officer have been empowered to ascertain the point of taxation to the best of his judgment

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Amendments in Cenvat Credit Rules, 2004

Effective w.e.f. 01.04.2012 (unless some other date is specified)

Amendment in Cenvat Credit Rules

• Capital goods definition amended to include motor vehicles and parts, etc – Part 1– All motor vehicles except covered under CETH 8702, 8703, 8704 and 8711

are eligible as capital goods both for manufacturers and service providers– Dumpers and tippers are specifically includedPart 2– Motor vehicles designed for transportation of goods including their chassis – registered in the name of service provider when used for –

• Service of renting of motor vehicle • Transportation of inputs and capital goods used for providing output service• Providing courier service

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Capital goods contd…Part 3– Motor vehicles designed to carry passengers including their chassis – registered in the name of service provider when used for providing–

• Service of transportation of passengers • Service of renting of motor vehicle • Imparting motor driving skills

Part 4– Components, spares and accessories of above (Part 1-3)

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Capital goods contd…• Earlier (till 01.04.12) credit on all motor vehicles was available to a few specified service providers. • This was liberalised w.e.f. 01.04.12• Now (w.e.f. 01.07.12) further liberalised • e.g. Tractors, Crane Lorries, Mobile drilling derricks, Fire fighting vehicles, Concrete mixer lorries are

not covered below

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S.No. Tariff Heading Description of Motor Vehicle

1 8702 Motor Vehicles for the transport of ten or more persons, including driver

2 8703 Motor Cars/ other motor vehicles principally designed for the transport of persons including station wagons and racing cars

3 8704 Motor Vehicles for transport of goods

4 8711 Motor Cycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side-cars

5 Chassis of all the Motor Vehicle prescribed above

Capital goods contd…

• Specified Service Providers till 30.06.12:– Courier Agency– Tour Operator– Rent a cab – Cargo Handling Agency – now would not get credit – doesn’t carry

inputs/capital goods of service provider– Goods Transport Agency - now would not get credit - – doesn’t carry

inputs/capital goods of service provider– Outdoor Caterer– Pandal or Shamiana Contractor

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Input services

Input Services amended to include • ‘General Insurance’, ‘servicing, repair and maintenance’, of

motor vehicles covered as input service in case of vehicle manufacturers and insurance companies;

• Renting of motor vehicle availed by a person for whom motor vehicle is capital goods, shall be considered as input services;

• For others these services are excluded

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Input services and inputs – works contracts and builder’s services

Input definition….. but excludes-(B) 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;

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Input services and inputs – works contracts and builder’s services

but excludes-(1) service portion in the execution of a works contract and(2) construction services including (3) service listed under clause (b) of section 66E of the Finance Act

(hereinafter referred as specified services) in so far as they are 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 one or more of the specified services; or]

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Contd..

• Bonanza for developers

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Service tax paid on reverse chargeOutput service2(p) “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 of the Finance Act; or(2) where the whole of service tax is liable to be paid by the recipient of service3. CENVAT credit.-(1) A manufacturer or producer of final products or a provider of output service shall be allowed

to take credit (hereinafter referred to as the CENVAT credit) of 5B. Refund of CENVAT credit to service providers providing services taxed on reverse charge

basis.- • A provider of service providing services notified under sub-section (2) of section 68 of the

Finance Act and • being unable to utilise the CENVAT credit • availed on inputs and input services for payment of service tax on such output services, • shall be allowed refund of such unutilised CENVAT credit subject to procedure, safeguards,

conditions and limitations, as may be specified by the Board by notification in the Official Gazette

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Service tax paid on reverse charge

• Service provider in which case 100% ST payable by receiver may not be able to take benefit of 5B

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Removal of CG

Duty payable on Capital Goods if after being used removed as capital goods or as waste or scrap [R. 3(5A)]

• at transaction value/ Depreciated value which more [effective from 17.03.12]

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Removal of CG

Amended Rule 3(5A) of CCR, 2004If the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CEVAT Credit, namely:- (a) for computers and computer peripherals : – for each quarter in the first year @ 10% – for each quarter in the second year @ 8% – for each quarter in the third year @ 5% – for each quarter in the fourth and fifth year @ 1%

(b) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter: Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

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Removal of CG

Example: Capital Goods purchased on 01.04.2012 for Rs. 1,00,000 Used for 5 months i.e. upto 31.08.2012 Sold either as capital goods or as scrap for Rs. 10,000 Value on which duty is payable is higher of following:

Depreciated Value: 1,00,000-(5% of 1,00,000)= 90,000 Transaction Value: 10,000 i.e. Duty is payable on Rs. 90,000

Position before amendment:• If sold as capital goods, duty is payable on Rs. 90,000 (i.e. on depreciated

value)• If sold as scrap, duty is payable on Rs.10,000 (i.e. on transaction value)

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CC of inputs and CG - evidence

Documentary evidence for delivery and location of inputs and capital goods

• To avail Cenvat credit, service provider has to maintain documentary evidence for delivery and location of inputs and capital goods at its premises.

Cont…

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Refund of Cenvat Credit

Rule 5. Refund of Cenvat Credit:• New provision has been brought for refund of Cenvat credit to

exporters of goods/ services [rule 5].• The new scheme does not require correlation between

exports and ‘inputs and input services’• But proportion is applied across the board – even if used fully

for export• This problem not in rebate Notn – 39/2012-ST

Cont…04/07/2023

Refund of Cenvat Credit

Relevant Extract of old RULE 5 - Refund of CENVAT credit• Where any input or input service is used in the manufacture of final product

which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,(i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or (ii) service tax on output service, and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification :

Cont…

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Refund of Cenvat Credit

Relevant Extract of New RULE 5 - Refund of CENVAT credit• (1) A manufacturer who clears a final product or an intermediate product for

export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette:

Refund amount = (Export turnover of goods+ Export turnover of services) x Net CENVAT credit

Total turnover

Where,- (A) Refund amount‖ means the maximum refund that is admissible; (B) Net CENVAT credit means total CENVAT credit availed on inputs and input services by the manufacturer or the output service provider reduced by the amount reversed in terms of sub-rule (5C) of rule 3, during the relevant period

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Rule 6

Reversal of Cenvat Credit for exempt service/goods in rule 6(3):• Increased from 5% to 6%.• In case of transportation of goods/passengers by train – 2%Banking Co/Financial Instt/NBFC• Earlier – if services provided under 65(105)(zm)• Now – only if extends deposits, loans and advances…. Then 50% CC reversal• Now no problem to investment NBFCsReversal of credit where business of sale of securities• Value of service - 1% of Purchase price or SP-PP (whichever higher)Export of services• If all conditions of r 6A of ST Rules satisfied and the payment to be received in foreign

exchange but actually not received within time allowed by RBI• Still not considered as exempt service

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Amendment in Cenvat Credit RulesRule 7. Manner of distribution of credit by input service distributor. - The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following conditions, namely:— (a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; (b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed; (c)credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and (d)credit of service tax attributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates. Explanation 1.- For the purposes of this rule, ―unit‖ includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or otherwise. Explanation 2.- For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5.’- Now monthly calculation to be made

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Amendment in Cenvat Credit Rules

Old Rule 7:Manner of distribution of credit by input service distributor. - The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:-

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or

(b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

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Effect of the change• CCE v ECOF Industries 2011 (23) S.T.R. 337 (Kar.)

10. Therefore, these are the only two limitations, which are imposed in Rule 7 preventing the manufacturer from utilizing the CENVAT credit, otherwise, he is entitled to the said credit. Merely because the input service tax is paid at a particular unit and the benefit is sought to be availed at another unit, the same is not prohibited under law. It is in this context, the manufacturer is expected to register himself as a input service distributor and thereafter, he is entitled to distribution of credit of such input in the manner prescribed under law

• New provision has been brought for distribution of credit by the input Service Distributor.

• Cenvat credit attributable to any particular unit is to be transferred only to that particular unit; and

• If Cenvat credit is attributable to two or more units, it is to be transferred to those units only in ratio of turnover.

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Amendment in Cenvat Credit Rules

Transfer of unutilised Cenvat credit of SAD • Manufacturer having two or more factories can transfer

unutilized Cenvat credit of SAD from one excise unit to another on strength of a transfer challan

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Amendment in Cenvat Credit Rules

“No interest” on Cenvat credit wrongly availed but not utilised

• Rule 14 amended to provide that interest is chargeable if Cenvat credit is “wrongly availed and utilized”. Thus, no interest is chargeable if Cenvat credit is wrongly availed but remains unutilized.

• However, rule 15 relating to penalty has not been amended and therefore in deserving cases, penalty may be charged even if wrongly availed Cenvat credit is not utilized.

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Services provided to SEZ Unit/ Developer

• Rule 6(6A) of CCR introduced w.e.f. 01.03.11• Cenvat credit of inputs, input services and capital goods used

for providing services to a unit/developer of SEZ• Services provided to SEZ even though exempt, Cenvat credit

of inputs, input services and capital goods allowed with retrospective effect from 10.02.06

• Validation clause also introduced• Now renamed as R 6(7)

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Reverse charge

• GTA – if any of the consignor or consignee is – – Factory regd. under factories Act– Coop Society– Society regd. under Societies Regn. Act– FSD/SSD– Body corporate– Partnership firm whether registered or not incl AOP

• Person liable to pay tax – person paying freight, if he is in taxable territory.

• Otherwise service provider

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Contd…• Advocate/ law firm/Arbitral tribunal – 100%• Insurance agent to insurer – 100%• Sponsorship to Body corporate/partnership located in taxable

territory – 100%• Govt/Local authority by way of support services excluding

renting of immovable property and services in (1), (2), (3) of 66D

• To any business entity located in taxable territory– Specified services by Post office– Transport of goods and passengers– Services in port or airport

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Contd…

• Following services – provided by Ind/HUF/AOP/Partnership whether

regd or not located in taxable territory– To a business entity regd as body corporate

located in taxable territory• Renting of motor vehicle – 40% by receiver• Manpower – 75% by receiver• Works contract – 50% by receiver

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Contd…

• Import of services – 100% by receiver

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THANK YOUPuneet Agrawal, Partner

ATHENA LAW ASSOCIATESContact:

puneet@athenalawassociates.com, +91 9891 898911