Important Budgetary changes in CENVAT Credit Rules 2004 & some other amendments

Presentation by: Indirect Taxation GroupCreated by: 152162 Date: 21-03-2011

Doc. Classification: General

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AGENDA

Definition of Inputs, Capital Goods and Input Services.

Impact of Budget due to change in definition under Cenvat Credit Rules 2004.

Proposed counter measures.

Other important amendments impacting the company.

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CAPITAL GOODS (Rule- 2a)

Upto 31.03.2011 w.e.f 01.04.2011

“Capital goods” means:- (A) the following goods namely:-

(i) all goods falling under Chapter 82,Chapter 84,Chapter 85,Chapter-90,Heading-6805,Heading-6804of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipments(iii)components, spares and

accessories of 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(vii)storage tank, used-

(1)in the factory but does not include any equipment or appliances used in an office; or

(2)for providing output service;(B) Motor vehicle registered in the

name of output service provider for providing taxable service as specified in sub clauses (f), (n), (o), (zr), (zzp), (zzt),(zzw) of clause (105) of section 65 of the finance Act;

“Capital goods” means:- (A) the following goods namely:-

(i) all goods falling under Chapter 82,Chapter 84,Chapter 85,Chapter-90,Heading-6805,Heading-6804of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipments(iii)components, spares and accessories of 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(vii)storage tank, used-

(1)in the factory but does not include any equipment or appliances used in an office; or

(1A) outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory ; or

(2)for providing output service;

(B) Motor vehicle registered in the name of output service provider for providing taxable service as specified in sub clauses (f), (n), (o), (zr), (zzp), (zzt), (zzw) of clause (105) of section 65 of the finance Act;

(C) Dumpers or tippers, falling under chapter 87, registered in the name of output service provider for providing output service taxable as specified in sub clauses (zzza) and (zzzy) of clause (105) of section 65 of the said finance Act;

(D) components, spares and accessories of motor vehicles, dumpers or tippers used to provide taxable services as specified in (B) and (C);

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INPUT (Rule- 2k)

Upto 31.03.2011 w.e.f 01.04.2011

“Input” means- (i)All goods ,except light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, used in or in relation to the manufacture of final product whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of final products cleared along with final product goods, goods used as paints, 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 factory of production;

(ii) All goods, except light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol and motor vehicles, used for providing any output services;

Explanation :Inputs includes goods used in manufacture of capital goods, which are further used in the factory of the manufacturer but shall not include cement, angles, channels, CTD, TMT and other items for construction of factory shed, building or laying of foundation or making structure for support of capital goods.

“Input” means-(i) all goods used in the factory by the manufacturer of the final product; or(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or(iii) all goods used for generation of electricity or steam for captive use; or(iv) all goods used for providing any output service; but excludes-(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;(B) any goods used for-(a) construction 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 any taxable service specified in sub-clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act;(C) capital goods except when used as parts or components in the manufacture of a final product;(D) motor vehicles;(E) 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; and(F) any goods which have no relationship whatsoever with the manufacture of a final product.

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INPUT SERVICE (Rule- 2 I)Upto 31.03.2011 w.e.f 01.04.2011

““Input service” means any service, -(i) used by a provider of taxable service for providing an output service; or(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,and includes service used in relation to setting up, modernization, renovation or repair of a factory, premises of output service provider or an office relating to such factory or premises, advertisement, sales promotion, market research, storage upto place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

““Input service” means any service, -(i) used by a provider of taxable service for providing an output service; or(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernization, 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, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes services,-(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for-(a) construction 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(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

Services :Cenvatable Input services

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Services used by a provider of taxable service for providing an output service

Services used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal

Services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises.

Specific services in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Services: Non- Cenvatable services

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Services provided by architect, port, airport ,commercial or industrial construction services, construction of complex service and works contract service When they are used for- (a)construction 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,

General insurance service, rent-a-cab service, authorized service station and supply of tangible goods services ,when they relates to a motor vehicle

services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

Summary of Changes

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Sl No Before Budget After budget

1 Services in relation to setting up of the factory is an input services

Services in relation to setting up of the factory is not an input services

2 Any Services in relation to business activity is an input services.

This has been withdrawn

3 commercial or industrial construction services and works contract service in relation to civil structure, laying of foundation and Support of capital goods is an input services

These are not qualified as input service

4 Rent a cab is an input service Rent a cab is not an input service

5 Services in relation to employee consumption and benefits in relation to production is an input service

These are not qualified as input service

Annual Impact of Excluded Services:

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Sl No Excluded Services Service Tax Credit (Approx)

1 WCT Contract in respect to Civil Job 13.69 Crs

2 Construction Services 2.73Crs

3 Rent – a – Cab 0.03 Crs

4 Employee Related services• Outdoor Catering• Shabashi expenses

0.01 crs

Proposed Action Plan:

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Sl No Activity Sub - Activity Responsibility Target

1 To optimize the availment of cenvat credit of excluded services before 31st March’2011

Communication to vendors to submit the bill for the job done till date.

Project engineering

Certification of the bill Project engineering

27th March,2011

Payment of those bill and providing the hard copy of those bill to Indirect Tax section

Bills Section 30th March,2011

Availment of cenvat Credit Indirect Tax Section

31st March,2011

2 To amend the tax code of the live work order.

Identification of the live order with respect to the excluded services

Procurement Division

25th March,2011

Change the Tax Code suitably as non Cenvatable tax code

Procurement Division

30th March,2011

Inputs :Cenvatable inputs

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All goods used in the factory by the manufacturer of the final product; or

any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or

all goods used for generation of electricity or steam for captive use; or

all goods used for providing any output service;

Input: Non- Cenvatable

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light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;

any goods used for-

(a)construction 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,

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; and

any goods which have no relationship whatsoever with the manufacture of a final product.

Summary of Changes

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Sl No Before Budget After budget

1 Goods should be used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product

Goods used in the factory by the manufacturer of the final product

2 Not specifically included goods which are used for generation of electricity or steam for captive use

specifically included goods which are used for generation of electricity or steam for captive use

3 Goods which are used for construction of shed and structure for support of capital goods are excluded through explanation.

These are excluded clearly in the definition.

4 Overall it was very stringent by definition

It gives little relaxation by excluding only the goods which have no relationship whatsoever with the manufacture of a final product.

Annual Impact of Included inputs– TSL Works:

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Sl. No Included Inputs Cenvat Credit (approx)

1 Items which are clearly cenvatable 0.20 Crs

2 Items which are cenvatable but needs clarification from the department

14.46Crs

Proposed Action Plan:

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Sl No Activity Responsibility Target

1 To identify the non- Cenvatable materials

Indirect taxation group

2 Examine the cenvatability of those material with reference to their use and input definition.

Procurement Division

3 Amendment of tax code in the purchase order

Procurement Division

New Service Proposed :

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1. Services provided by air-conditioned restaurants having license to serve alcoholic beverages in relation to service of food and/or beverages. The effective burden will be 3 % of taxable value as they will enjoy a rebate of 7 % on the amount charged.

2. Services provided for accommodation by a hotel, inn, club or amp site, or any other similar establishment for a continuous period of less than three months in excess of declared tariff of Rs.1000/- per day with an abatement of 50% so that the effective rate is only 5 % of the amount charged.

(Effective from the date to be notified, after the enactment of finance Bill, 2011).

Expansion of Scope of services

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Health Check up and treatment service :

Currently, the levy covers health services provided in relation to health checkups or preventive care to an employee of a business entity.

Following are also included in the above category :- Service provided by hospitals, maternity/ nursing homes, dispensary, clinic, etc with central air-conditioning and more than 25 beds. Diagnostic services with the aid of a laboratory or medical equipment. Services provided by doctors from the premises of such hospitals, maternity/nursing homes , dispensaries, clinics, etc, who are not employees of such establishments.

(Effective from the date to be notified, after the enactment of finance Bill, 2011).

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