UNION BUDGET 2015: CHANGES IN THE CENVAT CREDIT RULES, 2004 AND ITS IMPACT

In the Union Budget, 2015 presented by the Hon’ble Finance Minister Shri Arun Jaitley on February 28, 2015, Saturday, numerous changes in ...

In the Union Budget, 2015 presented by the Hon’ble Finance Minister Shri Arun Jaitley on February 28, 2015, Saturday, numerous changes in the Indirect taxes, have been introduced to combat/ surpass the challenges encountered in the way of progress of continued growth and to pave way for smooth implementation of Goods and Services tax (“GST”).

Discussion Forum – Articles

1. Increase in time limit for availing Cenvat credit on Input services and Inputs – Whether applicable on invoices issued prior to March 1, 2015? 
2. Interest on Wrong availment of Cenvat Credit but not utilised – a tale of never ending litigation and interpretational issues 
3. Aftermath of non-excisable goods being equated to exempted goods/ final products for the purpose of Rule 6 of the Cenvat Credit Rules, 2004 
4.  Doubtful fate of refund on Deemed exports

We are discussing here the changes made in the Cenvat Credit Rules, 2004 (“the Credit Rules”) under the  Union Budget, 2015 viz-a-viz existing/ old provisions for easy digest as under:

Changes in the Credit Rules vide Notification No. 6/2015-Central Excise (N.T) dated March 1, 2015

Changes in Rule 4 of the Credit Rules: Conditions for allowing Cenvat credit

W.e.f: March 1, 2015 Ø  A: Rule 4(1) and Rule 4(2)(a) of the Credit Rules amended –Availability of Cenvat credit on Inputs/ Capital Goods directly despatched to job worker: Rule 4(1): Cenvat credit of Inputs can be taken immediately on receipt of Inputs in the premises of the job worker, in case where the Inputs are sent directly to the job worker’s premises on the direction of the manufacturer or the provider of output service. Hitherto, Cenvat credit was available only on receipt of Inputs in the factory of the manufacturer or in the premises of the provider of output service. Ø  Rule 4(2)(a): Parallel amendment has also been incorporated in Rule 4(2)(a) of the Credit Rules dealing with conditions for availing Cenvat credit on Capital Goods. Accordingly, effective from March 1, 2015, Cenvat credit on Capital Goods can be taken immediately on receipt of the Capital Goods in the premises of the job worker, in case where the Capital Goods are sent directly to the job worker’s premises on the direction of the manufacturer or the provider of output service. Hitherto, Cenvat credit was available only on receipt of Capital Goods in the factory of the manufacturer or in the premises of the provider of output service or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory. Therefore, through the stated amendment, the manufacturer or the output service provider would be able to dispatch the Inputs/ Capital goods directly to the job workers’ premises and avail Cenvat credit, thereby removing the blockage in Cenvat credit when Inputs/ Capital goods are directly sent to job worker’s premises. B: Rule 4(5)(a) of the Credit Rules substituted – Provisions pertaining to Cenvat credit in case of Inputs/ Capital Goods sent to job workers: Rule 4(5)(a)(i): Cenvat credit on Inputs sent to job worker Ø  Availment of Cenvat credit would be permissible even if Inputs as such or after being partially possessed are sent to a job worker and from there subsequently sent to another job worker and likewise, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose provided that the Inputs or the products produced therefrom are received back by the manufacturer or the provider of output service within 180 days of being sent. Ø  Cenvat credit of Inputs can be taken immediately where the Inputs are directly sent to the job worker’s premises without their being first brought to the premises of the manufacturer or the provider of output service. Here the time limit of 180 days shall be counted from the date of receipt of the Inputs by the job worker. Rule 4(5)(a)(ii): Cenvat credit on Capital Goods sent to job worker Ø  Time limit for receipt of Capital Goods from job worker: Availment of Cenvat credit would be permissible even if Capital Goods as such are sent to a job worker, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose provided that the Capital Goods are received back by the manufacturer or the provider of output service within 2 years of being sent. Ø  Cenvat credit of Capital Goods sent directly to job worker’s premises: Cenvat credit of Capital Goods can be taken immediately where the Capital Goods are directly sent to the job worker’s premises without their being first brought to the premises of the manufacturer or the provider of output service. Here the time limit of 2 years shall be counted from the date of receipt of the Capital Goods by the job worker. Rule 4(5)(a)(iii): Reversal of Cenvat credit Ø  If the Inputs/ Capital Goods are not received back within the above stipulated time, the manufacturer or the provider of output service shall pay an amount equivalent to the Cenvat credit attributable to the Inputs/ Capital Goods, as the case may be, by debiting the Cenvat credit or otherwise. However, Cenvat credit can be taken again on receipt of such Inputs/ Capital Goods in the factory or in the premises of the provider of output service. C: Third proviso to Rule 4(1) and Sixth Proviso to Rule 4(7) of the Credit Rules amended – Enhancement of time limit for availing Cenvat credit on Inputs/ Input Services from 6 months to 1 year Ø  Till September 1, 2014, there was no time limit prescribed under the Credit Rules for availment of Cenvat credit. However, effective from September 1, 2014, the said liberty in respect of availment of Cenvat credit on Inputs/ Input Services was withdrawn vide Notification No. 21/2014-CE dated July 11, 2014 (Applicable w.e.f September 1, 2014), amending Rule 4(1) [for Inputs] and Rule 4(7) [for Input services] of the Credit Rules in order to fix a time limit of 6 months from the date of issue of any of the documents specified in Rule 9(1) thereof, for availment of the Cenvat credit. Considering the hue and cry created in the Industry, the Union Budget, 2015 has enhanced the stated time limit (effective from March 1, 2015) for availing Cenvat credit on Inputs and Input services to 1 year (as against 6 months earlier) from the date of issue of any of the documents specified in Rule 9(1) of the Credit Rules. D: Applicability of the Explanations I and II of Rule 4(7) of the Credit Rules extended to Rule 4 thereof Ø  In the Explanations I and II, for the words “sub-rule”, the word “rule” has been substituted. Thereby, the amount mentioned in Rule 4 of the Credit Rules and not just Rule 4(7) thereof, shall be paid by the manufacturer of goods or the provider of output service by debiting the Cenvat credit or otherwise, on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31stMarch. Further, provisions of Rule 14 of the Credit Rules will be invoked for recovery of the Cenvat credit wrongly taken in case the manufacturer of goods or the provider of output service fails to pay the amount payable under Rule 4 thereof. W.e.f: April 1, 2015 A: Rule 4(7) amended – Conditions for availment of Cenvat credit on Input services under Partial Reverse Charge: Ø  Cenvat credit in respect of Partial Reverse Charge allowed immediately after the payment of the Service tax by Service Recipient: Proviso to Rule 4(7) of the Credit Rules has been amended to provide that effective from April 1, 2015, Cenvat credit in respect of Partial Reverse Charge can be availed immediately after payment of Service tax by the Service recipient and there is no requirement of payment of the value of Input services as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9 of the Credit Rules. Hitherto, in case of Partial Reverse Charge, the Cenvat credit of Input services were allowed on or after the date on which the payment of the amount of Service tax as well as value of Input services were made. Here, it would not be out of place to mention that vide Notification No. 21/2014-CE (NT), dated July 11, 2014 (Applicable w.e.f September 1, 2014) in case of Service tax paid under Full Reverse Charge, the condition of payment of invoice value to the service provider for availing Cenvat credit of Input services was withdrawn.

Changes in Rule 5 of the Credit Rules: Refund of Cenvat credit on Inputs/ Input Services used for Export of Goods

Definition of Exports goods inserted w.e.f. March 1, 2015 Ø  The term “Exports goods” has been defined to include within its ambit any goods which are to be taken out of India to a place outside India. Hitherto, in terms of Rule 5 of the Credit Rules, the 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, was allowed refund of Cenvat credit as determined by the formula, procedure, conditions etc. specified therein. Accordingly, intention of stated change warrants that Deemed exports benefits would not qualify for refund under Rule 5 of the Credit Rules (Elaborated in Article - Discussion Forum)

Changes in Rule 6 of the Credit Rules: Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services

Scope of reversal of Cenvat credit under Rule 6 of the Credit Rules extended to non-excisable goods w.e.f. March 1, 2015: Ø  Explanation-1 has been inserted in Rule 6(1) of the Credit Rules, which provides that, for the purpose of this Rule, exempted goods or final products as defined in Rule 2(d) and Rule 2(h) thereof shall include non-excisable goods cleared for a consideration from the factory. Therefore, requirement of Cenvat credit reversal under Rule 6 of the Credit Rules in respect of clearance of exempted goods has been extended to clearance of non-excisable goods also. Further Explanation – 2 provides that Value of such non-excisable goods shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Central Excise Act, 1944 (“the Excise Act”) and the Rules made thereunder.

Proviso to Rule 9(4) of the Credit Rules

Provisions of Rule 9(4) of the Credit Rules applicable to First Stage Dealer or Second Stage Dealer shall also apply mutatis mutandis to importer who issues an invoice on which Cenvat credit can be taken [W.e.f. March 1, 2015]: Ø  Rule 9(4) of the Credit Rules provides as under: “(4) The CENVAT credit in respect of input or capital goods purchased from a first stage dealer or second stage dealer shall be allowed only if such first stage dealer or second stage dealer, as the case may be, has maintained records indicating the fact that the input or capital goods was supplied from the stock on which duty was paid by the producer of such input or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him”

Provision of Rule 12AAA of the Credit Rules Amended: Power to impose restrictions in certain types of cases

Provision of Rule 12AAA of the Credit Rules extended in case of registered importer: Ø  In order to prevent the misuse of the provisions of the Cenvat credit, power of the Central Government has been extended to impose  restrictions on registered importer apart from the following existing categories: ·         Manufacturer; ·         First stage and second stage dealer; ·         Provider of taxable service; ·         Exporter The nature of restrictions may include restrictions on utilization of Cenvat credit and suspension of registration.

Rule 14 of the Credit Rules substituted to segregate Recovery of Cenvat credit wrongly availed but not utilized from the cases of Cenvat credit wrongly availed and utilized [W.e.f. March 1, 2015]

Rule 14(1)(i): Cenvat credit availed wrongly but NOT UTILIZED – recoverable under Section 11A of the Excise Act or Section 73 of the Finance Act, 1994 (“the Finance Act”) Ø  Where the Cenvat credit has been availed wrongly but not utilised, the same shall be recovered from the manufacturer or the service provider, as the case may be, and the provisions of Section 11A of the Excise Act (Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded) or Section 73 of the Finance Act (Recovery of Service tax not levied or paid or short-levied or short-paid or erroneously refunded), as the case may be, shall apply mutatis mutandis for effecting such recoveries; Rule 14(1)(ii): Cenvat credit availed AND UTILISED wrongly – recoverable along with interest under Section 11A/ 11AA of the Excise Act or Sections 73/ 75 of the Finance Act Ø  Where the Cenvat credit has been availed and utilised wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the service provider of output service in terms of the provisions of Sections 11A and Section 11AA (Interest on delayed payment of duty) of the Excise Act or Sections 73 and 75 (Interest on delayed payment of service tax) of the Finance Act, as the case may be, shall apply mutatis mutandis for effecting such recoveries. Manner of determining utilization of Cenvat credit Ø  For the purposes of Rule 14(1) of the Credit Rules, all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: -                   i.            Opening balance of the month has been utilised first;                 ii.            Cenvat credit admissible in terms of the Credit Rules taken during the month has been utilised next;               iii.            Cenvat credit inadmissible in terms of the Credit Rules taken during the month has been utilised thereafter.

Rule 15 of the Credit Rules substituted: Confiscation and Penalty [With effect from the date on which the Finance Bill, 2015 receives the assent of the President]

Penalty provisions amended in terms of Section 11AC of the Excise Act or Section 78 of the Finance Act Sub-Rule of Rule 15 Cenvat credit taken or utilised wrongly by Cenvat credit in respect of Input or Capital Goods or Input services Old Provision New Provision Rule 15(1) Any Person In contravention of any of the provisions of the Credit Rules Goods liable to confiscation and penalty not exceeding duty or Service tax on such goods services or Rs. 2000/-, whichever is greater. Goods liable to confiscation and penalty in terms of Section 11AC (1)(a) or 11AC (1)(b) of the Excise Act or Section 76(1) of the Finance Act, as the case may be. Rule 15(2) Manufacturer By reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of the Excise Act, or of the rules made thereunder with intent to evade payment of duty Section 11AC of the Excise Act Penalty in terms of Section 11AC(1)(c) or 11AC(1)(d) or 11AC(1)(e) of the Excise Act Rule 15(3) Service provider By reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of the Credit rules or of the Finance Act or of the rules made thereunder with intent to evade payment of Service tax Section 78 of the Finance Act Section 78(1) of the Finance Act

Bimal Jain
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