17-07-2012, 03:27 PM
TECHNICAL GUIDE TO CENVAT CREDIT
Technical guide to CENVAT credit.pdf (Size: 2.09 MB / Downloads: 337)
Introduction and Transition
The concept
CENVAT (Central Value Added Tax) has its origin in the system of
VAT (Value Added Tax) which is prevalent in over 100 countries in the
world. The concept of VAT was developed to avoid the cascading
effect of taxes. It was found to be a very good and transparent tax
collection system, which reduces tax evasion, ensures better tax
compliance and increases tax revenue.
MODVAT (Modified Value Added Tax) was introduced in India in 1986
(re-named as CENVAT w.e.f. 1.4.2000). The system was termed as
MODVAT, as it was restricted up to the manufacturing stage and
credit of only excise duty paid on manufacturing products (and
corresponding CVD paid on imported goods) was available.
A system of State VAT (in lieu of sales tax) has been introduced in all
the States in the Country.
Proposed integration of goods and services tax
A Task Force Committee was formed under chairmanship of Dr.Vijay
Kelkar on Implementation of Fiscal Responsibility and Budget
Management Act. The Kelkar Committee submitted its report in July,
2004. The Committee strongly recommended introduction of ‘Goods
and Services Tax’ (GST).
Central Government, through the Union Budgets, has announced
intention to introduce GST w.e.f. 1.4.2011.
As a major step towards the introduction of GST Regime, Union
Finance Minister, Shri P. Chidambaram, in Para 148 of his Budget
Speech on 8.7.2004, stated as follows.
Validity of earlier Circulars and Notifications
Rule 16 of CENVAT Credit Rules, 2004 states that earlier
notifications, circulars and trade notices issued under CENVAT Credit
Rules, 2002 and Service tax Credit Rules, 2002 will continue to be
valid, to the extent they are relevant and are consistent with new
Rules. It would appear that, generally circulars can be validated, but
notifications issued under Rules/Act would lapse when the main
Rules/ Act, are withdrawn. In Air India vs.UOI (1995) 4 SCC 734, it
was held that when the main Act lapses, the subordinate legislation
also lapses, unless there is an express saving clause in the repealing
statute. Since there is a saving clause under CENVAT Credit Rules,
2004, it would reasonably appear that, notifications may also be valid
to the extent relevant and consistent.
Beneficiaries
Under CENVAT Credit Rules, 2004, there are only two types of
beneficiaries who can avail the benefit of CENVAT credit viz.:
(a) manufacturer of final products
(b) output service provider
Hence, in order to avail the benefit under CENVAT Credit Rules, 2004,
it is absolutely essential that such person is either a manufacturer of
final products or output service provider or both. It should be noted
that an assessee would not be entitled to CENVAT credits just
because he happens to be a manufacturer or a service provider;
importance should also be given to the excisability of the goods
manufactured and the taxability of the services provided by him.
Trading activities
It is commonly found that a person is often engaged in trading activity
(buying and selling of goods/services). The same could be in one or
more of the following combinations:
(a) Only Trading
(b) Manufacturing and Trading
© Services and Trading
(d) Manufacturing, Services and Trading
As regards pure trading activity, it is very clear that the benefit of
CENVAT credit (viz. service tax paid on input services and excise duty
paid on inputs/capital goods) would not be available to such dealer.