Rule 3 (1) of CENVAT Credit Rules, 2004 provides that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of-
- the service tax leviable under Sec. 66 of the Finance Act, 1994;
- the Education Cess on taxable services leviable under Sec. 91 read with Sec. 95 of the Finance Act, 2004 (23 of 2004); and
- the Secondary and Higher Education Cess on taxable services leviable under Section 136 read with Section 140 of the Finance Act, 2007 (22 of 2007) paid on any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September 2004. Rule 3(4) that the CENVAT credit may be utilized for payment excise duty or service tax.
Rule 4 prescribes conditions for allowing CENVAT credit. This rule in respect of availing service tax paid on input services imposed conditions vide sub-section (7). According to this sub section the CENVAT credit in respect of input service shall be allowed, on or after the day on which payment is made on the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in Rule 9. But this condition is not applicable in respect of credit of duties paid on inputs and capital goods.
The reason for such discrimination is explained by the Department in FAQ – Directorate of General of Service Tax,, 5th Edition, September 2010. The question and answer in relating to this aspect is reproduced as below:
12.6. Whether it is necessary to avail credit only after making payment against the bill/invoice challan in respect of input services?
Yes. Credit of service tax on the input services can be availed only after making payment of the amount indicated in the invoice/bill challan. This is necessary because the input service provides will be paying the service to the Government only after he realizes the payment, as the payment of service tax is only upon realization. (Rule 4(7) of CENVAT Credit Rules, 2004). The above requirement is not applicable in respect of credit of duties paid on inputs and capital goods.
Now the payment of service tax pattern is changed by the Notification No. 18/2011 from the cash basis to accrual basis by making the rule namely ‘Point of Taxation Rules, 2011. Due to this Rule 4(7) should also be changed. The Notification No.3/2011-Central Excise (N.T) dated 01.03.2011 which comes into effect from 01.04.2011 brings amendments to the CENVAT Credit Rules, 2004 through CENVAT Credit (Amendment) Rules, 2011. This Amendment Rule does not amend Rule 4(7) but inserted a proviso after Rule 4(7) as detailed below:
“Provided that if any payment or part thereof, made towards an input service is returned, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount proportionate to the CENVAT credit availed in respect of the amount so returned.
Explanation I – The amount mentioned in this sub rule, unless specified otherwise, 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 31st day of the month of March.
Explanation II – If the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in Rule 14, for recovery of CENVAT credit wrongly taken.
Explanation III – In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expression, “following month” and “month of March” occurring in Sub Rule (7) shall be read respectively as “following quarter” and “quarter ending with the month of March”.