Key Service Tax and Cenvat Credit Amendments

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Key Service Tax and Cenvat Credit Amendments

 A lot is being written on the Point of Taxation Rules (‘POT Rules’), which is to be implemented with effect from April 1, 2011. Many are under the impression that this is an attempt to switch over from the cash basis to the accrual basis. The fact remains that the POT Rules would travel much beyond the accrual basis. 

Point of taxation

Transition rule:

Point of Taxation Rules effective from 1st April 2011 determining point of tax will not apply where-

• Provision of service is complete prior to 1st April 2011: or
• Invoice is issued prior to 1st April 2011.

An option has been provided to the tax payer to continue to pay service tax on receipt of payment where-

• Provision of service is complete on or before 30 June 2011 or
• Invoice is issued on or before 30 June 201 

General rule:

General rule to determine point of taxation shall be earlier of-

• Issuance of invoice; or
• Receipt of payment, including advance; or
• The date of completion of service, where invoice is not issued within 14 days of completion of service

The rule determining point of tax in case of “change of rate of tax” has been amended to mean “change in

effective rate of tax”. It is further provided that such change shall also include a change in taxable value under a notification.

• Individuals, proprietary firms or partnership firms providing taxable services of Architect, Interior Decorator, Chartered accountant, cost accountant, company secretary scientific or technical consulting and legal services.

This rule will have overriding effect over the other rules determining point of tax. 

Associated enterprises

For services received from associated enterprise located outside India, the point of tax shall be earlier of-

• Payment date; or
• Date of credit in the books of account of service recipient 

Cenvat credit rules 2004

Point of Cenvat credit

Cenvat credit will be allowed on “receipt of invoice” as against on “payment of value of taxable service along with service tax”. It is also provided that if payment of value of input service and service tax thereon remains unpaid for 3 months from the Invoice date, the amount of credit initially availed needs to be paid. The amount so paid will be subsequently available as credit upon payment of value of input service and service tax thereon.

Where  service tax is payble under reverse charge, the Cenvat credit will be allowed only upon payment of value of input service and service tax thereon.

As a transition provision, for invoices  issued prior to 1 April 2011, Cenvat credit will continue to be available upon payment of value of input service and service tax thereon.

Various amendments have been made in Cenvat Credit Rules, 2004 vide Union Budget 2011. Definitions of the terms like ‘inputs’, ‘input services’, ‘exempt services’, etc. have been amended. Also, amendments have been made in the methodology prescribed for credit reversal in case an assessee is engaged in both taxable and non taxable activities.

The purpose of this document is to summarize some of the key clarifications issued vide the Circular (Circular No. 943/04/20 1 1-CX dated 29 April 2011 ) and possible action points on the part of the companies pursuant to these clarifications.

Clarification – Negative list

The list of goods and services for which credit has been disallowed (such as catering, club services, etc.) is only illustrative and not exhaustive. The principle is that Cenvat credit is not allowed when any goods and services are used primarily for personal use or consumption of employees.

Key Action Points

• Expense list needs to be analysed not only to carve out those expenses which are specifically excluded in the definition but also those expenses, which though not specifically covered, satisfy the principle mentioned in the preceding para.
• It needs to be analysed whether expenses incurred by employees during business/ official visits would get covered under the negative list.
• Credit of ineligible expenses should be denied upfront to avoid any interest exposure.

Clarification – Scope of the term ‘inputs’

In respect of ‘inputs’, it has been clarified that goods such as furniture and stationary used in an office within the factory would be construed to be goods used in the factory. Thus, the same would be deemed to be used in relation to the manufacturing business and hence credit of the same shall be allowed.

Key Action Points

• Re-evaluate expenses incurred in the factory from credit eligibility perspective with special emphasis on expenses with respect to which credit has been forgone till now.
• Ensure that goods in respect of which credit is intended to be taken in terms of the amended provisions (e.g. furniture, stationary items, etc.) are purchased against Excise invoice.

Clarification – Treatment of credit of common inputs and input services used in trading before 1 April 2011

It has been clarified that the same could be availed subject to prescribed restrictions as were applicable during the relevant period. This clarification seems to suggest that trading was all along an ‘exempt service’ (i.e. the recent amendment clarifying that trading is an exempt service will have retrospective effect).

Key Action Points

• Analyse whether this would necessitate reversal/re-instatement of credit pertaining to the past period (depending upon the position taken earlier with respect to credit reversal pertaining to trading activities)
• Formulate the strategy accordingly and consequently, revise the tax returns.

Clarification – Availability of credit on services received before 1 April 2011 on which credit is not allowed now – e.g. rent-a-cab service

It has been clarified that the credit on such services shall be available if their provision had been completed before 1 April 2011.

Key Action Points

• Review the status of credit with respect to services that have been completed before 1 April 2011.
• Avail credit even if the booking/ payment/ billing in respect of these services have been done on or after 1 April 2011.
• Analyse whether credit of Service tax incurred on advance payments made before 1 April 2011 would be available.

Clarification – Manner of determining ‘value’ of trading activities It has been clarified that for calculating the value of trading:

• As regards application of specific principle of LIFO, FIFO, etc. – the method normally followed by the concern for its accounting purposes as per generally accepted accounting principles should be used.
• With respect to the taxes and year end discounts – generally accepted accounting principles need to be followed in this regard. All taxes for which set off or credit is available or are refundable/ refunded may not be included. Discounts are to be included.

Key Action Points

• Ascertain the accounting policy adopted by the Company and
  compute ‘sale price’ and ‘cost of goods sold’ accordingly.

Conclusion

The Circular should be seen as a timely step on the part of the authorities to clarify various issues arising out of the amendments. Further, most of these clarifications should be welcomed by the industry.

However, there are still number of issues that have not been addressed, such as:

• Whether credit of general business expenses, like rent, telecommunication, equipment maintenance, etc. would be allowed.
• Whether the credit reversal formula prescribed for trading activities can be applied retrospectively.
• Whether expenses incurred by employees during their official trips would be construed as being personally used/consumed by these employees.
• Accordingly, one would hope that the Government comes up with another set of clarifications to address the unresolved issues to obviate alternate interpretations/disputes

Before concluding….

It would seem that the Finance Minister has singled out the IT sector for some rough treatment in this Budget, whether it is the refusal to renew the tax holiday scheme or the drastic amendments in the cenvat credit scheme.  This seems rather unfortunate and uncalled for, given the fact that the IT sector has been mightily contributing to the national cause by consistently posting impressive growth rates.