SERVICE TAX, CENVAT CREDIT RULES AND SELECTED ISSUES

BY

C A S H A I L E S H R A T H IACA, M.Com

B A H E T I & S O M A N IChartered Accountantswww.bandsindia.com

TOPICS COVERED

Who is eligible? On what is he eligible? When is he eligible? Any conditions for

claiming CENVAT Credit? Accounting Treatment

Who is eligible and

On what is he eligible ?

Manufacturer who manufactures taxable goods

Service Provider who provides taxable output service

What is eligible for credit? Manufactured Products - Excise Duty,

Additional Excise Duty, NCCD, Education Cess, Secondary & Higher Education Cess

Imported Products - Countervailing Duty, Additional Duty of Customs, Education Cess, Secondary & Higher Education Cess - Services

Service Tax, Education Cess, Secondary & Higher Education Cess

ISSUES In cases where a person pays

service tax as a recipient of service, can he

-Avail the CENVAT Credit?-Utilise the CENVAT Credit? What are the provisions

pertaining to internal allocation of duties & cesses?

internal allocation of duties & cesses WHAT AGAINST WHAT

Utilisation

Availment

Excise Duty

Service Tax Education Cess

SHE

Excise Duty/CVD/

Service Tax

Education Cess

SHE

INPUTS All Goods used in relation to

manufacture of final products within the factory of production

All Goods used for providing any output service

Does not include LDO/HSD/Motor Spirit

Includes inputs used in manufacture of capital goods which are used in the factory for manufacture

ISSUE Can a motor vehicle be

considered as inputs•for other service providers? •For Manufacturers?

POINT OF AVAILAMENT

Inputs - Rule 4(1) –•immediately

Capital Goods Rule 4(2) •50% in the year of receipt •Balance thereafter

Input Services - Rule 4(7) •On payment of the value of the service

Inputs lying in stock •at the time of taxability of output - Rules 3(2) & 3(3) •at the time of exemption of output - Rules 11(2), 11(3) & 11(4)

CENVAT AND NON TAXABLE

ACTIVITIES

Rule 6(1): Not Available for Exempted Goods or Services

OPTION I

Rule 6(2): Specific Identification and claim for taxable goods / services –

OPTION II

Rule 6(3)(i): No identification - composite scheme for manufacturers / service providers based on output (ad hoc payment) - OPTION II

OPTION III

Rule 6(3)(ii): No identification - composite scheme for manufacturers / service providers based on input (proportionate payment) - OPTION III

OPTION - I

Maintain Separate Records and claim FULL credit of inputs and input services attributable to taxable output services / taxable finished goods - Rule 6(2)

Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4)

Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5)

OPTION - II

Claim FULL Credit of Inputs and service tax unless exclusively used for exempted services/ exempted finished goods

Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4)

Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5)

Pay an Amount equal to 10% of value of exempted goods Rule 6(3)(i)

Pay an Amount equal to 8% of value of exempted services Rule 6(3)(i)

OPTION - III

Effectively Claim PROPORTIONATE Credit of Inputs and Input Services unless exclusively used for exempted services/ exempted finished goods

•Manufacturer Input Quantity Based

•Service Provider Output Value Based

Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4)

Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5)

PROPORTIONATE CREDIT to be worked on Provisional and Final Basis

OPTION - III

Provisional Percentage to be based on previous financial year (can be Zero)

Final Percentage to be based on current financial year

Pay Difference before 30 June (otherwise pay interest@ 24% p.a.)

Excess can be re-claimed as "Credit"

COMPOSITE OUTPUT : OPTIONS TAX

SITUATION

INPUT Capital Goods

SERVICES Consequence on Output

Manufacturer/Service Provider maintaining separate records

NA

Manufacturer not maintaining separate records (output side)

10%

Service Provider not maintaining separate records (output side)

8%

Manufacturer not maintaining separate records (input side) % % NA

Service Provider not maintaining separate records (input side)

% % NA

ISSUES

Are services provided to SEZ Unit taxable services or exempted services? Are exports taxable or exempted services?

the person making

payment towards freight would be liable

to pay the service tax

IN CASE THE CONSIGNOR OR THE CONSIGNEE OF THE GOODS TRANSPORTED IS ONE OF THE FOLLOWING:-Factory registered under or governed by the Factories Act;Company established by or under the Companies Act;Corporation established by or under any law;Society registered under Societies Registration Act or similar law;Co-operative society established by or under any law;Dealer of excisable goods, registered under the Central Excise Law; orAny body corporate established, or a partnership firm registered, by or under any law.

the person making

payment towards freight would be liable

to pay the service tax

Exemption from tax in the following two situations-

1. Where the gross amount charged on all consignments transport in a goods carriage does not exceed Rs. 1500

2. Where the gross amount charged individual consignment transported in a goods carriage does not exceed Rs. 750.

There is no SSP exemption available in case of GTA.

Taxability of Services to Be Provided

Facts :

1.Date of Agreement 1/5/2009

2.Agreement to become operational from 1/6/2009 & executed over 2 years; value of services Rs. 20 million

3.Advance received on 5/5/2009 Rs. 5 million

Taxability of Services to Be Provided Agreement aborted on 31/5/2009 due

to death of service receiver

XYZ reasons Services to be provided Nil Advance forfeited

Now Question is -

Is there Service Tax liability on advance received?

Yes, Services provided or to be provided.

ISSUE

Revision in the tax rate subsequent to receiving advance:

•Will it affect the tax liability?

•What happens if service is made exempt when actually provided?

When both “provided” and “to be provided” are taxable a future exemption will apply only to the “outstanding payments”

ACCOUNTING ISSUE

The Service Tax law recognised only cash system of accountancy. However, the Companies Act provides that every company will have to keep its account on accrual basis and while maintaining the account on accrual basis, the accounting standards as promulgated by the ICAI needs to be followed.

ACCOUNTING OF SERVICE TAX INPUT

CREDIT

On Receipt of Invoice –Expenses Account … Dr 100

Service Tax Credit Suspense… Dr 10

To Party Account 110

On Payment to PartyService Tax Credit … Dr 10

To Service Tax Credit Suspense 10

ACCOUNTING OF SERVICE TAX OUTPUT

At the end of a year :

(a)Service Tax Credit a/c will show a Debit balance which would be equal to CENVAT Credit on account of Service Tax at the year end.

(b)The Service Tax Credit Suspense a/c will represents CENVAT Credit not availed of the Service Tax which has not become due since the payment for rendering services is not made.

ACCOUNTING OF SERVICE TAX OUTPUT

On Billing–Party Account … Dr 110

To Sales 100

To Service Tax Payable Suspense 10

On Receipt of the Bill amountService Tax Payable Suspense … Dr 10

To Service Tax Payable 10

ACCOUNTING OF SERVICE TAX OUTPUT

At the end of a year :

(a)Service Tax payable a/c will show a credit balance which would be equal to Service Tax payable at the year end.

(b)The Service Tax Payable Suspense a/c will represents liability of the Service Tax which has not become due since the payment for rendering services is not received.

issueIs Service Tax Liability not due also liable for disallowance under section 43B?

THANK YOU