Budget 2014: Cenvat Credit –Time For A Makeover?
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Tax Partner, EY
Senior Tax Professional, EY
Time and again, changes related to cenvat credit have found its place in the budget speech and the amendments introduced in the union budget.
In Budget 2004-05, Credit Rules were introduced as a major step towards integrating the tax on goods and services.
In Budget 2011-12, amendments in the Credit Rules were introduced to make the credit regime restrictive wherein inter alia business related services, services of setting up a building or a civil structure and employee benefit related services were excluded from the ambit of credit. Such changes were proposed to achieve a more realistic balance between input credits and output tax and to harmonise the provisions of the scheme across goods and services.
In Budget 2012-13, the Negative List regime for levy of service tax was introduced and Credit Rules were amended again and the Finance Minister assured that the new approach was not a revenue augmentation measure but intended to make compliance simple and administration of service tax law easier.
As is evident from the various budget speeches and clarifications, the Credit Rules have been amended frequently sometimes with the intention to minimize cascading of taxes, providing an assessee friendly regime and aligning the cenvat credit provisions with the much awaited GST regime whereas on some occasions it has been made restrictive. However, there seems to have been an inadvertent deviation from the intended path and what has erupted is a scenario where the assessee does not know what to claim and the revenue does not know what to disallow.
The shift to Negative List based levy of service tax was inevitable considering that GST is knocking at the door of the Indian economy. The implementation of the concept of Negative List of Services has resulted in most of the activities being covered under the ambit of service tax. However, the restrictions, exceptions and limitations on availability of cenvat credit still continue.
The definition of ‘input’ and 'input service' as per the current credit regime, places various restrictions on availment of cenvat credit. Some of these input and input services are essential in provision of output services or under taking manufacturing activities and such restriction merely adds to the cost of the service provider or manufacturer.
The existing Credit Rules are extremely complex and the categorization into ‘inputs’, ‘capital goods’ and ‘input services’ have made the Credit Rules more perplex. Further, various provisions regarding reversal of credit and numerous restrictions on availment and utilization have only baffled the tax-payers more.
Such restrictions and limitations have steered a situation which is against the principle of value added taxation and has led to undue litigations and administrative difficulties both for the assessee and the revenue.
In GST legislations across the world, most of the expenses incurred in relation to the business are allowed as credit and can be set off against the output liability with very few inputs considered as ineligible. As a step towards the approaching GST legislation and to align the cenvat credit scheme with the Negative List regime and excise legislations, the definition of input services should be amended to allow input tax credit without any restrictions. Removal of such restrictions would result in a much needed fair and equitable credit legislation.
Further, categorizations like ‘input’, ‘input service’ and ‘capital goods’ have only added to the complexity of the credit legislation and the same may be done away with and all genuine business expenses should be allowed as credit. This will help reduce cascading of taxes as well as be a stepping stone to the assessee friendly GST regime.
What is expected from the new Finance Minister are steps to be taken to ensure uninterrupted and unrestricted credit barring minimum exceptions to match the comprehensive coverage of services under the tax net.
Apart from revamping the basic structure on which credit can be availed, expectations regarding improvement of various other provisions of the Credit Rules continue to surface. One of the areas where change would be welcomed would be the provisions regarding reversal of credit. The existing provisions and formulae are perceived not only to be extremely complex but also to an extent inimical and unfriendly. A simplified and more coherent mechanism for reversal of credit would be appreciated.
The wish list for amendments in the Credit legislation also includes amendment in Rule 7 of the Credit Rules regarding distribution of credit by an ISD. Recent changes have created an ambiguity in the formula for distribution of credit which seems to restrict the total eligible credit being distributed. Clarification or amendment in the same would be an added blessing to the tax-payers.
There are some much needed changes in the credit legislation to match the pace of the changing indirect tax legislation and to project an encouraging augury of the anticipated GST regime. What remains to be seen is to what extent the hardships of the tax-payers are resolved. One can only hope that ‘Acche Din’ comes soon!