Reversal of CENVAT Credit

- By : Date : 25-Apr-16

Manufacturers of Dutiable Goods and providers of Taxable Services avail and utilise CENVAT Credit of duties / taxes paid on inputs, capital goods and input services.  If they also manufacture exempted goods or provide exempted services, then they have to reverse CENVAT Credit in terms of Rule 6 of the CENVAT Credit Rules, 2004.  The provisions contained in Rule 6 are overhauled in recent budget.  The salient features of amended provisions are as under.

 Now, for the purpose of Rule 6, ‘exempted services’ includes an ‘activity’ which is not even a ‘service’ in terms of Section 65B (44) of the Finance Act, 1994.  The said amendment has brought, practically, all the manufacturers and service providers under the provisions of Rule 6.  For example, now, even selling of old newspapers is covered under ‘exempted service’ requiring reversal of credit.   The manufacturers and service providers have two options under Rule 6.

The first option is pay equal to six per cent of the value of exempted goods and seven per cent of the value of exempted services.  These payments are subject to maximum of the credit available at the end of the said period.  Further, the duty of excise, if any, paid on the exempted goods will be reduced from such payments.  For example, the goods on which benefit of concessional rate of duty @2% under Notification No. 01/2011-C.E. are covered under ‘exempted goods’.   Therefore, the duties paid on such clearances will be reduced from this amount of reversal.

The second option is to pay amount computed in terms of sub-rule (3A) of Rule 6.  Under this, the proportionate credit of common inputs and common input services, attributable to exempted goods and exempted services have to be reversed.  The manufacturers and service providers intending to exercise this option has to intimate in writing to the jurisdictional Superintendent giving the following particulars.

  1. Name, address and registration No.
  2. Date from which the option under clause (3A) is exercised or proposed to be exercised.
  3. Description of inputs and input services used exclusively in or in relation to manufacture  or removal of exempted goods or for provision of exempted services.
  4. Description of such exempted goods and exempted services.
  5. Description of inputs and input services used exclusively in manufacture or removal of non-exempted goods or provision of non-exempted services.
  6. Description of such non exempted goods removed or non-exempted services provided.
  7. CENVAT Credit of input or input services lying in balance on the date of exercising the option.

The manufacturer or service provider exercising the option under this sub-clause shall determine and  pay monthly a  provisionally computed amount towards the credit attributable to the exempted goods and services, by following the steps given below sequentially.

  • Take the total amount of CENTVAT Credit as T.
  • Compute the credit of inputs and input services used exclusively in or in relation to manufacture and / or clearance of exempted goods and provision of exempted services and denote it as A.
  • Compute the credit of inputs and input services used exclusively in or in relation to manufacture and / or clearance of non-exempted goods and provision of non-exempted services and denote it as B.Denote common credit as C and compute it as C = T –(A+B).
  • Compute D as the common input credit  attributable to the exempted goods and exempted services as D = (E/F)xC.
  • E will be sum total of
    1. Value of Exempted services provided during the previous year, and
    2. Value of Exempted goods cleared during the previous year.
  • F will be the sum total of
    1. Value of non-exempted services provided during the previous year.
    2. Value of non-exempted goods cleared during the previous year.
    3. Value of exempted services provided during the previous year.
    4. Value of exempted goods cleared during the previous year.
  • The manufacturer and service provider will reverse the amount equal to D on monthly basis and in case of failure liable to pay interest @ 15%.

At the end of the year, the manufacturer, service provider will finally computed the common credit attributable to the exempted goods and exempted services.  The method of computing the final credit is similar to that of method prescribed for computing the provisional computing with the difference that the value of clearances of current year will be taken in place of the value of clearance of previous year. The amounts debited provisionally, as indicated above, shall be deducted from the said amount and balance will be debited by the 30th of June of the succeeding year.   In case of failure the amount will be paid along-with fifteen percent interest.  In case, the amount provisionally paid is in excess of the amount finally arrived, the excess amount is permitted to be re-credited.

All the manufacturers and service providers are advised to careful go through the provisions contained in Rule 6 of the CENVAT Credit Rules, 2004 and take decide which option to exercise.   Timely not exercising the option may result into wiping off the entire CENVAT balance.  In view of the author, the option of proportionate reversal will suit most of the service providers and manufacturers.

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