The last two Budgets were witness to the Government trying to put a quietus to the storm generated over retrospective taxation and to increase tax compliance through certain amendments to law and procedures. The Union Budget-2016 carries the imprimatur of the government’s emphasis on “Transform India”. Towards this objective, the Govt. has launched various initiatives like ‘Skill India’, ‘Digital India’, ‘Startup India Plan’ and sought to move towards a ‘pensioned society’, besides the grandiose ‘Make in India’ and ‘Swachh Bharat’ initiatives. Leaving such macro policy initiatives aside, this article seeks to examine some of the important changes brought about as part of Budget, 2016 and the Finance Bill, 2016.
Changes in Rule 6 of the Cenvat Credit Rules, 2004
The changes proposed in Rule 6 of the Credit Rules on first glance are humongous and are accompanied by various complicated formulae. However, it appears these are constructive amendments carried out with a view to remove certain ambiguities and disputes pertaining to apportionment of credit towards manufacture of exempted goods or for provision of exempted services. The changes incorporate the following principles:-
- Option 1 - The assessee can pay an amount equal to 6% of value of the exempted goods and 7% of value of the exempted services. This amount will be capped at a maximum of the total credit available with the assessee at the end of the period to which the payment relates.
- Option 2 – Pay an amount as determined under Rule 6(3A). Credit on common inputs/input services is identified and the same is apportioned based on the exempted/dutiable turnover. Credit on common inputs/input services is allowed only proportionately.
- No credit is to be allowed on inputs/input services used exclusively in the manufacture of exempted goods / services.
- Full credit is allowed on the inputs/input services used exclusively in the manufacture of dutiable goods / taxable services.
Rule 6 has been streamlined to provide clarity and make it less complicated. The amendment which provides for capping of payment at 6% or 7% at a maximum of the amount of Cenvat Credit available, is long overdue. The Karnataka High Court in CCE, Bangalore-III v. Himalaya Drug Co. - 2011 (271) E.L.T. 350 (Kar.) had held that payment of such amount is not required when separate accounts are not maintained but proportionate Cenvat credit attributable to inputs used in exempted product is reversed. However, it would be pertinent to remember that even after discharging 6% or 7% of the value of exempted goods / services, Cenvat Credit with respect to inputs / input services exclusively used for exempted goods / services continues to be separately ineligible in tandem with the erstwhile Rule 6 and the credit scheme itself.
At this point, it would be useful to recall the disputes in the past few years on the point as to whether for the purposes of the computation of the proportionate credit as prescribed under Rule 6(3A), the ratio is to be applied to the amount of ‘total credit’ or to ‘common credit’. The Department was of the view that total Cenvat credit has to be taken into account and not the common Cenvat credit. The Department’s view was prima facie agreed with by the CESTAT in Thyssenkrup Industries Pvt. Ltd. v. CCE - 2014 (310) ELT 317 (Tri-Mum). This dispute has now been taken care of by the present amendments.
The newly amended Rule 6 also clears the way for banking and financial institutions to exercise any of the options for reversal of Cenvat credit in addition to the option of payment of 50% of the Cenvat credit which was mandatory earlier. Rules 6(1), (2) and (3) of CCR have been overhauled to rationalize the admissibility of input service credit. The sequence for reversal of credits has also been defined. Despite such overhauling, the essential DNA of Rule 6 remains and therefore, one has to remain alert while working under Rule 6 even in the amended scenario.
Cesses – New Infrastructure Cess & restriction on credit utilisation for NCCD
A new levy, namely Infrastructure Cess has been introduced on motor vehicles falling under Chapter Heading 8703 of the First Schedule to the Central Excise Tariff. The proposed rates are 1%, 2.5% and 4% depending on the fuel used to run the vehicle. Infrastructure Cess can neither be paid from Cenvat credit nor can Cenvat credit be taken of the same. This may lead to a spike in vehicle prices which might give a slight fillip to the Government’s stated objective of liberalizing the passenger road transport sector and decongesting cities.
Further, from 1 March, 2016, the 5th proviso to Rule 3(4) of the Credit Rules has been amended according to which Cenvat Credit of any duty specified in sub-rule (1) except NCCD cannot be utilized for payment of NCCD on any product. This means that now, credit earned in respect of Basic Excise Duty (BED) cannot be used for payment of NCCD on final product. NCCD liability can be offset by using only NCCD credit. This amendment overcomes the judgment of the Guwahati High Court in CCE, Dibrugarh v. Prag Bosimi Synthetics – 2013 (295) ELT 682 (Gau.) wherein it was held, inter alia, that Cenvat credit obtained from other sources like BED can be utilized for payment of NCCD on the final product.
Revision of returns & Reduction in number of returns
The number of returns required to be filed by an assessee in a year has been stated as reduced from 27 to 13, i.e. 12 monthly returns and 1 Annual return. The facility of revising one’s returns was already available to assessees under Service Tax. The Finance Bill, 2016, proposes to extent this facility to Central Excise assessees as well. An assessee who has filed returns within the prescribed period may file revised returns by the end of the calendar month in which the original return was filed. The ‘relevant date’ for recovery of duty in cases where revised returns are filed shall be the date on which the revised returns were filed. Also, it has been proposed that an assessee who has filed Annual Returns within the prescribed period may also submit revised returns within a period of one month from the date of submission of such annual returns. These changes may have marginal impact on otherwise arduous compliance burden of the assessees.
From Input Service Distributor to Input Distributor
The Finance Bill, 2016 enables manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute inputs with credit to the individual manufacturing units. Already, the institution of an Input Service Distributor was existing eponymously under Rule 2(m) of the Credit Rules with appurtenant procedural responsibilities & obligations. With this amendment, an implicit nod to the establishment of an ‘Input Distributor’ has been given by the Government without referring to it as such.
Cenvat credit on office equipment/appliances allowed
Amendments to Credit Rules have removed the restriction with regard to ‘the equipments and appliances used in an office’ as contained in Rule 2(a)(A)(viii)(1) of the present Credit Rules. This is a beneficial amendment which enlarges the scope of the definition of capital goods.
Conclusion
The Budget proposals reiterate the intent to adopt the much-awaited tax reform of GST. However, the Finance Minister in his speech did not indicate anything regarding the proposed date of its implementation or the roadmap for introduction of a draft legislation. Notwithstanding the same, the amendments discussed above eschew flamboyance and aim to rationalize and streamline the existing legal regime so as to prepare for the introduction of GST.
[The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi]