Exempted Services - Rule 6 of the Cenvat Credit Rules

Exempted Service

Rule 6 of the Cenvat Credit Rules

INTRODUCTION:-

Rule 6 of CENVAT Credit Rules, 2004 provides for the “Obligation of manufacturer of dutiable and exempted goods”. The said section confers the manner and provisions governing the availment of CENVAT Credit in case of manufacturing of dutiable and exempted goods or services. The Budget 2008 has introduced a very significant change in the Rule 6 ibid.

The basis of the Rule 6 is to disallow the benefit of Cenvat Credit to such extent as is in relation to exempted output services, being provided by a service provider providing both exempted as well as taxable service. Hence a provider of output service who is exclusively providing exempted service would not fall under the purview of Rule 6.

The amended Rule 6 ibid provides for three options to the assessee for determination of such extent of Cenvat Credit as is disallowed under the said Rule. Henceforth, a service provider is having the following option,

· Maintaining separate accounts ‘for receipt, consumption and inventory of input and input service meant for providing output service’; and can take Cenvat credit only on that quantity of input or input service which is intended for use in providing taxable output service, orEither to

· In any other cases

1. Pay an amount equal to ‘eight percent of value of the exempted services’; or

2. Pay an amount equivalent to the Cenvat credit attributable to inputs and input services used for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A) of Rule 6.

THE DISPUTE:-

The dispute arises in the case of the output service provider who is providing both taxable services and exempted services and cannot maintain separate account of the inputs and input services used for providing the said services.

For this situation, the assessee is left with either of two options i.e. either to pay proportionate Cenvat Credit attributable the exempted output services or secondly, pay an amount equal to 8% of value of exempted output services.

In case the assessee opts for proportionate reversal of Cenvat Credit then the formula given in sub-rule 3A of Rule 6 is applicable thereto. Such formula as stated therein is in itself very complicated and practically unworkable (as already being elucidated by a number of authors).

Hence the assessee is left with the only option to pay an amount equivalent to 8% of the value of exempted services. The varied provisions and complicacies involved while availing such an option are discussed herein this article.

Old Provisions: -

Sub Rule 3 of Rule 6 ibid provided for the conditions applicable on the provider of Output services not maintaining separate accounts relating to both exempted as well as taxable input services.

The Rule provided that the service provider who was providing both exempted service and taxable service could pay Service Tax to the extent of 20% of total service tax payable from Cenvat credit and the rest 80% from the account current i.e. in cash.

Hence in for instance if the total service tax payable by the assessee amounts to Rs. 100 then the assessee will have to pay the tax to the extent of Rs. 20 (i.e. 20% of total service tax payable) and the residue herein Rs. 80 from account current i.e. in cash.

New Provision: -

Now the circumstances have changed. The Budget 2008 has brought an amendment in the aforementioned Rule 6 ibid. The amended Rule provides for the new provisions as under: -

1. maintain separate accounts ‘for receipt, consumption and inventory of input and input service meant for providing output service’ and then take Cenvat credit on the quantity of input or input service which are used in providing taxable service. The first option is to

(Hence the first option has been kept as it is for the assessee with no change thereto.)

2. Else in case the “Service Provider” does not maintains separate accounts for both taxable and exempted services then he is provided with the following two options, either to

a. Pay 8% of the value of the exempted services; or

b. Calculate proportionate credit attributable to the exempted services rendered by him and reverse the same.

(Herein the impact of amendment emerges.)

In case the assessee opts for second option as stated above then he is required to pay an amount equivalent to 8% of the value of the exempted services. To correctly interpret this Rule one has to see what is the meaning of the term “Exempted Service”.

Clause (e) of Rule 2 of the Cenvat Credit Rules, 2004 defines the term “Exempted Services” as under:-

“exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act;

The definition construe that “Exempted services” covers two types of services:-

(i) The services which have been expressly exempted and

(ii) The services which have not been specified under Section 66 of the Finance Act, 1994.

Henceforth interpretation of Rule 6 read with Rule 2(e) conveys that the assessee opting to pay an amount @ 8% of the value of exempted services, shall also include the value of the services not taxable while such computation. This result in a heavy duty loss to assessee.

For instance if we take the example hotel industry which is providing the services of dry cleaning, Internet, Health and fitness centre etc. which are taxable and on the other hand it also provides exempted room rent service which is his main and basically provided service. The hotelier is earning maximum revenue from the hotel service and moderate revenue by providing the additional services of dry cleaning, Internet, Health and fitness centre etc. which are taxable. Then, if he has availed Cenvat credit of inputs and input services used for providing both exempted and taxable services, and opts to reverses the Cenvat credit at the rate of 8% of the value of exempted service provided as per Rule 6, then is likely to pay a huge amount which may be much higher than the amount of Cenvat credit used by him.

Conclusion:-

In nut shell it can be said that out of the three options available to the assessee under Rule 6 none of them is beneficial to the assessee. As in case the assessee opts for proportionate reversal then complicated formula to compute the value of reversal is too confusing and problematic. On the other hand the assessee can not opt the option to maintain separate inventory of inputs and input services as it is impracticable and not feasible. Like for instance in case of telephone bills it is not possible for the assessee to keep separate record as to which call was made to provide taxable service and which call was made to provide an exempted service.

At the end the assessee is left with the option to reverse the Cenvat credit at the rate of 8% but this is also not feasible as the assessee in such a case will have to reverse an amount equal to 8% of aggregate of exempted as well as not taxable services. Ultimately resulting in greater amount of duty reversal as against the one availed.

As a final point the best option available to such a service provider is to forego the Cenvat credit availed by him. He can save his time and avoid lot of complications as well as legal hassles.

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Exempted Services - Rule 6 of the Cenvat Credit Rules

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