This article has been written by Chandan Kumar Pradhan from KIIT School of Law, Odisha. This article talks about the detailed analysis of the CENVAT(Central Value Added Tax) Credit Rules, 2017 and how it is imposed on the manufactures and service providers.
Table of Contents
Introduction
CENVAT or Central Value Added Tax is modified from the MODVAT(Modified Value Added Tax) and is a part of the central excise framework of the country. While referring to CENVAT Credit Rules, 2004, the central government made CENVAT Credit Rules, 2017. This rule is targeting to reduce the tax burden faced by the customers while purchasing the goods. The rule notifies , the credit is available for both manufacturers and service providers ensuring that all parties are aware of their own duties. This rule ensures that there is a smooth flow of duties with no additional waste of money, whether it is a manufacturer or a customer, and reducing the double taxation system and keeping the whole chain clean and simple.
An example of how the CENVAT works
Pradhan Fans Private limited, is a manufacturing company which is an expert for producing different types of fans. This company requires the raw material to make the fans, those are steel blades, copper wires, plastic blades, motors etc. The owner purchases the blades from Mishra Blades Private limited, copper wires from Khamari Private limited and motors from Mukherjee Private limited, by paying them a certain price. Here, each time the company purchases the materials, it includes certain excise duties which have been paid by the main manufacturer. Therefore, the tax liability of Pradhan fans is increasing.
Then, CENVAT allows Pradhan fans Private Ltd to use the credit when they purchased the materials for the manufacturing process, thereby reducing the overall tax liability.
The reducing liability is not just for them but also for the final customer. Now, if we calculate the total CENVAT of all the raw materials, it is Rs 50,000/- and the CENVAT on the final product is Rs 60,000. Then, the tax liability of Pradhan Fans is (Rs 60,000-Rs 50,000=Rs 10,000).
Here, CENVAT reduces the cascading of tax paid by the main manufacturer. And the rule ensuring that no party is unnecessarily paid any additional amount of tax.
Conditions for imposing the CENVAT Credit Rules
Rule 6 of the CENVAT Credit Rules gives the conditions for allowing the credits as mentioned below:
- The credit should be taken instantly on receipt of inputs in the premises of the manufacturer or in the premises of the job worker. In this case, the goods are sent directly to the job worker on the command of the manufacturer,
- It is given that the manufacturer shall not claim CENVAT Credit after one year of the date of the issue of the documents provided under Rule 11(1) CENVAT Credit Rules,
- The credit on the inputs shall be allowed, even if the inputs are processed partially from a job worker and go like a chain from one job worker to another for the next process to create the manufacturer of the final product. But the products worked under the job workers that should be back within 180 days when it is sent from the factory,
- The credit shall be allowed even if the inputs are directly sent to the job worker without taking to the control area of the manufacturer. In this case also, the 180 days rule will be applied and count to be returned with the given period from the date of receipt of the input signed by the Job worker,
- If the inputs are not received by the manufacturer within 180 days then the credit will be reversed. Then, the manufacturer has to give the credit once again,
- If the inputs are sent to the job worker by the direction of the commissioner or assistant commissioner of the central excise who has the jurisdiction, then the period will be valid for 3 financial years to return the inputs and it should be in a condition as he may impose in the interest of revenue.
Note: If the manufacturer of the product does not pay the amount due under this rule, it will be recovered under Rule 16 of the CENVAT Credit Rules.
Refund of the CENVAT Credit Rules
Under Rule 7 of the CENVAT Credit Rules, a manufacturer who transports the final product or a moderate product for transport without taking payment of duty under a letter of undertaking, he shall be allowed for the refund of credit by the following formula:
Refund amount= (Export turnover of goods × Net CENVAT Credit)
Total turnover
Where:
- “Refund amount” means the maximum refund allowable.
- “Net CENVAT Credit” means the total Credit which is inputted by the manufacturer to decrease by the amount recovered from the provided period.
- “Export turnover of goods” means the final products and moderate products which were transported during the given period and without the payment of central excise duty under any letter of undertaking.
- “Total turnover” means the overall sum of the price of:
- All excisable goods approved during the provided period including exempted goods, dutiable goods and excisable goods exported.
- All inputs removed under Rule 4(1) of the CENVAT Credit Rules against a statement, during the period for which the claim is filed.
No refund credit will be provided if the manufacturer has difficulty to make the products as per The Customs and Central Excise Duties and Service Tax Drawback Rules, 1995 then he can claim the deduction of duty of the Central Excise Rules, 2017.
Justification- For the view of this rule:
- “Export goods” means any goods which were carried out from India to another country.
- “Relevant period” means the time period for which the application is filed.
Obligations of the Manufacturer or Service Providers of final products
The exempted goods can not be manufactured as per the CENVAT Credit Rule, even if a huge quantity of input is used then also those goods will be cleared from the factory and credit will not be allowed and paid by the manufacturer in terms of the provisions of sub-rule (2) or sub-rule (3) of the CENVAT Credit Rules.
A manufacturer who completely manufactures the exempted goods for their space up to the place of removal will pay the total amount of credit of input. It is not only for getting the credited inputs.
A manufacturer who makes only 2 types of goods, namely-
- Non exempted goods removed
- Exempted goods removed, if any of the following satisfied:
- In relation to the payment and credit of the amount invested during the period, he has to pay an amount which is equal to 6% of the value of the exempted goods, which depends on the total initial loan balance available at the starting of the period.
- Pay an amount as set under sub-rule(4) of the CENVAT Credit Rules.
As long as, if any duty of excise is paid on the exempted goods, that payment will be decreased from the amount payable.
For the settlement of the amount, it is compulsory to be paid under clause(2) of sub-rule (3) of the CENVAT Credit Rules. The manufacturer of goods have to follow the essential procedure given under:
A manufacturer will send in writing to the Superintendent of central excise giving the following particulars:
- Address, name, and registration number of the manufacturer of the goods.
- Date from which the option under this provision is exercised.
- Description of inputs used completely in relation to the manufacture of exempted goods removed.
- Description of inputs used completely in relation to the manufacture of non-exempted goods removed.
- CENVAT Credit of inputs in the balance as on the date of exercising the option under this condition.
- The manufacturer of the final goods should control the credit to be paid, out of the overall credit of inputs taken during the month.
- The manufacturer will resolve the amount of CENVAT credit by identifying the exempted goods and removed for the whole financial year.
Where a manufacturer has failed to apply the option under sub-rule (3) of the CENVAT Credit Rules and observed the process supplied under sub-rule (4) of the CENVAT Credit Rules, the central excise officer should decide the case based on the amount of CENVAT Credit involved and pay the amount with interest calculated at a rate of 15%.
The payment of a product under sub-rule (3) of the CENVAT Credit Rules will be redeemed under CENVAT credit. And for exempted goods, there is no CENVAT Credit applied.
The provisions under sub-rules(1), (2), (3) of the CENVAT Credit Rules will not apply if the manufactured goods removed without payment of duty are either-
- Approved an entity in a special economic zone or a developer of a special economic zone for their authorized operations,
- 100% clean up export-oriented enterprises,
- Supplied to the United Nations or an International organization for their official use or to projects funded by them, upon which exemption of duty is available under the government of India notification in the Ministry of Finance(Department of Revenue) is 108/95-Central Excise, dated August 28, 1995,
- Notification No. 12/2012, in terms of the provisions of CE, supplied for the use of foreign diplomatic missions or consular missions or career consular offices or diplomatic agents, dated March 17, 2012,
- Approved for export under bonds under the provisions of the Central Excise Rules, 2017.
Powers of the Central Government
The central government has the power to solve the problems under CENVAT Credit Rules if it finds any type of misuse and any other problems where such use is irrelevant. The central government will put restrictions on the registered manufacturer and may also notify him from any official gazettes about the nature of restrictions on utilization of CENVAT Credit Rules and seize the registration certificate of an importer or of any dealer and procedure for issues of order given by the principal chief commissioner of central excise.
Additional Provisions
Under CENVAT Credit Rules, 2004 if the central government gives any notification, instruction, standing order, trade notice or issues any other order, then the Central Board of Excise and Customs, the principal chief commissioner of the central excise or chief commissioner of central excise, have to obey the rules under this Act as earlier it was stable and they have to issue the rules the which were instructed.
References in the rule, any notifications, standing order, trade notice or any other order to the CENVAT Credit Rules, 2004 and any clauses away from the start of these rules, be created as references to the CENVAT Credit Rules, 2017.
Confiscation(Seizing of goods) and Penalties under CENVAT Credit Rules, 2017
- If any person uses the CENVAT Credit Rules in any wrongful Act then, all of his goods shall be liable to confiscation and he will be also liable to a penalty under the clause (a) or (b) of sub-section (1) of the section 11AC of the Excise Act,
- In any case, where the CENVAT Credit Rules in respect of input is taken wrongly by reason of fraud or any wilful misstatement or dispute of any of the provisions of the Excise Act, then the manufacturer shall also be liable to pay the penalty under the provisions of clause (c), (d) or (e) of sub-section(1) of section 11AC of the Excise Act,
- Any provisions given under sub-Section(1) or sub-Section (2) will be issued by central excise officers following the principles of natural justice.
Whoever breaks the provisions of these rules, there is no penalty provided in the rules, he will be liable to pay 5000/- rupees.
Conclusion
In this article, we got to know that the exempted goods can not be manufactured and if anyone made the products after knowing this, he will be liable under CENVAT Credit Rules. The product which is made by the manufacturer should be useful for final customers. And the central government has a lot of power to decide any wrongful act happened during the manufacturing process.
References
- https://taxguru.in/excise-duty/cbec-notifies-cenvat-credit-rules-2017.html
- https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7510
- https://www.teachoo.com/670/207/Rule-5B-Refund-of-CENVAT-in-case-of-Reverse-Charge/category/Refund-of-Cenvat/
- https://www.bms.co.in/cenvat-obligation-of-manufacturer-of-dutiable-and-exempted-goods/
- https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00038_194401_1523354126456&type=rule&filename=CENVAT%20CREDIT%20RULES,%202017.pdf
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