Input Tax Credit under Service Tax is allowed as per Cenvat Credit Rules, 2004 (CCR, 2004). Service tax credit rules have been drawn from CCR replacing the previous Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. This discussion deals with provisions applicable only to service provider.
Some important definitions
As per Rule 2(a) of CCR, 2004, capital goods include:
- All goods falling under Chapter 82, Chapter 84, Chapter 85 and Chapter 90 (heading 6804 & 6805) of the First Schedule to the Central Excise Tariff Act;
(Goods under Chapter 82 are Tools & Implements; Goods under Chapter 84 are Machinery and mechanical appliances and parts of such machinery; Goods under Chapter 85 are Electrical and electronic machinery and equipment Goods under Chapter 90 are Measuring, checking, precision apparatus and its accessories
- Pollution control equipments;
- Components, spares and accessories of the goods specified at (a) and (b) above;
- Moulds and dies, jigs and fixtures;
- Refractories and refractory materials;
- Tubes and pipes and fittings thereof;
- Storage tanks;
- Motor vehicles (other than those falling under tariff headings 8702, 8703, 8704 and 8711 and their chassis, but including dumpers and tippers)
All these capital goods should be used for providing output service.
Only such vehicles which are designed and used for transport of goods would be considered as capital goods for service providers engaged in business of transport of goods or courier agency services or hiring of such transport vehicles or vehicles used by motor car driving schools.
As per Rule 2(k) of CCR, 2004, ALL GOODS used for providing any providing any output service can be termed as “inputs”. However, the following goods have been specifically excluded or cannot be considered as inputs:
- Light diesel oil, high-speed diesel oil, motor spirit i.e. petrol;
- Any goods used for construction of a building or a civil structure or laying of foundation or making structures for support of capital goods;
- Capital goods except when used as parts or components in manufacturing final product
- Motor vehicles
- any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee;
In brief, if the following conditions are satisfied, only then the item can be considered as an eligible input credit for paying service tax:
the input should be used for rendering output service
the input should not be in the excluded category
the input should not be used for personal consumption of any employee
As per Rule 2(l) of CCR, 2004, input service is ANY SERVICE used by the provider of output service for providing an output service. Input services includes services used in relation to
- setting up, modernization, renovation or repairs of a factory,
- premises of provider of output service or an office relating to such factory or premises,
- advertisement or sales promotion, market research,
- storage upto the place of removal,
- procurement of inputs,
- activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training,
- computer networking,
- credit rating, share registry, and security,
- inward transportation of inputs or capital goods and outward transportation upto the place of removal.
Input Service Distributor
As per Rule 2(m) of CCR, 2004 “Input service distributor” means an office of the manufacturer or
producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be;
As per Rule 2 (p) of CCR, 2004, “Output service” means any service provided by a provider
of service located in the taxable territory but shall not include a service, –
(1) specified in section 66D of the Finance Act; or
(2) where the whole of service tax is liable to be paid by the recipient of service.
Section 66D provides a list of negative services on which service tax is not leviable. Certain services are included under reverse charge mechanism, which are not a part of output services.