Cenvat Credit related to Service Tax

Every service provider may also a service receiver. Whenever he receives any service, he pays service tax on it to the service provider. Similarly, if he purchases raw materials or capital goods, he pays excise duty on the said goods.This system of taking credit on the tax paid and using the credit for the tax payable is called cenvat credit.This service provider rendering taxable service/s can avail cenvat credit of the service tax/excise duty paid on input services taken and/or excise duty on raw material or capital goods purchased.
The provisions of availing Cenvat credit have been laid down in Cenvat Credit Rules, 2004 (Notification No. 23/2004-CE (NT) dated 10-09-2004)

Provisions relating to cenvat credit have been summarised below:

Essential documents under which cenvat credit can be taken:

  • Invoice issued by:
  • a manufacturer for clearance of inputs, capital goods from his factory/depot,
  • an importer,
  • an importer from his depot or from the premises of a registered consignment agent,
  • a first stage or second stage dealer,
  • a supplementary invoice, Bill of entry, certificate issued  by an appraiser of customs,
  • Invoice/ bill/challan issued by a provider of input service, Invoice / bill /challan issued by an input service distributor are the prescribed documents.

Who can avail Cenvat credit:

The provider of taxable output service can take the cenvat credit. According to Cenvat Credit Rules, 2004, “output service” means any service provided by a provider of service located in the taxable territory, but shall not include a service specified in section 66D of Finance Act, 1994 or where the whole of service tax is liable to be paid by the recipient of service. i. e. service receiver, who is paying service tax on behalf of the service receiver, cannot avail cenvat credit.

Conditions for availing cenvat credit:

On inputs/raw material:

Credit can be taken instantly on receipt of the raw material. It should be remembered that credit is allowed only for those inputs/raw material which are/is used in providing output service. When inputs on which credit has been taken are removed, equal credit should be reversed except in cases where the inputs are removed to job worker or removed for the purpose of providing output service.

On capital goods:

The cenvat credit in respect of capital goods received in the premises of provider of output service, only 50% of credit of is eligible in the first year of receipt. The balance 50% can be taken in any financial year subsequent to the financial year in which the capital goods were received in the premises of the provider of output service. Cenvat credit is not allowed on the amount of duty which has been claimed as depreciation.

Utilisation of Cenvat Credit:

Cenvat credit can be used for payment of tax, i. e. service tax, education cess (EC) & secondary and higher education cess (SHEC) on output service. The credit taken on EC and SHEC can be utilised only for payment of EC and SHEC

According to Rule 2(e) of Cenvat Credit Rules, 2004’ “exempted service/s” 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; or taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service will be taken. Hence, the input credit cannot be used exclusively in for against the liability of output service, if both taxable and exempted services are being provided.

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