Now it is official. It is judicially confirmed. The Supreme Court has said it in so many words that the Cenvat Rules are not properly drafted. Not one but two judgements came in quick succession which said the same thing. One is the case of Maruti Suzuki Ltd vs. CCE Delhi[1] and the other is the case of CCE vs. Gujarat Narmada Fertiliser Co[2]... In the second case the Supreme Court has been forthright in saying that problems of interpretation are arising because “the Rules have not been properly drafted.”
The first case was about Maruti having installed some gas turbines in their factory for generation of electricity. Naptha was used as a fuel for the gas turbines. Some of the electricity was sold to joint ventures and therefore were not used in their own factory. Maruti argued that so long as the naptha was used for generation of electricity, the credit of duty was allowed and it was wrong to disallow (as Revenue did) it to the proportionate extent for what was so sold out. It led to a huge discussion of so many rules of the Cenvat Rules, involving what was written and what was the intention and so on. The Supreme Court ultimately agreed to the view of the Revenue but not before remaking that no penalty was imposable as the rules were so complicated that such misunderstanding could legitimately arise. The Court observed that “on account of repeated amendments to the Cenvat Rules, huge litigation in the country stands generated.”
In the next case of Gujarat Narmada was about admi-ssibility of credit of duty in the manufacture of exem-pted goods. While the Court upheld the view of Revenue that proportionate disallowing of credit of duty was legal, it passed another stricture on Revenue for the complicated nature and improper drafting of the Cenvat Rules. So the Court ruled that no penalty should be imposed. Squarely the responsibility lies with the Revenue Department. It is something which cannot be conveniently passed on to political interference. The Revenue Department is consistently impervious to suggestions from the independent analysts and public and taxpayers to simplify the Cenvat Rules. The very old distinction between raw materials and capital goods should be immediately abolished . These definitions cause all the trouble as they are being (mis)interpreted by interested parties.
Many economists and Reports have suggested several times to abolish the distinction and have one simple Rule that all the goods used in the factory of production would get credit excepting those in a list which can be called a banned list. That would simply eliminate a huge number of controversies. And the other root cause is the number of duties that get credit. They are easily nine in number.
Why do we have Education cess and of two types? That also creates a lot of controversy. With such mentality we can hardly be successful in having a single rate GST.
So let us take advantage of this criticism and stricture coming from the Supreme Court as green signal for introducing reform in the Cenvat Rules by just simplifying them and not amending them repeatedly. The first requirement is to appoint a Task Force for formalizing the suggestions.
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This should consist of some economists who know this subject, some from Industry, some from the former officers and some from the existing officers from the CBEC who actually deal with and are in charge of implementing the changes by making Rules. The idea is that at the implementation level they should not raise some further objections.