In the Budget Speech the Finance Minister has announced that steps have been taken for modifying the provisions of the Cenvat Credit Scheme to achieve a more realistic balance between input credit and out put tax and harmonising the provisions of the Scheme across goods and services. It has been claimed that the basic thrust of these changes is to broad base and simplify definitions to reduce disputes and to achieve a more realistic attribution when common input or input services are used for the manufacture of both dutiable and exempt goods.
In order to exactly know what has been done, one has to see the amendment as in the Notification No.3/2011-Central Excise (NT) dated 1st March 2011. What has been provided in the notification is that the definition of input contained in Rule 2(k) has been revised. The requirement that goods should be used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not has been removed. Henceforth, all goods used in the factory by the manufacturer of the final product, except those specified in the negative list and goods having no relationship whatsoever with the manufacture of final product, would qualify for treatment as input. The definition of 'input service' has also been rationalized to impart clarity and to achieve congruence between goods and services so that the services related to any goods excluded from the definition of 'input' are also excluded from the definition of 'input services'.
So what has been achieved is that the definitions of input for goods and input for services (input services) have been defined more scientifically, that is to say, redefined so as to make them more amenable to and more understandable for Cenvat credit. It is good but not good enough. It is only half the job done. What has not been done is also very important. Nothing has been done in respect of achieving a comprehensive goods tax. This would have been possible if the distinction between capital goods and input had been abolished and the two concepts merged into one concept of input.
There is no justification at all for keeping the distinction between capital goods and input. This distinction arose historically because when Modvat system was introduced in 1986 only the raw materials were first brought under its fold. Later in 1994 Budget the capital goods were also brought under its fold. Therefore the distinction was relevant at that time but now after 17 years such a distinction between capital goods and input is totally antiquated, mea-ningless and detrimental to the smooth functioning of Cenvat system. In the VAT system of other countries no such distinction exists and for good reason.
There is no advantage in trying to distinguish between capital goods and raw materials which are basically covered by the expression 'input'. Both are subject to input tax credit and therefore any distinction between them is nothing but a hindrance to the concept of comprehensive goods tax. This distinction leads to a tremendous number of litigation at all levels starting from the lowest officers of the Department to the higher levels such as Commissioner (appeal), Tribunals, High Court and the Supreme Court. All these litigation would disappear if the concept of input includes capital goods also.
The only reason why probably Revenue wants this distinction to continue is that the input credit for capital goods is staggered over a period of two years. But this is unjustified for two reasons. Firstly, there is no justification for staggering. In 1994 when capital goods credit was first introduced, it was not staggered. There is no reason to stagger it now when the economy is on the growth path. If anyt-hing, staggering is anti-gro-wth. And even if it has to be staggered, there is no need for a definition of capital goods. Only an enumeration separately with respect of each chapter for staggering purpose would suffice.
The conclusion is that by keeping the distinction bet-ween capital goods and input, the Budget has failed to achieve the comprehensive goods tax which is the primary requirement for the impending comprehensive Goods and Service Tax (GST).
The author is former Member CBEC
Email: smukher2000@yahoo.com
