Cenvat credit rules have become more complex

EXPERT EYE

The Cenvat Credit Rules made in 2004 are as elaborate as they are complicated. I am quite sure that no taxpayer, big or small, will ever be able to avail of Cenvat credit without a lawyer to help him. If he does try, he is most likely to get a showcause memo for following a wrong rule or procedure.

Years ago, when the rules was framed, they were simple. Now while all senior functionaries talk of simplification, the rules have become most complicated. The availment of credit is subject to as many as seven provisos, which have got several sub-clauses and a daunting number of notifications, which keep on changing all the time.

The reason is not just a matter of insufficient drafting. The officers can never make it simpler unless the top echelons in the finance ministry are determined to simplify the tariff itself. The reasons for the complications are as below:

· a) Too many types of duties - the Rule 3(7)(b) enumerates seven types of duties and cess which are eligible for credit;

· b) Too many exemptions "� since there are exemptions for excise, service tax and education cess, several provisions have been made for them;

· c) Unwillingness to make interchangeability between goods and services complete "� there has been a limit on the utilisation of credit between goods and services and between input services and output services such as given in Rule 6(3)(c), which limits the use of input service tax credit for output service to 20 per cent;

· d) Two types of education cess with numerous exemptions have created further complications. This could be avoided if the cess was merged with the main excise duty.

· Definitions of capital goods in Rule 2(a) separately from the definition of input in Rule 2(k) is one of the most archaic pieces of legislation. This distinction between capital goods and input made sense only when duty credit was not being given for capital goods till the 1994 Budget. Thereafter, this distinction should have been abolished, particularly when the government's intention of moving towards GST has been made amply clear in the last two Budgets. There are umpteen litigation on this issue about what are capital goods and what are inputs. The definition of capital goods is altered every now and then. Several committees have recommended the abolition of such distinction. After all, capital goods are nothing but inputs. So there could be a general rule that all inputs are eligible for Cenvat credit, except those in a negative list. That would make the rules immensely simpler.

· There is another legacy, the continuation of the concept of manufacture. This concept is alien to the concept of VAT. The definition of input in Rule 2(k)(i) uses the expression, "Used in or in relation to manufacture of final products or for any other purpose, within the factory of production".

At the same time, in the Rule 3(3) second Proviso, the expression is, "used in the manufacture of final products". There is substantial difference between the two expressions, which is a fertile source of litigation. So the best way is only to keep the wording, "used within the factory of production". Moreover, the negative list will take care of any situation where the government does not want to give the credit.

smukher2000@yahoo.com