Service tax hits excise mop-up

For the first time ever, Cenvat credit, utilised by companies to pay taxes, overshot net excise duty collections during fiscal 2006-07.

The finance ministry data show that Cenvat credit utilised by companies grew 34 per cent to Rs 1,28,698 crore in the last fiscal, while net excise duty collections (cash collections) rose 5.8 per cent to Rs 1,17,088 crore.

Service tax collections, which rose 62 per cent to Rs 37,482 crore in 2006-07, are projected to grow 34 per cent to Rs 50,200 crore in 2007-08. That means, companies paid their excise duties more by utilising tax credits available to them, rather than in actual cash.

Experts attribute the 6-7 per cent growth rate in excise collections in recent years to the high service tax that companies pay on business purchases or input services, which they follow up by claiming Cenvat credit. Besides service tax, area-based exemptions, liberalisation of small-scale industry scheme and exports are also adversely affecting central excise revenue.

Other factors contributing to higher Cenvat utilisation include availability of Cenvat credit against special additional Customs duty, dealers' invoice and duty paid on capital goods.

Though gross excise collections (net collection and Cenvat utilisation) rose 19 per cent to Rs 2,45,786 crore in 2006-07, the same was not reflected in net excise duty collections (see chart) due to surge in service tax collections.

"With an increasing number of business purchases coming under the service tax net, input taxes paid by manufacturers have gone up rapidly. More business-to-business transactions means more input taxes and more credit utilised," said Satya Poddar, partner, Ernst & Young.

He feels that a clearer picture will emerge if service tax collections and Cenvat credit utilisation trends are compared.

"By increasing service tax on inputs, the Centre is not getting additional revenue. Instead of focusing on final consumption, the service tax now covered business deals," said Poddar.