Sukumar Mukhopadhyay: Service tax can't be in Cenvat

EXPERT EYE

The Finance Minister has announced in the last Budget that credit for goods and services tax would be combined in the new dispensation for which the new rules had been made. They are called Cenvat Credit Rules, 2004, and have come to effect from September 9, 2004.

They give effect to the idea of allowing credit of tax on those taxable services that go to form a part of assessable value on which excise duty is charged.

The Rules merge the credit of excise duty on goods and services and the utilisation process of the credit is also combined for goods and services. We can now call it Goods and Services Tax under the umbrella of two Acts on excise and services.

Right in the beginning one is attracted by the fact that the name Cenvat for both goods and services is inappropriate, misleading and even legally untenable. The rules provide for credit for also the service tax.

But the service tax is not included in the Cenvat. That has been legally defined in the charging section, namely, Section 3 in the following words: "a duty of excise to be called the CENVAT". So the service tax cannot legally be included in Cenvat. The name is not legal. It is also not transparent.

One expected that when the new rules have been made the existing rigidities would be removed. But none has been done. In fact some new ones have been imposed. They are discussed below.

This occasion of integrating credit for goods and services could be utilised for simplifying the whole structure of rules by saying that all goods are to be given Cenvat credit except those in a negative list. This has not been done.

The existing distinction between the capital goods and inputs has been kept, which means all the possibilities of litigation will also continue. There was no need for such a distinction at all. Since all inputs of goods and services are to be given credit of the duty paid on them, it would be better to keep only the distinction between goods and services and abolish the internal distinction between input and capital goods.

It would have been better to allow clubbing of all input credit to be adjusted against all the total of output duty to be paid. That would make the operation simpler. But now so many separate adjustments are to be maintained. Cess can be adjusted against cess. And limit to the utilisation of service tax input has also been provided.

Under Rule 6 (3) ©, which is difficult to understand (some commentator said only God knows) the limit of utilisation of input credit for services is 20 per cent of the output service tax payable in a month. This is a rigidity, which will come for strong criticism.

Same rigidity of 50 per cent utilisation of input duty of capital goods in the first year still continues.

This occasion of making new rules could be used for clarifying that if one wants not to avail of an exemption one can pay the duty and avail of Cenvat credit. One of the weakest links in the VAT-chain is exemption. When there is an exemption for some goods, there is no payment of duty.

So there is no credit of input duty. If the chain breaks, then down the line nobody can claim the credit. That would bring back the cascading effect, which the VAT intends to avoid.

However the judicial decisions are unanimous in allowing exempted goods to pay duty optionally and claim Cenvat credit. Once this was put in the rules all controversies would be over.