In the entire scheme of indirect taxation, the concept of Central Value Added Tax (Cenvat) credit is a boon to the manufacturer and service providers. Manufacturers of taxable goods and providers of taxable service are entitled to take credit of duty or tax paid on procurement of goods and services used for manufacturing taxable goods and provision of taxable service, respectively. The accumulated credit can be set-off against the output tax liability, which eventually helps in reducing the tax cascading and hence the effective cost of manufacturing and service provision.

Usually, it is construed that credit of all goods or services procured by a manufacturer or service is available. However, during the course of time, the scope of creditable items has been clarified either by the government (by way of amendment in the provisions) or judicial rulings.

INPUT SERVICE

As per Budget 2011, the definition of ‘input' has been widened to include all goods used in an office within the factory or premise of the service provider, with a few exemptions (such as goods used for construction of building or civil structure, laying of foundation, goods used in guest house, clubs etc). This has given an opportunity to manufacturers and service providers to re-evaluate expenses, on which credit was forgone till now from credit eligibility perspective.

Likewise, the definition of input service until Budget 2011 was worded such that it was wide enough to include most of the services procured by a manufacturer or service provider. The usage of the phrase ‘in relation to setting up' gave a leeway for wider interpretation to input service. Credit on services in relation to business and other services like architect's service, works contract service, construction service, outdoor catering service, rent-a-cab service was legally allowed.

However, the story took a different turn when the definition of input service was amended in Budget 2011. The phrases ‘in relation to setting up' and ‘in relation to business' have been deleted from the definition of the input service, thus restricting its scope. The definition now has a specific exclusive portion, in addition to the existing inclusive portion. This has resulted in exclusion of certain taxable services from the ambit of input service, the credit of which was allowed earlier.

In view of the amended definition of input services, for the purpose of availing credit, the manufacturers and the service providers would have to determine if the service falls under the category of (i) services which are specifically included in the definition of input service, (ii) services which have a direct nexus with the provision of output service, (iii) services which are of the nature that creates infrastructure or efficient environment for providing output services and hence used for providing the output service, (iv) services which are specifically excluded from the definition of input service, and (v) services which are not included in the definition of input service.

INCLUSION AND EXCLUSION

Thus, at the time of determining the eligibility of credit, there would be certain taxable service categories which would be a clear inclusion (such as chartered accountant's services, commercial training or coaching services, security agency's services etc.), or exclusion for the purpose of availing Cenvat credit. However, there would be other service categories which should be examined on a case-to-case basis for determining the eligibility of credit.

The exclusion of certain taxable services from the definition of input services (such as rent-a-cab service, catering service, services used in setting up of business etc. on which credit was allowed earlier), has altered the settled position of law vis-a-vis availment of credit. There are various judicial pronouncements that supported the eligibility of credit on such services.

The amended definition of input service would have a direct impact on the costing of a company, as a major portion of credit would now stand disallowed. Re-evaluation of the expenses needs to be undertaken to avoid any interest exposure on account of wrongful availment of credit.

(The author is Tax Partner, Ernst & Young. Views expressed are personal.)

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