Financial Daily from THE HINDU group of publications
Friday, Aug 13, 2004
Ministry releases draft rules for extending input tax credit
New Delhi , Aug. 12
COMPANIES can soon look forward to claim credit on the service tax paid by them on advertising, market research or telephone bills against their excise duty liability on manufactured goods, irrespective of whether the services are consumed in the head office or factory premises.
The facility forms part of the draft Cenvat Credit Rules, 2004, released by the Finance Ministry on Thursday. The new rules would give effect to the Finance Minister, Mr P. Chidambaram's Budget proposal to extend the credit of input tax across goods and services. It would come into effect from the date of enactment of the Finance Bill, 2004.
At present, credit on service tax is allowed only on an inter-services basis. In other words, the tax paid on an input service can be set off only against the tax payable on an output service, just as credit on the excise duty paid on inputs and capital goods is allowed only against payment of excise duty on final products.
The new rules propose to allow tax credit on those taxable services that form an input to the manufacturing process, by being part of the assessable value on which excise duty is charged. Accordingly, services are categorised into three types.
The first covers those services received prior to commencement of manufacture but whose value gets absorbed in the value of the goods. The second includes those services that are received after the goods are cleared from the factory. The third category consists of services such as advertising, market research, telephone and security, which are not directly related to manufacture but linked to the sale of the manufactured good.
In the first category of services, companies can fully set off the service tax paid by them against the excise duty payable on the finished goods manufactured by them. For the second set of services, credit would be extended fully on services received by the manufacturers up to the stage of the place of removal (e.g. warehouse), as spelled out under Section 4 of the Central Excise Act.
With regard to the third category, the proposed rules provide for full credit of service tax on services that are received even in the offices and not the factory of a manufacturer.
The rules also give flexibility to companies in cases where the bills/invoices against services are raised in the name of their head office or regional offices for services received in the factory. Similarly, the bills for services that are not specific for any factory/premises, such as advertising or management consultancy, are generally received only in the head offices.
"The issue is as to what would be the mechanism for passing the credit of tax in such situations. It would be left to the assessee to decide as to how he distributes the credit, only ensuring that the total credit allowed does not exceed the eligible credit amount," the draft rules have said, even while mandating that offices distributing the credit would have to obtain service tax registration.
The draft rules have also clarified that tax credit would not be permitted on diesel, petrol or motor vehicles. Credit on motor vehicles would, however, be allowed to service providers of courier, tour operators, rent-a-cab scheme operators and goods transport agencies.
Further, manufacturers making both exempted and non-exempted goods and not maintaining separate accounts would pay 9 per cent (increased from 8 per cent as credit of service tax is being allowed) of the price of exempted goods. A service provider of exempted and non-exempted services not maintaining separate accounts would pay 5 per cent of the price of exempted services.
The restriction of 50 per cent on credit on capital goods would continue for manufacturers as well as service providers.
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