What is it that the maker does not want, the buyer does not use and the user does cannot see? A coffin. What is it that the tax-payer does not know what to claim, the tax-collectors do not know what to disallow and the consultant does not know what to do? Cenvat Credit.

The liberal definition for inputs given in Rule 2(1) of the Cenvat Credit Rules gets the boot ostensibly after refund claims by exporters.

An attempt has been made to bifurcate the definition of inputs between manufacture and service.

Input now has a long-winded definition to include all goods used in the factory, any goods including accessories valued and cleared along with the final product, goods used for generation of electricity or steam for captive use and all goods used for providing any output service but does not include petrol, diesel and oil, construction of a building, laying of foundation except for specific services, capital goods except when used as parts or components in the manufacture of a final product, motor vehicles, any goods used primarily for personal use or consumption and good which have no relationship whatsoever with the manufacture of a final product.

Input service appears to have a more liberal definition as it includes any service used by the manufacturer directly or indirectly in manufacture up to the place of removal, but excludes construction of a building, laying of foundation and specific services such as outdoor catering, membership of a health and fitness centre etc when such services are used primarily for personal use or consumption of any employee.

Any entity attempting to claim credit under the last restriction would have a devil of a time convincing the Department that the meal or the work-out session was for the entity's purpose and not personal.

The expression ‘no relationship whatsoever with the manufacture of a final product' could make assessing officers imaginative - would security charges for a software company or the latest version of an accounting package for a manufacturer be considered to have no relationship with their final product? Such generously worded sentences have troubled us in the past and would continue to do so, if not removed.

Exemption and formulae

Budget 2011 in a single stroke brought 130 new activities under the Central Excise Act at a nominal rate of 1 per cent. These goods have been marked as exempted goods. Services that are eligible for abatement with the condition that Cenvat credit cannot be claimed qualify as exempted services.

Trading margin has also been marked as an exempted service. Manufacturers and service providers with a mix of taxable and exempted goods and services would be able to claim credit on a proportionate basis, though an option is given to them to pay 5 per cent in lieu of the formula. Books of account would have to be maintained accordingly to justify a claim.

Banking and Insurance have an altogether new formula — these entities shall pay a blanket amount equal to 50 per cent and 20 per cent respectively of all credits availed on input and input services and will only be eligible to avail of input tax credits on the balance.

Ideal GST Law

In all the versions of the draft Goods and Services Tax law, we appear to have followed the South African model though Canada is said to have one of the most effective GST laws.

The Canadian Excise Tax Act specifies only a few items that would not be considered to be inputs. The intention appears clear- to deny input tax credit on exempted services and on inputs used for personal consumption.

Though the intention appears similar in India, we seem to have deviated from the path of an ideal GST as illustrated by the fact that a service provider in Canada can claim credit on a service provided post-removal which would specifically be denied here.

(The author is a Bangalore-based chartered accountant.)

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