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The Central Government amends Rule 7 of the CENVAT Credit Rules, 2004

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Information about The Central Government amends Rule 7 of the CENVAT Credit Rules, 2004
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Published on February 27, 2014

Author: kpmgindia

Source: slideshare.net

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The Central Government (vide Notification No. 05/2014 – Central Excise (N.T.) dated 24 February 2014) has amended Rule 7 of the CENVAT Credit Rules, 2004, which provides the manner of distribution of credit of Service tax paid on input services by an office of the manufacturer or service provider to its factory/units (also known as the input service distributor). These amendments would come into force with effect from 1 April 2014.
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KPMG FLASH NEWS KPMG IN INDIA The Central Government amends Rule 7 of the CENVAT Credit Rules, 2004 26 February 2014 Background Rule 7 of the CENVAT Credit Rules, 2004 (the Credit Rules), provides the manner of distribution of credit of Service tax paid on input services by an office of the manufacturer or service provider to its factory/units (also known as the input service distributor). Proposed Amendments Sr. No. Prior amendment 1 Credit of Service tax attributable to services used in a unit which was exclusively engaged in manufacture of exempted goods or provision of exempted services was not allowed to be distributed. Credit of Service tax attributable to services used by one or more unit exclusively engaged in manufacture of exempted goods or provision of exempted services would not be allowed to be distributed. 2 Credit of Service tax attributable to services used wholly in a unit was allowed to be distributed only to that particular unit. Credit of Service tax attributable to services used wholly by a unit would be allowed to be distributed only to that particular unit. The trade and industry had submitted representations to Dr. Parthasarathi Shome Forum, set up under the Ministry of Finance, for simplification of these Rules to remove certain procedural difficulties faced while implementing these provisions. Pursuant to the representations, the Government has issued a Notification No. 05/2014 – Central Excise (N.T.) dated 24 February 2014 (‘the Notification’), for making amendments to these Rules which would be effective from 1 April 2014. to Post amendment © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Sr. No. Prior to amendment Post amendment 3 Credit of Service tax attributable to services used in more than one unit (also referred to as ‘common input services’) could be distributed on a pro-rata basis by adopting the ratio of turnover of the concerned unit to the turnover of all the units to which the services related, during the relevant period. Credit of Service tax attributable to services used by more than one unit (also referred to as ‘common input services’) would be distributed on a pro-rata basis by adopting the ratio of turnover of the unit to the turnover of all the units, which are operational in the current year, during the relevant period. ‘Relevant period’ was considered as the month/quarter previous to the month /quarter during which credit was distributed. ‘Relevant period’ would now be considered as the previous financial year to the year in which credit is being distributed. Further, where these turnover details were not available for a particular period, credit was permissible to be distributed only after the end of such period where the turnover was available. Further, where these turnover details are not available for a particular period, credit would now be permissible to be distributed on the basis of the turnover of the last quarter (for which turnover of all the units are available) previous to the month/quarter (for which credit is to be distributed). While the above-mentioned recommendation has not been accepted, the Notification is a step in the right direction from a simplification perspective. Some of the illustrative impact areas post these amendments (which would require deliberation) include: 4  Whether services like goods transportation, offshore testing, etc., could be construed to have been used ‘in’ a unit, was an area of debate. By replacing the word ‘in’ with ‘by’, this issue should be resolved.  For common input services:   There could be interpretational ambiguities as regards what constitutes an ‘operational unit’ e.g., what happens in cases where the unit is operational only for a month in the current year?   The quantum of credit distributed may get reduced since turnover of all the operational units need to be considered instead of the units to which the service relates. Since the turnover needs to be taken from the previous financial year, but applied to units operational in the current year, there could be anomalies in cases where a particular unit becomes non-operational in the current financial year. Distribution based on previous financial year’s turnover instead of identifying previous month’s turnover every month should also lead to reduction in compliance costs. Having stated the above, the long term solution could be to allow distribution of eligible credit to taxable units without any restrictions, subject to the fact that the eligible credit is computed after applying principles of Rule 6 of the Credit Rules that provides for reversal of credit in case of exempt activities. Our comments One of the key representations (with respect to credit distribution mechanism) that was made was the withdrawal of procedure for pro rata distribution of credit on the basis of turnover (as introduced vide Budget 2012). The rationale given for this was that once the eligible credit has been determined by adopting the pro-rata formulae, there is no adverse impact on revenue in the event where this credit is distributed to multiple units or to any one unit, manufacturing excisable goods/providing taxable output service. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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