Credit on goods procured from 100% EOUs - CENVAT Credit Rules amended finally
In respect of 100% EOUs, not only the duty payable by the units (when they clear the goods in DTA) but also the amount of CENVAT credit available to the buyer of the goods has always been a confusing affair. However, to make things simpler, a formula was introduced in Rule 3(7) to quantify the amount of Credit available to the purchaser of the goods. When Notification has been amended vide Notification dated 1.3.2006 to prescribe the duty payable by the EOU as "aggregate duties of customs on like goods imported with the duty of customs specified in the First Schedule to the Customs Tariff Act, 1975 reduced by 75%", the revised formula was incorporated in Rule 3(7) as under:
The credit shall be equal to X multiplied by {( 1+BCD/400) multiplied by (CVD/100)}
Assuming the value as Rs 100, BCD rate at 20% and CVD rate at 14%, the credit amount will be:
{100X (1+20/400) multiplied by 14/100} = 14.7
This 14.7 is nothing but the CVD payable on the goods at 5% (20% rate reduced by 75% under Notification 23/2003) BCD
The duty payable by the EOUs has been revised in Budget 2008 and Notification 23/2003 has been amended vide Notification dated 1.3.2008 to prescribe the customs duty as:
"the duty of customs specified in the First Schedule to the Customs Tariff Act, 1975 read with any other notification in force was reduced by 50%".
So, with the same rates as mentioned above, the CVD payable by the EOUs from 1.3.2008 will be:
Assessable value | Rs 100 |
BCD at 10% (50 % of 20%) | Rs 10 |
Value for CVD | Rs 110 |
CVD at 14% | Rs 15.4 |
Thus, with effect from 1.3.2008, the buyer of the goods in DTA should have been entitled for a credit of Rs 15.4, but unfortunately the mathematician who incorporated the formula in Rule 3(7) of the CENVAT Credit Rules 2004 must have been transferred from his place by 2008 and nobody after him could understand the importance of amending the formula in CENVAT Credit rule to make the credit available as Rs 15.4 in view of the amendment to Notification in 2008.
So, even after 1.3.2008, the Credit was governed by the old formula as per which only Rs 14.7 was available as credit.
In the post Budget seminars organized by TIOL, many assessees explained that the formula in Rule 3(7) should be revised to replace the denominator 400 with 200 to make the credit available as Rs 15.4, but nobody could understand the crux of the issue. In an open house conducted in Hyderabad by FAPCCI, when a young Chartered Accountant was trying to explain the formula to the babus and the need for the amendment, he was simply silenced by clarifying that "Look, there is formula in the Rule and there must be reason behind it. Just follow the formula".
And finally, after nearly 10 months, their prayers were answered. Rule 3(7) of the CENVAT Credit rules has now been amended to replace the denominator (400) in the formula with 200. The new formula now reads:
"X multiplied by [(1+BCD/200) multiplied by (CVD/100)]"
What about the credit for the period from March to November? When they don't amend on their own, why can't they just give a patient hearing to someone who is trying to put forward the problem and try to understand the same?
We had brought this problem to the notice of the Board.
An assessee had asked the Board, In the recent budget, the duty now chargeable would be equivalent to 50% of the Basic Customs duty plus CVD (as applicable) as per notification no dated 01-03-2008. We request you to kindly advice us any corresponding amendment with regard to availment of CENVAT credit under Rule 5(7) of CENVAT Credit Rules, 2004.
And the reply received from the Board tersely stated, "there has been no amendment in this provision"
We had also extensively explained this issue in TIOL-DDT 870 22.05.2008 - Duty paid by EOUs for DTA clearance - amount of credit eligible. Board forgets to amend Cenvat Credit Rules while amending Notification No.
We are happy that the Board has finally relented and amended the Rules, but this should have been done with retrospective effect.
We made an inadvertent mistake in our flash that the Credit is doubled and vigilant Netizens pounced on us. We thank them and we regret our lapse.
Notification No. dated 5th December, 2008