Is CENVAT Credit Admissible on Exempted Services?
WITH effect from 1.4.2011, Rule 2(e) of the CENVAT credit has been amended to include taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken, in the definition of exempted services. Similarly Rule 2(d) has also been amended to include the goods on which duty is paid under Notification 1/2011 CE (@1%) in the definition of exempted goods. It has also been clarified by the JS (TRU)-I that no CENVAT credit will be admissible to the buyer of these 1% duty goods.
Since the 'partially exempted services' are included in the exempted services, many are of the view that no credit is admissible on these partially exempted services like, mandap keeper, tour operator etc (and other services listed in Notification 1/2006 ST). But actually it is not so. There is no bar in the CENVAT Credit Rules for availing credit ON THE EXEMPTED services. Let us see Rule 6(1).
Rule 6(1) of the CENVAT credit rules 2004 after the amendment reads:
(1) The CENVAT credit shall not be allowed on such quantity of input used in or in relation to the manufacture of exempted goods or for provision of exempted services, or input service used in or in relation to the manufacture of exempted goods and their clearance up to the place of removal or for provision of exempted services except in the circumstances mentioned in sub-rule (2)
A plain reading of the above rule would indicate that while no credit is allowed on the inputs or input services used in or in relation to the manufacture of exempted goods / provision of exempted services, it does not stipulate that no credit is allowed 'on the exempted goods / exempted services.'
In respect of 1% goods, credit is not admissible to the buyers not because of Rule 6(1), but because of the proviso inserted in Rule 3(1) as:
Provided that CENVAT credit of such duty of excise shall not be allowed to be taken when paid on any goods in respect of which the benefit of an exemption under notification No. 1/2011- CE, dated the 1st March, 2011 is availed;
The inclusion of 1% goods in the definition of 'exempted goods' ? is only to disallow the CENVAT Credit on inputs/ input services used in the manufacture of these exempted goods.
Therefore there is a subtle difference between the amendment to the definition of exempted good and exempted services. While no credit is allowed on 1% duty goods to the buyer of these goods ? by virtue of proviso in Rule 3(1), there is no bar on taking credit on the service tax paid on the 'partially exempted services' though these services are exempted services.
This is also evident from the fact that 40% credit is allowed on erection commissioning, construction services (which are exempted services under Rule 2(e) used in works contract service (Notification 1/2011 ST) and rule 2(l)(A) allowing credit on construction service in respect of the specified services.
However, the assessee will have tough time in explaining all this to auditors of the department who will certainly not believe in 'allowing credit on exempted services'