Is trading an exempted service?
IN response to our story VCES - CENVAT Credit and Trading - Am I eligible? (DDT 2232), a Netizen posted this message:
Sir, trading activity is covered under negative list (Sec.67D(e)) of Finance Act, 1994 which means the said activity is not at all a taxable service. In such case, where is the question of looking into exemption or taxable. Moreover, Rule 6(3)/6(3A) of CER, 2004 is applicable where both taxable and exempted services/goods exist. Since as per my opinion, trading is not a service at all being under negative list, the question of exemption arises. Accordingly, rule 6(3) / 6(3A) of CCR, 2004 is not applicable. Would you please clarify further?
Firstly, the VCES is applicable for the period from 1.10.2007 to 31.12.2012. So, except for a period of six months, (1.7.2012 to 31.12.2012), the provisions existing before the negative list will apply.
Secondly, there is a widespread opinion that with effect from 01.07.2012, trading is a negative list service and hence the provisions of Rule 6(3)/6(3A) of the CENVAT Credit Rules, 2004 are not applicable.
As per the definition of Rule 2(e) of CCR 2004,
(e) "exempted service" means a-
(1) taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) taxable service 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;
Service on which no service tax is leviable under Section 66B are nothing but Negative list services. Section 66B reads:
There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
So, with effect from 01.07.2012, all Negative list services including trading are exempted services for the purpose of CENVAT Credit Rules, 2004. Though the definition of service given under Section 65B(44) excludes sale of goods, for the purpose of CENVAT Credit Rules, trading is treated as an exempted service. Hence, the provisions of Rule 6 of the CCR 2004 are applicable. Even when trading was not defined as an exempted service, the Tribunal in held:
Trading activity is not an exempted service - rule 6 of the CCR, 2004 does not apply - there is no provision in the Cenvat Credit Rules, 2004 to cover such situations - only obvious solution which is legally correct is to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is deducted - Matter remanded for quantification
Also, explanation under Rule 6 of CENVAT Credit Rules, 2004 carries the procedure of how to compute value in case of trading activity for the purpose of Rule 6(3) and 6(3A).