Friday 6 March 2015

Withdrawal of CENVAT Credit of EC & SHE Cess-many unanswered questions

WITH the singlemost recurring reference in the budget speech of the Finance Minister being to "GST", the underlying theme in the present budget has been to set the stage for GST. One such change which is made in the light of forthcoming GST is the withdrawal of Education Cess ("EC") and Secondary and Higher Education Cess ("SHEC") on excise duty with effect from 01.03.2015. As a parallel change, EC and SHEC on service tax have also been withdrawn. However, this will come into force once the enhanced rate of service tax of 14% becomes effective.
While the withdrawal of EC and SHEC on excise duty appears to be a welcome measure, it comes as a double-edged sword with its own set of concerns for the industry at large.
There is a bar on utilization of Cenvat credit of EC and SHEC under the Credit Rules wherein such credit can be utilised only for payment of EC and SHEC. Since there is no EC and SHEC on the final products with effect from 01.03.2015, the credit of EC and SHEC will remain unutilized. It is only a matter of time when the service providers would also face the brunt of the change made for forthcoming GST. So the question is whether the EC and SHEC credit balance remaining as on 01.03.2015 becomes mere dead stock in the hands of the manufacturer? This amendment in question brings to light several issues which have remained unaddressed.
Disparity between manufacturers and service providers
While EC and SHEC on excise duty have been withdrawn with immediate effect, the corresponding withdrawal of EC and SHEC on service tax would be effective from a date when the enhanced rate of service tax comes into play. The increase in the rate of service tax will be effective only from the date notified for such purpose after enactment of the Finance Bill, 2015. On the other hand, the rate increase of excise duty has come into force immediately owing to a declaration under Provisional Collection of Taxes Act, 1931 accompanying such increase.
Though the time lag in the above cases appears to be the legal mechanism at work governing excise duty and service tax, such a time gap has left manufacturers in a disadvantageous position when compared to service providers. This time gap has given service providers with an opportunity to utilize the existing EC and SHEC balance.
Utilization of EC and SHEC for payment of EC and SHEC on service tax- Possible?
As service providers are required to pay EC and SHEC on service tax at present, those manufacturers who are also service providers and liable to pay service tax can utilize such credit for payment of the EC and SHEC on service tax till the time such levies are in force. In the absence of clear enabling provisions in the Credit Rules, the utilization of credit of EC and SHEC on excise duty taken as a manufacturer for the payment of EC and SHEC on service tax as a service provider is certainly another concern which can surface owing to this amendment.
Treatment of balance 50% of credit on capital goods
In a situation where capital goods are purchased during the financial year 2014-15, 50% of credit of EC and SHEC is taken in the current year and balance 50% credit of EC and SHEC on capital goods would be taken in the subsequent financial year i.e. 2015-16. This additional 50% credit which will become alive on 01.04.2015 would add to the pile of unutilized credit.
Reversal of credit on capital goods- capital goods removed as such and used capital goods
This amendment in question has also thrown open the floodgates of ambiguities on credit reversals of capital goods removed as such and used capital goods.
When capital goods are removed as such, the existing EC and SHEC credit balance can be utilised for payment of credit on removal. In case of removal of used capital goods, as a result of the provision in place, there can be a scenario where there would be less reversal of credit as compared to a scenario where capital goods are removed as such. This distinction would result in anomaly in treatment of capital goods removed as such and used capital goods.
In the current budget where registration provisions have been simplified and steps have been taken to remove roadblocks for GST, the glitches accompanying the withdrawal of EC and SHEC will severely hamper the transition towards GST. It remains to be seen whether and how government would come to the rescue of the industry by bringing in suitable amendment to address the above concerns and provide means of utilization of credit of EC and SHEC or allow refund of such unutilized credit.

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