Your SlideShare is downloading. ×
White Paper May 12
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

White Paper May 12

261
views

Published on

Input tax credit – the journey from ‘proforma credit’ to GST …

Input tax credit – the journey from ‘proforma credit’ to GST

A finished product comes to the consumer after multiple stages of manufacture, and taxes are levied on the product that emerges at every stage. The tax at one stage becomes part of the price of the product that is the input for the next stage, and the tax paid at the next stage will therefore include an element of tax on tax. Naturally the multiplicity of occurrence of tax on tax at different stages of manufacture of a product would add up to substantially inflate the price to the consumer if not neutralised in the intermediate stages. Input tax relief in some form, designed to neutralise this cascading effect of tax on tax, has been on the statute book in various forms since the inception of ‘proforma credit’ in 1962. It has successively mutated into ‘set-off’, Modvat, and Cenvat, and is poised to take another large stride under GST, which will provide for inter-state neutralisation of VAT on sale of goods. A quick look at this journey will show us how far we have come.


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
261
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. UDYOG WHITEPAPER MAY-2012 Input tax credit – the journey from ‘proforma credit’ to GST By Radha Arun, Consultant to Udyog SoftwareInput tax credit – the journey from ‘proforma credit’ to GSTA finished product comes to the consumer after multiple stages of manufacture, and taxes are levied on theproduct that emerges at every stage. The tax at one stage becomes part of the price of the product that isthe input for the next stage, and the tax paid at the next stage will therefore include an element of tax ontax. Naturally the multiplicity of occurrence of tax on tax at different stages of manufacture of a productwould add up to substantially inflate the price to the consumer if not neutralised in the intermediate stages.Input tax relief in some form, designed to neutralise this cascading effect of tax on tax, has been on thestatute book in various forms since the inception of ‘proforma credit’ in 1962. It has successively mutatedinto ‘set-off’, Modvat, and Cenvat, and is poised to take another large stride under GST, which will providefor inter-state neutralisation of VAT on sale of goods. A quick look at this journey will show us how far wehave come.Proforma credit‘Proforma credit’ was introduced in 1962 under Rule 56Aof the then Central Excise Rules 1944. The ruleunderwent many modifications, but its essence wasthat  in respect of finished products that were notified for the purpose, and  if the inputs fell in the same tariff item as the finished product,duty paid on inputs could be taken as a credit and usedfor payment of duty on the finished product. Thus inputrelief was allowed in a limited way. It was intended toobviate a plurality of duty payments under the sametariff item in the course of manufacture of a product.(An unexpected throwback to this concept came in theform of the Service Tax Credit Rules 2002, whichallowed credit of service tax paid on input services onlyif they were in the same taxable category as the outputservice!)Set-offProforma credit under Rule 56A was limited to thenotified items. Change came fifteen years later, whenthe scope of input tax relief was expanded by providing‘set-off’ for input excise duty, under two notificationsthat ruled the roost till the advent of Modvat in 1986: Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 1
  • 2. 178/77-CE – set off of input duties, with one to one correlationIn 1977 the government issued notification 178/77-CE dated 18 June 1977, which provided for ‘set-off’ ofduty paid on specified inputs, in the form of exemption notification. The substantive part of notification178/77-CE read as follows: “In exercise of the powers conferred by sub-rule (1) of rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts all excisable goods (hereinafter referred to as the ”said goods") on which the duty of excise is leviable and in the manufacture of which any goods falling under Item No. 68 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944) (hereinafter referred to as the inputs) have been used, from so much of the duty of excise leviable thereon as is equivalent to the duty of excise already paid on the inputs: Provided that where the duty of excise leviable on the said goods is less than the amount of duty of excise paid on the inputs the extent of exemption shall be restricted to the duty of excise leviable on the said goods."Thus the notification exempted excise duty on the finished product to the extent of excise duty paid oninputs used in their manufacture, if the inputs fell under tariff item 68 of the central excise tariff schedule (aresidual entry that covered products not specified in items 1 to 67). At that time the concession appeared tobe intended to soothe the public outcry on massive expansion of the excise duty net to cover items ‘notelsewhere specified’ as a residual item 68 of the tariffschedule.A substantive requirement of one to one correlation ofinput to finished product was implied in the words ofthe notification that exempted the finished product“from so much of the duty of excise leviable thereon asis equivalent to the duty of excise already paid on theinputs”. This was subsequently inserted as a proceduralcondition by notification 295/77-CE dated 28 Sept1977. The amendment required that the manufacturermust submit a statement showing the quantity ofinputs used in every unit of the finished product.Much litigation regarding this notification 178/77-CEand its successor notification 201/79-CE revolvedaround factual disputes as to whether the input wasactually used in the manufacture of the finishedproduct, classification disputes as to whether the inputsfell under item 68 or otherwise, and procedural issueslike prior filing of input-output ratios. In those daysexemption had to be claimed in the ‘classification list’and approved by the Assistant Collector. So the item 68inputs would be listed against the finished product inthe classification list, giving a statement of how muchof each input was used per unit of finished product, theAC would verify and approve the statement and theexemption. Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 2
  • 3. 201/79-CE: set off of input duties by credit mechanismNotification 177/78-CE was superseded by notification 201/79-CE, which used a different methodology forgiving the input tax relief. It replicated the ‘proforma credit’ mechanism, which was already being usedunder Rule 56A, to operationalise the set-off of duties. The procedure under this was prescribed in anAppendix to the notification, which required, inter alia, as follows: “1. A manufacturer of the said goods shall give a declaration to the Superintendent of Central Excise having jurisdiction over his factory, indicating the full description of the said goods intended to be manufactured in his factory and the full description of the inputs intended to be used in the manufacture of each of the said goods. 2. A manufacturer may take credit of the duty already paid on the inputs which are received by him after submitting the declaration, and utilise such credit for payment of duty of excise on the said goods."Thus the requirement of a declaration of input-output ratio remained as in notification 178/77-CE, but asubstantive difference introduced by notification 201/79-CE was that the duty paid on the inputs could betaken as a credit, and the credit would be utilised for payment of excise on the goods.The department’s interpretation of notification 201/79-CE was that the requirement of one-to-onecorrelation remained even at the stage of utilisation of credit and that the manufacturer had to take and usethe credit in product-wise silos. In general, industry conformed with this. However the Supreme Court in thecase of H.M.M. Limited [1996 (087) ELT 0593 (SC)] negated this stand, and observed that the credit could beused for payment of excise duty on any finished product for the manufacture of which the inputs werebrought into the factory.This position was explicitly notified by the centralgovernment in 1986, in the form of the Modvat creditrules, which required no declaration of input-outputratios, and also brought in further concessions asdiscussed below.Modvat scheme – wider coverage, dealer credit, capitalgoods credit iTAX is combo of IndirectThe year 1986 ushered in one of the cataclysmic changesin central excise, with the introduction of the MODVATscheme. This was incorporated as a series of new rules Taxation For Gobal &added into chapter V of the Central Excise Rules 1944. TheModvat scheme provided a table of inputs and finished Local ERP’s vendors orproducts and provided that credit could be taken on anyof the specified inputs if used in any of the specified customers who desire afinished products. Furthermore, it did not restrict the useof the credit to product-wise silos, but made it available local taxation modulesacross categories, for payment of excise duty on any of theeligible products. Thirty seven chapters of the central for their ERPsexcise tariff were covered initially, and the scope ofModvat was expanded over the years and extended tocapital goods also. Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 3
  • 4. In Modvat, the correlation of the input with the finished product was required only to establish eligibility tocredit at the threshold stage. An initial declaration of inputs and corresponding final products was requiredfor this purpose (- however ratios were not asked for). Once the credit was taken, it could be used to payexcise duty on any of the eligible finished products. Modvat credit, unlike credit in the earlier schemes, couldbe passed on through dealers. Also, unlike earlier schemes, excise duty or equivalent customs duty paid oncapital goods was also available as a credit to be used to pay excise duty on the finished product. These twosteps, of passing credit through dealers, and allowing credit of duty paid on capital goods, representedsignificant progress in beating the cascading effect of taxation.Separate Cenvat credit rulesTill 2001 the input credit provisions were part of the Central Excise Rules 1944. In 2001 the provisions forinput credit contained therein were separately notified as the Cenvat Credit Rules 2001, and then as theCenvat Credit Rules 2002.Service tax creditServices were first taxed under the Finance Act 1994, and the scope of service tax was extended to covermore services each year. In 2002 the Service Tax Credit Rules 2002 were notified, by which the service taxpaid on an input service could be taken as a credit and used to pay service tax on the output service, if theinput service was in the same taxable category as the output service.Amalgmation of service tax and central excise credit: Cenvat Credit Rules 2004The Cenvat Credit Rules 2004 represented a paradigm shift in input tax relief. The rules allowed credit of,inter alia: (i) central excise duty paid on indigenously manufactured inputs and capital goods; (ii) additional duty of customs (CVD) equal to excise duty, paid on imported inputs and capital goods; (iii) special additional duty of customs (SAD) equal to VAT, paid on imported inputs and capital goods; and (iv) service tax paid on input services, which included services unrelated to manufacture, like share registry, audit, and credit rating. Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 4
  • 5. Moving forward from input relief only for excise duty paid towards excise duty payable, the Cenvat CreditRules 2004 embodied the first attempt to give input tax relief for a plurality of duties and taxes, to furtherreduce the cascading effect of taxation. Till these rules were notified, there was no input tax relief for thecustoms duty equivalent to VAT, or for service tax for manufacturing, or even for provision of services in adifferent category from the input service. Thus the Cenvat Credit Rules 2004 gave relief to industry on anunprecedented scale.The Cenvat Credit Rules 2004 provided, as did all the earlier versions of input relief, that credit was not to betaken on inputs / services related to exempted finished product or exempted supply of service. In the case ofcapital goods, the bar applied only if the capital goods were exclusively used for exempted supply of goodsor services – partial use for exempted supply was not a disqualification.Input relief in VATThe states passed their respective VAT legislations, to replace sales tax, from 2005 onwards. The VAT Actsprovide for input tax credit on tax (VAT) paid on goods purchased from a registered dealer within the samestate and used in business. The goods must not be for personal use and must not be on the ‘negative list’. InVAT, no input tax relief is available for tax paid on inter-state supply of goods.GST expectationsAt present there are three levels of tax on tax. (i) On the one hand, central excise duty is paid on a value that generally includes VAT on inputs. (ii) On the other hand, VAT on the finished product is paid on a value that includes excise duty on the finished product: the line items of an invoice show price, excise duty, sub-total for VAT, and finally VAT calculated as a percentage of this sub-total. (iii) Finally, tax (at present, Central Sales Tax) paid on inter-state sale is not eligible to be taken as a credit. It is hoped that GST will eventually remedy the cascading effect at all three levels. At the outset, however,the second and third levels are being addressed, while about the first level the discussion paper circulated bythe Ministry of Finance has this to say in the context of input tax credit (ITC): Cross utilization of ITC between the Central GST and the State GST should not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained later. Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 5
  • 6. The IGST model refers to interstate GST credits. It is proposed that the centre will tax interstate movementof goods and allow credits of this tax to be taken in the state that receives the goods. This addresses level(iii) of the cascading effect of taxation, as mentioned in the foregoing paragraphs. However, cross utilisationof credit of VAT (state GST) and excise duty / service tax (central GST) is not proposed.Regarding level (ii), the good news is that GST will eliminate the problem. As it is envisaged that there willconcurrently be a state GST and a central GST on the same taxable transaction; both will be computed as apercentage of the base price and will form different line items in the same invoice. Therefore the situation ofVAT on excise duty, as subsists at present, will be remedied.The issue of VAT on inputs forming a part of the price for the purpose of central GST (conversely, the issue ofcross utilisation of credits of state and central GST) is a complex one that can be addressed only by politicalwill, as there are state revenues and central revenues involved in the same transaction. However,commonsense suggests that if the credit of input VAT (or input state GST, as it will be known) is completelyused up in paying output VAT (or output state GST), then it is no longer a cost that inflates the price of theinput for excise duty (or central GST). The problem of cascading effect will arise only if state GST is exemptedon a product or there is a skewed duty structure that results in accumulation of input VAT credits. Perhapsthe structure of duty and exemptions will be worked out with this in view. Visit www.udyogsoftware.com Call us on 9320124365 Or 022-67993535 Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535, Email: sales@udyogsoftware.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. Page 6