Central Excise Law

Cenvet Credit-Meaning and Nature-:

1.Excise Duty is paid on manufactured goods. All manufactured goods are not used by end-users or consumers. Final product of a manufacturer is also used by another person as input or capital goods or consumables for production of his goods. As the taxable event in excise is manufactured, all goods suffer excise duty at the hands of manufacturer. When such duty-paid goods are used by another manufacturer and duty is paid by such person, then the value of the goods includes duty paid on inputs also. Excise duty burden on the final products fall on duty paid on inputs. Thus a situation arises whereby duty becomes payable on duty. This results in cascading effect and such process continues till the goods reach ultimate consumer. The price of goods get inflated due to such extra duty burden. Cenvat Credit Scheme seeks to overcome this production so that value of goods alone is subjected to duty at every stage of manufacture.

2.A manufacturer or service provider can take credit of duty or tax paid on inputs or capital goods or input services and can adjust the same for payment of duty or tax on his final products or output services. Cenvat Credit denotes credit of the duties/service tax as specified in rule 3 of Cenvat Credit Rules, 2004. The object of the Modvat Scheme (as Cenvat Scheme was called befoe) was stated by Supreme Court thus “Modvat is basically a duty –collecting procedure, which aims at allowing relief to a manufacturer on the duty element borne by him in respect of the inputs used by hm” [Ichalkaranji Machine Centre Pvt. Ltd. V. Collector, 2004 (174)E.L.T.417 (S.C.)]. The nature of Modvat or Cenvat Credit was explained as “provision for facility of credit is as goods as tax paid till tax is adjusted on future goods”, Eicher Motors Ltd. V. Union of India, 1999(106)E.L.T.3(S.C.).

3.Cenvat Scheme essentially requires that final products should be duty paid and not exempted. Cenvat credit is not admissible even if ‘duty’ is paid by the supplier on unconditionally fully exempted goods, vide Section 5A(1A). But there are situations where final product is held as not liable to excise duty at a later date by Courts. Assessees are faced with demand notices seeking reversal of Cenvat Credit availed on inputs, capital goods and input services used in the manufacture of such goods. A new Section 5B has been inserted by Finance Act, 2007. It empowers the Central Government to issue notification for non-reversal of Cenvat Credit in cases where duty has been paid on final product and credit has been taken on inputs, capital goods or input services but later the production process for concerned goods is held as not chargeable t excise duty.

4.The focus in this portion is on credit for the goods, that is, the excise part. See Chapter 5 in Part 6 of this Manual for details.

Goods/services eligible for Cenvat Credit: In general, specified capital goods and inputs are eligible to Cenvat Credit. In Budget 2011, the definition eligible inputs and input services has been made restrictive and the half a century old liberal approach has been given up. The following paragraphs discuss the items that are entitled to Cenvat Credit.