TIOL-DDT 2899
29 07 2016
Friday

CAG conducted a Performance Audit on CENVAT credit scheme, to seek an assurance that provisions in the Act/rules/clarifications/procedures as laid down are unambiguous and adequate to safeguard any misuse of the CENVAT credit scheme and that the internal control and monitoring mechanism were in place and effective.

CAG found several provisions of the law inadequate in its recent report to Parliament.

Absence of provision to reverse credit of service tax paid on input services used for inputs removed as such:

As per rule 2(l) of the Cenvat Credit Rules, 2004, "input service" includes services used in relation to procurement of inputs and inward transportation of inputs or capital goods and outward transportation upto the place of removal etc. Further, rule 3 (1) of the rules, ibid, provides that the manufacturer or producer of final products or provider of taxable service shall be allowed to take credit of service tax on input service received by the manufacturer of final product. Although rule 3(5) provides for reversal of credit taken on inputs or capital goods removed as such, there is no corresponding provision under the rules requiring payment of the amount equal to the credit of service tax paid on input services. These services could include custom house agent's services, clearing and forwarding agents' services, transportation availed for procurement/transportation of inputs or capital goods etc. Non-existence of such provision resulted in unintended benefit to the manufacturer.

Audit Recommends:

The Ministry may insert a provision in Cenvat Credit Rules, to reverse the proportionate Cenvat credit of input services at the time of clearance of input/capital goods as such.

Audit had raised this issue earlier also. This was discussed in the Tariff Conference held on 28th and 29th October, 2015.

The conference noted that Rule 3(5) of the CENVAT Credit Rules, 2004 does not provide for reversal in respect of input services for a reason. Input services are consumed once the inputs and capital goods are received in the factory. Thus on receipt of inputs and capital goods, the associated input services have to be considered as consumed within the factory and become a cost to the business. Demand for reversal of the input services credit, when such input services cannot be reused, unlike inputs and capital goods which are available for reuse would not be fair to the trade. Therefore, the conference concluded that the present rule represents the correct provision in accordance with the principles of input tax credit. Rule 3(5) of the Cenvat Credit Rules, 2004, does not need any amendment.

Persistent CAG now wants a change in the law. Let us hope the Board would not budge.

Lacunae in provision allowing credit on input services:

While amending Notification dated 17 March 2012, the notification dated 1 March 2015 allowed clearance of mobile phones with payment of duty at the rate of one per cent subject to conditions as specified therein which restricted availing of Cenvat credit in respect of inputs and capital goods only.

The condition remained silent in respect of availing of Cenvat credit on input services. As the notification allowed concessional rate of duty in respect of mobile phones, allowing benefit of Cenvat credit in respect of input services does not appear to be in line with basic principles of Cenvat credit scheme.

Audit Recommends:

Government may consider making suitable amendment to the Notification to restrict credit on input services as well.

The Ministry stated that the issue is under examination of Tax Research Unit (TRU) and detailed reply will be furnished separately.

Absence of provision for credit reversal for obsolete goods

Rule 3 of Cenvat Credit Rules, 2004, provides that a manufacturer or a provider of output service shall be allowed to take credit of input or input services or capital goods for use in or in relation to the manufacture of final products or for providing output services.

Rule 3(5A) of Cenvat Credit Rules, 2004, provides that when the capital goods, on which Cenvat credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the Cenvat credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified in the rule for each quarter of a year or part thereof from the date of taking the Cenvat credit. But if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

According to rule 3(5B) of Cenvat Credit Rules, 2004, if the value of any input or capital goods before being put to use, on which Cenvat credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the Cenvat credit taken in respect of the said input or capital goods. But, there is no provision for goods declared as obsolete but not written off in accounts.

Audit Recommends:

The government may consider inserting provision for reversal of Cenvat credit where the inventories were declared as obsolete but were not written off from the books of accounts and where capital goods after being used are written off but not removed from the factory.

The Ministry stated (February 2016) that the issue is under examination.

Absence of provision for charging interest on reversal of credit for non-receipt/delayed receipt of goods sent for job work within 180 days

Inputs or semi finished goods sent to job worker under rule 4(5) (a) of Cenvat Credit Rules, 2004, should be returned to the factory within 180 days. For failure to do so proportionate Cenvat credit on inputs/semi finished goods not received back is required to be reversed. However, in case of delay in reversal of credit, there is no specific provision for charging interest on such delayed reversal. This results in loss of interest to the Government.

Audit Recommends:

The Government may consider inserting provision for charging interest in case of non/delayed reversal of Cenvat credit in respect of non/delayed receipt of goods sent to job worker.

The Tariff Conference held on 28 and 29 October 2015 had decided that the interest is liable to be paid after the expiry of period of 180 days and there is no need for insertion of provision for charging interest.

Audit is of the opinion that to avoid ambiguity there is a need to insert specific provision in this regard.

IRS Revolt - Jaitley Not Amused

A PIB Press Release says,

"The Ministry of Finance has learnt through a newspaper item which appeared today that some officers of Indian Revenue Service (Income-tax) Mumbai Branch have passed a resolution against the Department of Revenue.

The Finance Minister Shri Arun Jaitley has taken a serious view of such a Resolution by officers of Organised Group 'A' service to advise the Government on what role it should play. This is an act of insubordination. Officers indulging in acts of indiscipline would be subject to Conduct Rules.

No Department of the Government has absolute autonomy. It has to serve the larger goal of the Government. The supervisory powers of next higher authority ensures that there is no misuse of power by anyone in the Government."

Several stories are doing the rounds on what really happened.

It seems last week IRS (Income Tax) officers met in Mumbai and discussed interference by the Revenue Secretary in operational matters. It was felt that micro management by the Revenue Secretary has undermined the autonomy of the Central Board of Direct Taxes. The IRS officers were said to be unhappy with the recent transfer of an IRS officer. It seems there was a case of Rs. 10,000 Crore collected from a Bank on 30th March and 9500 Crore was refunded on 1st April. Obviously the Revenue Secretary doesn't understand such 'modus operandi' for revenue collection.

Is it another IRS Vs IAS story?

Speaking in the Lok Sabha on 18th March 2013, Ms. B. Jhansi Lakshmi, MP said,

"I would like to bring an important issue to the notice of Government through this august house that there is strong resentment among the officers of IRS about the faulty organizational structure of the Department of Income Tax. It is headed by the CBDT, which is a statutory authority created by the Central Board of Revenue Act, 1963 and part of the Revenue Department in the Ministry of Finance. All the senior officers in the department including chairman and members are IRS officers. But the Revenue Secretary who heads the Revenue Department is usually an IAS officer. The entire problem lies here. Both the CBDT and CBEC function under the administrative control of Department of Revenue and its Secretary is from IAS cadre. The Secretary even writes Annual Performance Appraisal Reports of the Chairman and members of both these boards. What is most heartburning fact among the IRS officers is that the Revenue Secretary, an IAS officer, belongs to a junior batch than the IRS officers who are on the boards of CBDT and CBEC. This means all the Chairmen and members of both the CBDT and CBEC should report to a person who is junior to them, which is a cause of concern among the IRS officers, when all the IAS, IPS, IIS and IRS are recruited through the same examination by the UPSC. Nowadays even some of the top rankers in the Civil Service Examination are choosing the IRS over the IAS and IPS and most of the female candidates prefer the IRS to the IPS because of the stable postings and postings in metros. This means that a higher ranked Civil Services candidate who chooses the IRS becomes subordinate to a lower ranked candidate who chooses the IAS. It affects the dynamism of the Income Tax Department and the morale of the IRS officers, as everything is to be routed through the Revenue Secretary. Therefore, to ease out the problems of IRS officers there is a need to immediately upgrade the CBDT to the status of a department in the Government of India by renaming it as the "Department of Direct Taxes", with its Chairman and Members having the status of ex-officio Secretary to the Government of India unlike the present status of exofficio Special Secretary. I, therefore, urge upon the Government to upgrade the CBDT to the status of a Department by renaming it as the "Department of Direct Taxes".

How did the Hon'ble MP know all this? An article by an IRS officer extracted by us in DDT 2376, is almost identical.

The IRS is IRS and IAS is IAS and the twain can never meet.

Until Monday with more DDT

Have a nice weekend.

Mail your comments to vijaywrite@tiol.in