No Cenvat credit on Input services after 1st July, 2012 ... ???

Notification No 18/2012-ST was issued on 1^st June 2012 by which Sections 65, 65A, 66 and 66A are to be deleted from Finance Act with effect from 1^st July, 2012.  Accordingly    these Sections  which  provided for the definition,  classification, charge of Service Tax  on service provided in India and  received from abroad respectively have become redundant with effect from the notified date of 1^st July,2012. The new Sections inserted in lieu of the above are 66B, 66C, 66D, 66E and 66F

It has been clarified in the Budget Circular D. O. F. No 334/1/2012-TRU dated 16th March, 2012 as follows:

“6. On the coming into force of the new provisions, the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions”

Let us examine the impact of the above in Cenvat Credit Rules and Service Tax Rules.

As per Rule 3 (1) of Cenvat Credit Rules, a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of –

(i)            Duty of excise specified in the First Schedule to Excise Tariff Act leviable under the Excise Act

(ii)           xxxx

(iii)          xxxx

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 (ix)  Service Tax leviable under Section 66of the Finance Act

With effect from 1^st July, 2012, Section 66 ceases to exist and new levy of Service Tax is under Section 66B. It would imply that  based on an Invoice issued under Service Tax Rules on or after 1^st July, 2012, Cenvat credit is not eligible as per the  provisions of existing Cenvat Credit Rules, 2004 since Service Tax is leviable under Section 66 B with effect from 1^st July.

Further, the  following provisions of Cenvat Credit Rules needs complete revamping since it becomes irrelevant after 30^th June, 12.

-          Definition of Capital Goods  as per Rule 2 (B),  (BA)  & (C)  specifies the sub-clauses (o) (d) ,(zo)  ( zzza) (zzzy) and (zzzzj) of clause (105) of section 65 of the Finance Act

-          As per  2(e),  definition of exempted service includes services on which no Service Tax is leviable under Section 66

-          Definition of Input as Rule 2(k) B excludes the taxable services specified in sub clauses (zn), (zzl), (zzm), (zzq),( zzzh) and ( zzzza) of clause (105) of section 65

-          Definition of Input service as per Rule 2(l) excludes the services specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), zzzh) (zzzza), (d),(o), (zo) and (zzzzj)

-          Definition of output service   as per Rule 2(p) excludes taxable service referred to in sub-clause (zzp)

With regard to Service Tax Rules, Rule 4 (1) mandates that every person liable for paying Service Tax shall make an application for registration within a period of 30 days from the date on which Service Tax under Section 66 of the Finance Act is levied. Effective from 1st July, 2012, there is no levy of Service Tax under Section 66, but is leviable under Section 66B.

 Vide Order No 1/2012 of Service Tax (Removal of Difficulty) Order, 2012 dated 15th June, 2012, anomaly in Section 68 (1) & (2) regarding payment of Service Tax which covered Section 66 was replaced with Section 66 B. But there is no corresponding amendment in Service Tax Rules which still speaks about Section 66.

With the deletion of Section 65(105) having Categories with service-specific references and various account heads for remittance of Service Tax, Service Tax Registration need to be under the broad description “Taxable Service” disregarding the manifold services provided by a service provider and there shall be only one account head for tax remittance as is being followed for Central Excise duty remittance.

It is high time to amend Cenvat Credit Rules/ Service Tax Rules 1994 and introduce the proposed common registration formalities, EST Return for Central Excise and Service Tax along with necessary structural changes in ACES functionalities before the negative list takes effect from 1^st July.

Let us hope that necessary changes will be brought about immediately so that same can be subjected to deeper studies and analysis by trade and professionals so as to iron out the anomalies and chances of unwanted litigation.