Credit availability for service tax and vat

[Narasimha Subramanian]

We are a trading and manufacturing company with SSI status for our manufacturing activity. We are also coming under Excise for our manufacturing. We have started implementing MS Navision ERP in our company and we found that the invoice from the supplier of this product has VAT charged on the licenses sold to us and Service Tax on the Software development charges or customization charges. Can credit be taken on the VAT and Service Tax charged as we are registered under Excise for our manufacturing? If Credit can be taken, is there any guideline available for apportioning the credit between manufacturing and trading activity? Please clarify.

[Surender Gupta]

Since the ERP is for the purpose of your business, you may avail the benefit of cenvat credit of service tax paid to discharge excise duty. However, in case of trading activity since the activity is not subject to any duty of excise or service tax, you may take the proportionate credit as calculated on some reasonable basis to fulfill the requirements of rule 3 and rule 4 of the cenvat credit and to comply with the requirement of rule 6(3) / (3A) of the Cenvat Credit rules.

Availing full credit may land you in trouble. Therefore, you may take the cenvat credit proportionate to your trading activity and manufacturing activity.

AI Summary

Cenvat credit entitlement limited: proportionate service-tax credit allowed for excise-related manufacturing, not full recovery.
Service tax on ERP customization may be claimed as cenvat credit to discharge excise duty where the ERP is used in the taxable manufacturing activity; credit for non-excisable trading activity should be taken only proportionately on a reasonable basis to meet the requirements of the Cenvat Credit Rules (including rule 3, rule 4 and rule 6(3)/(3A)), and full credit for mixed-use without apportionment is discouraged.