Penalty and interest - wrongly availed cenvat credit

[Asked by Guest]

We were taking CENVAT credit of Service Tax on the basis of billing of expenses against the legal provision of taking the credit on payment basis. This practice was being followed by us till September 2006 and from that period onwards we have started taking the credit on payment basis as is legally permitted. Now since we are aware of the anomaly we would like to rectify by depositing the wrongly taken credit along with interest and penalty (if any). So please advice the way we can do the same as per the provisions of the Service Tax rules in order to avoid any tax scrutiny by the department in the future. Please also advice us in the case of scrutiny by Service Tax dept whether this input (taken wrongly with payment to suppliers) can be disallowed fully by the dept and whether we can claim it (in case of disallowance for the particular period) in the future. If there is any case regarding this issue please also quote the case study.

[Madhukar N Hiregange]

As long as the payments were all made later in full the credit need not be reversed. Only the interest for the early availment of credit maybe calculated and discharged. The calculation sheet of month availed month paid excess credit and interest maybe kept in the ST compliacne file to be produced to the audit at the time of the same. The same maybe intimated by RPAD to dept as a measure of abundant caution. Reversal of the credit cannot be demanded and should not be done even if they state that the same can be availed later. This ( later credit) maybe considered as a sou motot credit and objection raised on the same again. Cases in central excise maybe referred as to my knowledge no such case has been decided in servic etax.

As per Rule 4(7) of CCR, 2004, CENVAT credit of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax… Thus, the department may ask you to reverse the credit in the months on which the credit was taken on accrual basis and avail the credit in the month in which actually the amount with tax was paid. Of course, the provision of Rule 6 of CCR, 2004 should be taken note of while availing/utilising the CENVAT Credit. The differential Service tax payable because of such reversal of CENVAT on a monthly basis is to be paid with interest (@ 13% p.a.) As held in number of judicial pronouncments,if the differential tax along with interest component is paid by the assessee on its own before the issuance of SCN, then no penalty would be leviable. Filing of letter with the department explaining the position along with working of liability/interest and month-wise CENVAT credit changes/adjustments and a copy of GAR 7 challan, as a proof of payment would regularize the position from your end.

AI Summary

Cenvat credit on payment basis: pay differential tax with interest and disclose to avoid penalty if done pre notice.
Where CENVAT credit of input services was availed on accrual instead of on payment, the department may require reversal for the months of accrual and re availment on actual payment; the taxpayer should compute and pay the differential service tax with interest, and if paid voluntarily before issue of a show cause notice penalty is generally not leviable. Maintain month wise workings, discharge liability via challan (GAR 7) and file a disclosure letter with computations and proof of payment to regularize the position.