Background
During the nascent period of the commencement of the Voluntary Compliance Encouragement Scheme, 2013 (‘VCES’), the industry and taxpayers were doubtful as regards their eligibility to avail CENVAT credit in respect of the tax dues paid under the VCES, i.e., paid under the reverse charge mechanism and against supplementary invoices raised by their service providers. The CBEC sought to put this uncertainty to rest by issuing clarification in the form of a Circular [No. 170/5/2013-ST dated 08-08-2013] (on issues pertaining to the VCES). In the aforesaid Circular Q. No. 18 (or FAQ No. 22 of the CBEC’s booklet on Frequently Asked Questions relating to VCES issued on 08-08-2013) dealt with the issue of eligibility of CENVAT credit to the recipient of service in respect of the tax dues paid under a supplementary invoice or under reverse charge.
At that time, it was clarified that apart from the restriction imposed by rule 6(2) of the Service Tax Voluntary Compliance Encouragement Rules, 2013 (hereinafter referred to as ‘VCES Rules’), relating to utilisation of CENVAT credit for payment of tax dues under the VCES, all issues relating to admissibility of CENVAT credit shall be determined in terms of the provisions of the CENVAT Credit Rules, 2004 (‘CCR’). It was also clarified that the admissibility of CENVAT credit of; (i) service tax paid by a service recipient under an invoice or a supplementary invoice issued by a service provider for the amount of tax dues paid under VCES, and (ii) tax dues paid by a service recipient under reverse charge mechanism under VCES; shall be determined in terms of rule 9(1)(bb) and 9(1)(e) respectively of the CCR.
Recent clarification
Despite the above, a large section of the tax payers (and declarants under the VCES) felt that the issue was needed more clarity was needed on this issue. Accordingly, clarifications were pursued by trade and industry mainly related to the timing for availment of such CENVAT credit, i.e., whether the credit would be available immediately upon payment of first installment of tax dues or only after payment of tax dues in full and receipt of acknowledgement of discharge in Form VCES-3. In response, recently, the CBEC, vide its Circular No. 176/2/2014-ST dated 20-01-2014 has indicated that CENVAT credit shall be available only upon full payment of tax dues and receipt of Form VCES-3, stated as under:
“3. It would be in the interest of VCES declarants to make payment of the entire service tax dues at the earliest and obtain the discharge certificate within 7 days of furnishing the details of payment. As already clarified in the answer to question No.22 of FAQ issued by CBEC dated 08-08-2013, eligibility of CENVAT credit would be governed by the CENVAT Credit Rules, 2004.
4. Chief Commissioners are also advised that upon payment of the tax dues in full, along with interest, if any, they should ensure that discharge certificate is issued promptly and not later than the stipulated period of seven days.”
Through the above clarification, the CBEC has briefly, professed that, (i) the eligibility for availment of CENVAT credit shall be determined in terms of the CCR and (ii) CENVAT credit shall be available only after full payment of tax dues and receipt of acknowledgement of discharge in Form VCES-3.
Brief Analysis
While the prescribed time permitted under the VCES for payment of tax dues is 30th June, 2014 and 31st December, 2014 with interest, the CBEC has entreated the declarants to earnestly deposit the balance tax dues in order to avail CENVAT credit. Further, the CBEC has maintained that the eligibility of CENVAT credit would be governed by the CCR. In this regard, the CBEC has also urged the Chief Commissioners to ensure that the issuance of acknowledgement of discharge in Form VCES-3 is concluded within the stipulated period of seven days of receipt of information regarding full payment of declared tax dues.
Confusing clarification
Generally, a circular or clarification is issued to put to rest any doubts that may exits on a particular issue. However, it appears that the aforesaid Circular has created more doubts instead of clarifying the existing ones. Here’s why this Circular has created more confusion than clarification.
The CCR allow availment of CENVAT credit on the basis of either (i) an invoice, a bill or challan issued by a provider of input service or (ii) a supplementary invoice, bill or challan issued by a provider of output service, in terms of the provisions of Service Tax Rules, 1994 subject to certain exceptions or (iii) a challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax.
A thorough reading of the relevant Rules in CCR with the aforesaid clarification from a service recipient’s perspective, the following fact situations emerge:
1. Where a supplementary invoice is raised by the service provider for collection of service tax – In terms of the Clarifications stated above, the eligibility to CENVAT credit in such a case shall be determined in terms of rule 9(1)(bb) of the CENVAT Credit Rules, 2004 which permits CENVAT credit availment except where the additional amount of tax became recoverable from the provider of service on account of non-levy or non-payment or short-levy or short-payment by reason of fraud or collusion or willful misstatement or suppression of facts or contravention of any of the provisions of the Finance Act or of the rules made thereunder with the intent to evade payment of service tax. Hence, where fraud, suppression etc., with intent to evade payment of tax does not exist, CENVAT credit may be availed on the basis of receipt of a supplementary invoice.
The question, whether the department can allege fraud, suppression etc., with intent to evade payment of tax in respect of VCES declarations, where the declarants have voluntarily disclosed their tax dues, it is still unclear and open for deliberation as this has specifically not been clarified by the department till date.
2. Where an invoice has not been issued by the service provider at the time of rendering service and an invoice is issued for the first time – The present Circular No. 176/2/2014-ST dated 20-01- 2014 as also the Circular No. 170/5/2013-ST dated 08-08-2013 (hereinafter referred to as ‘Clarifications’) clarify that the eligibility to CENVAT credit shall be determined in terms of the CENVAT Credit Rules, 2004; specifically rule 9(1)(bb) or rule 9(1) (e). Where an invoice is issued for the first time, CENVAT credit can be taken on the basis of the invoice, challan or bill issued in terms of rule 4A of the Service Tax Rules, 1994 and the provisions under the CENVAT Credit Rules, 2004 do not impose any restriction similar to that under rule 9(1)(bb) of CENVAT Credit Rules, 2004 for such availment.
Under normal circumstances, the service recipient is eligible to take CENVAT credit immediately upon receipt of the invoice (subject to the condition that the service provider is paid within the specified period). The case of a service recipient would be no different is the service provider has issued an invoice with the service tax component for the first time. In this scenario, can the service provider be restricted from availing CENVAT on the basis of such invoice? The circular is conspicuously silent on this aspect.
3. Where tax dues have been partially paid under reverse charge – In such a situation, rule 9(1) (e) of the CENVAT Credit Rules, 2004 provides that CENVAT credit may be availed immediately on the basis of a challan evidencing payment of service tax by the service recipient as the person liable to pay service tax without laying down any additional conditions.
This situation is similar to (2) above. Generally, the service recipient becomes eligible to claim CENVAT as soon as he deposits the service tax, on the basis of the tax paid challan.
The circular seems to suggest that even in case of a service recipient having deposited 50% of tax, would not be permitted to avail CENVAT credit unless and until the entire liability declared under the VCES is cleared. Whether such a restriction can be imposed by way of a clarification is open issue.
The CBEC has by virtue of the clarification, put the service recipients into an irrational situation, i.e., they would be entitled to CENVAT credit only after the issuance of acknowledgement of discharge to the declarants, which has till date been at the mercy of the department; more so in the case where the entire amount of tax dues have been paid by the declarant (service provider/recipient, as the case be) but acknowledgement of discharge has not been is- sued within 7 days of intimation to the department. Such a condition for postponement of availment of CENVAT credit is unwarranted on the part of CBEC.
The CBEC has also failed to consider the fact that, except in case of payment of tax dues arising out of reverse charge, the declarants and person entitled to CENVAT credit are different. The payments made by declarants under the VCES, continue to be ‘tax dues’ irrespective of the conclusiveness of the declaration made. The documentary trail showing the collection of service tax by the service provider should meet the requirement of law and the service recipients are not expected to produce any evidence to show that the service provider is actually deposited the dues with the Government.
It is quite likely that to this extent, the aforesaid Circular may be challenged as being ultra vires the provisions of the CENVAT Credit Rules, 2004, VCES and VCES Rules. It is doubtful that this confusing and overstepping clarification by CBEC, will help the declarants in away in getting swift receipt of the acknowledgement of discharge.
