Budget tips to simplify Cenvat

EXPERT EYE

An important hurdle on the way to introducing GST at the Central level is the absence of a comprehensive goods tax, that is, a comprehensive availability of input tax credit of Central Excise duty to all goods except those in a Negative List. A comprehensive system would not have artificial distinction between capital goods and raw-material and between different similar expressions such as manufacture, use, etc. Only a comprehensive goods tax can be matched with a comprehensive service tax to make it a comprehensive goods and services tax (GST) at the Centre. State GST is a different issue.

The present system has numerous distortions in the system of availability of input tax credit.  A typical case came before the Supreme Court in Vikram Cement vs Commissioner of Central Excise, Indore, 2006 (194) ELT 3(SC). The court broadened the scope of the Modvat (Cenvat) by interpreting the entitlement to input tax credit not only in cases where the inputs have been used "within" the factory of production but even outside, if "ultimately" it is used within. There are many such examples of rigidity in the input tax credit system. One can amend the Rules to accommodate this interpretation but such piece-meal amendment would not go long enough. Only a comprehensive availability of input tax credit to all excisable goods (with the exception of those in the Negative List) can eliminate this problem permanently.

Let me explain, in greater detail, how the distortions affect the free flow of inter-changeability of input tax credit in the Cenvat regime. One important distortion is the distinction between capital goods and raw material. Both are inputs and there should have been no distinction between the two. This distinction is a historical fact since the initial Modvat scheme started in 1986 and did not include capital goods. But it is no longer relevant after 1994-1995 Budget when this scheme was extended to capital goods. It is high time now, after 14 years from that budget, that an omnibus rule is made making input tax credit allowable to all excisable goods excepting those in a Negative List which may include items like petrol, car, office furniture, etc. where the Government does not want to allow input tax credit. 

The inter-changeability in respect of input tax credit for goods and for services should be made more general and all-pervasive. 

It is understandable that the Cenvat procedure itself cannot be more simple to operate than the whole tax structure itself. Today, the tax structure of Central Excise is extremely complicated because of numerous duties and exemptions.  Eligibility of Cenvat is for twelve taxes namely "" (i) Basic excise duty in the First Schedule, (ii) Excise duty in the Second Schedule, (iii) Additional duties of Excise under Textiles and Textile Articles Act, (iv) Additional excise duty under Goods of Special Importance Act, (v) National Calamity Contingent duty, (vi) Education Cess, (vii) Additional Duty (Countervailing Duty) under Section 3 of Customs Tariff Act, (viii) Additional Duty under sub-section (5) of Section 3 of the Customs Tariff Act, (ix) Additional Duty of Excise leviable under Section 157 of the Finance Act, 2003, (x) Service tax, (xi) Education cess on service tax and (xii) Additional Duty of Excise leviable under Section 85 of the Finance Act, 2005. Unless the number of additional duties and cesses are reduced, any attempt to simplify Cenvat procedure only is doomed to a certain failure.

In the context of such a complicated Cenvat system it will be most unreal to assume that taxpayers will not make genuine mistakes. The best way is to simplify the system.

smukher2000@yahoo.com