Cenvat creates level playing field for domestic producers

CHATROOM

If the additional duty is not levied, domestic producers (who do pay VAT) can become less competitive vis-à-vis imports.

According to the proviso to Rule 3 (1)(vii)(a) of the Cenvat Credit Rules, 2004, the additional duty leviable under sub-section (5) of Section 3 of the Customs Tariff Act, 1975 shall not be eligible for Cenvat Credit in case of a service provider.

Can you explain why such credit of additional duty of customs is denied to a service provider? Can a service provider make a representation to include them also for availing the Cenvat?

Sub-section (5) of Section 3 of Customs Tariff Act, 1975 says that "if the Central Government is satisfied that it is necessary in the public interest to levy on any imported article, whether on such article duty is leviable under sub-section (1) or, as the case may be, sub-section (3) or not, such additional duty as would counter-balance the sales tax, value added tax, local tax or any other charges for the time being leviable on a like article on its sale, purchase or transportation in India, it may, by notification in the Official Gazette, direct that such imported article shall, in addition, be liable to an additional duty at a rate not exceeding four per cent of the value of the imported article as specified in that notification."

It is apparent, therefore, that the additional duty in question is levied to mainly countervail value added tax (VAT) that domestic producers pay. If this is not levied, domestic producers (who do pay VAT) can become less competitive vis-à-vis imports. Domestically produced goods suffer VAT.

So, let the imported goods also suffer similar burden. That seems to be the idea behind the levy. The duty creates a level playing field for the domestic producers.Under the Value Added Tax (VAT) laws, input tax credit (similar to Cenvat credit) is available. But, it is available for those who sell their goods by charging VAT. No input tax credit is admissible for those who do not charge VAT on their sales.

Now, VAT is charged on sale of goods. Manufacturers sell goods and so, collect VAT. Service Providers who do not sell goods need not collect VAT and so, cannot take input tax credit on their purchases, under the VAT laws.

A similar logic plays out with the additional duty that you have referred to. Manufacturers who sell goods are eligible to take Credit but not those who do not sell goods.

In case of imported goods, the additional duty in question is collected by the Central Government and not the state governments. Allowing credit of the said duty under VAT laws would not be very feasible as state governments will not agree for that. So, the central government has allowed Cenvat credit of the duty. But the Cenvat credit of that duty is allowed to manufacturers, who sell goods and not to service providers who do not sell goods.

Regarding making a representation, you can always write to the Central Board of Excise and Customs (CBEC) giving your views and justification.