CENVAT Credit on Capital Goods

There are many capital goods that have been covered under the CENVAT credit. There are different percentages for each quarter. CENVAT credit also differs from product to product.

Capital goods are machinery, spare parts of machinery, plant, dyes, tools, etc. that is used for manufacturing a final product and used for providing taxable service.

Capital goods covered are:

  • Hand tools
  • Tools
  • Knives
  • Electrical machinery
  • Machinery
  • Grinding wheels
  • Measuring, checking and testing machines
  • Abrasive powder or grain on the base of paper, textile material, paper board or any other materials.
  • Steel and cement for construction
  • Dumpers and tippers
  • Capital goods hired or leases or taken on loan
  • Spare parts
  • Component tools and dyes

Utilising Credit on Capital Goods:

  • Capital goods on which CENVAT credit has been taken is removed after use, the manufacturer is to pay the amount equal to CENVAT credit taken minus the percentage points which is calculated on a straight line method. The percentage for each quarter is as follows:
  • Capital goods which have been removed and on which the manufacturer pays an amount equal to the credit availed and the removal is made under the cover of an invoice. The payment will not be required to be made on the capital goods that have been removed.
  • While paying excise duty or service tax, you are allowed to utilise the CENVAT credit to the extent the credit is available on the last day of the quarter or month. CENVAT credit cannot be claimed for the payment of excise duty for which benefit of exemption is availed.
  • Output service - service tax.
  • Amount under rule 16 (2) of Central Excise Rules 2002.
  • Amount equal to CENVAT credit taken on capital goods, if such goods are removed.
  • Amount equal to CENVAT credit taken on inputs if the inputs are removed or being partially processed.
  • Duty of excise on final product.
  • Manufacturer or provider is allowed to take credit on central excise duty paid on the capital goods or on final product received on or after 10th September, 2004. CENVAT credit can be utilised for paying either of the following:
  • For computers and its peripherals:

    • 10% for each quarter in the first year
    • 8% for each quarter in 2nd year
    • 5% per quarter in 3rd year
    • 1% per quarter in 4th and 5th year
  • For other capital goods the percentage reduced is 2.5% each quarter if the amount calculated is less than the amount to be paid in transaction value.
  • If the value of capital goods on which CENVAT credit has been taken is either written off or partially written off before the capital good is put to use, then the manufacturer shall pay amount equivalent to the credit taken against that capital good. If that good is later on used in manufacture, then the manufacturer can take credit for the amount equal to the CENVAT credit paid earlier.
  • Capital goods produced and manufactured completely for export or in an Electronic Technology Park or in a Software Technology Park in India, and if the unit is paying excise duty, then the amount is calculated as follows:
  • 50% of the assessable value multiplied by 1+basic customs duty divided by 100 and multiplied by additional customs duty multiplied by 100.
  • Excise duty
  • Education cess on the excise duty
  • Credit on the education cess on the excise good and education cess on taxable service can be used for paying education cess on excise goods or to pay the education cess on services that are taxable.

Conditions allowing CENVAT Credit:

Following are the condition for allowing CENVAT credit:

  • CENVAT credit is allowed for capital goods used by a manufacturer for generating electricity for use within the factory at any time in a given financial year is taken for an amount not exceeding 50% of the duty paid on the good for that FY.
  • It is allowed on duty paid on the capital goods for the FY.
  • It is allowed in additional duty levied for the capital good in receipt of the good by the manufacturer.
  • It is received on the whole amount on duty paid on the good that is eligible for the manufacturer to avail exemption.
  • Balance of CENVAT credit can be taken in subsequent FY as long as the capital goods are possessed by the manufacturer. For instance if a manufacturer received machinery on 16th April, 2002 and paid Rs.2 lakh CENVAT, then the manufacturer can take credit up to Rs.1 lakh in 2002 and 2003.
  • Credit is available on capital goods leased from a financing company.
  • Credit is not allowed for the part of the good that the manufacturer claims depreciation.
  • It is allowed on capital goods that is sent to a job worker for further testing, repair, reconditioning or for any other purpose or processing provided that the goods are received back in 180 days from sending it to the job worker.
  • It is not allowed on the goods used in manufacturing exempted goods or which provides exempted service.
  • Output service provider can take credit on the capital goods received.
  • Credit can be taken by manufacturer, provider and service distributor on basis of the invoice issued by manufacturer of clearance, importer, first stage or second stage dealer.
  • Manufacturer of the final product is to maintain records for receipt, disposal, recovery, consumption and inventory of goods that includes the value, duty paid, CENVAT credit taken and used and the person from whom the goods were procured. The manufacturer and service provider holds the burden of collecting proof for admissibility of CENVAT credit.

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