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Tax to be paid if CGs sold after taking cenvat credit
November, 16th 2007
Manufacturers and service providers will now be liable to pay duty if capital goods (CGs) on which cenvat credit has been taken are removed after their use. This follows an amendment carried out by the government in the Cenvat Credit Rules, 2004.

However, they would be allowed to claim a depreciation at the rate of 2.5% for each quarter of a year or part thereof from the date of taking the cenvat credit.

If the capital goods, on which cenvat credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the cenvat credit taken on the said capital goods reduced by 2.5% for each quarter of a year or part thereof from the date of taking the Cenvat credit the notification said.

Experts say this has been mainly done to plug the loophole which existed in the cenvat credit rules. This was an expected amendment and is in line with the Cenvat Credit Rules as it existed prior to the present set of rules.

However, the period of claiming deduction should be reckoned from the date of receipt of capital goods instead of date of claiming credit as mentioned in the amendment as most of the times there could be a time gap between the date of receipt of capital goods and date of claiming credit, says PricewaterhouseCoopers executive director Prasad Paranjape.

For every rupee of cenvat paid by the industry on inputs, it earns a credit that can be used against setting off its liability. Credit can be availed against duty paid on capital goods used by manufacturers of final products. Giving credit against duty paid arrests the cascading effect of tax on tax or duty on duty at every stage of manufacture.

Up till now, there was no statutory provision dealing with the situation when used capital goods were removed by manufacturers and service providers on which they would have availed cenvat credit at the time of receipt of such capital goods.

Based on the letter of the law, certain assessees took a plea and also succeeded in litigation with the revenue authorities to sustain their argument that in the absence of a specific provision in the law to deal with a situation where used capital goods are removed, there is no obligation on the assessee to pay any tax or reverse any cenvat credit on such removal by them.

This resulted in loss of substantial revenues for the government.
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