The Budget 2007-08 has kept the countervailing duty (CVD) on imports in lieu of state Vat not Cenvatable against service tax liability. According to tax experts, this is inequitous as Cenvat credit for the CVD is available for the manufacturing industry against its excise liability. But there is no unanimous view on this among analysts. A section of them believes that since the output service is not subject to state Vat, the 4% CVD should not be Cenvatable against service tax.

In Budget 2005-06, the finance minister P Chidambaram had taken the power to impose a CVD on all imports to compensate for state-level taxes, but the levy was initially applied on imports of Information Technology Agreement-bound items and their inputs, except software. In Budget 2006-07, he extended the levy to all imports and made available full credit of the duty to manufacturers of excisable goods.

It is, however, argued that the logic itself was flawed. There is no sound logical basis for the stance that the 4% duty would compensate for state Vat, said Vivek Mishra, indirect tax head, Ernst & Young. Mr Mishra said that although the CVD might not have a cascading effect on manufacturer, it adds to the cost of the service provider. The special additional duty (SAD), the earlier avatar of this tax, was applicable only if there was no onward sale of the goods, and it was therefore more defensible than the current CVD, said Mr Mishra.

The counter-point is that the CVD should not be Cenvatable against service tax as the states dont levy service tax. If the output is a service, then that is not subject to state Vat. So Cenvat credit for the CVD is not called for, said Jatin Arora, manager, indirect tax, RSM & Co.

Countering this, S. Harishanker, executive director and indirect tax head, KPMG said, anyway you are setting off the 4% CVD against central excise, not against state Vat. There is no reason for discrimination between the service provider and the manufacturer on this count. He envisaged the case of a telecom service provider paying the CVD to import an equipment but unable to discharge his service tax liability by using Cenvat credit for the CVD paid.

Of course, the issue will get resolved with the proposed introduction of state Vat on imports. This would perhaps come with the states starting to levy service tax on a few identified services. These require major legal and administrative changes. As an interim measure, the centre could have done well, by making the CVD in lieu of Vat, just like the CVD in lieu of excise, Cenvatable against both excise and service tax.