MoF on Cenvat credit trail, asks 4,000 firms for details

NEW DELHI: Domestic pharma, machinery, chemicals, cosmetics and steel majors had better watch out. The Finance Ministry has decided to scrutinise Cenvat credit offtake by companies in these sectors to check misuse.

Around 4,000 companies may be asked to furnish detailed information on the use of Cenvat credit — including the consumption pattern of inputs — to excise authorities.

Finance minister P Chidambaram has directed the Central Board for Excise and Customs (CBEC) to finalise the format, a senior official said.

The Cenvat credit system allows manufacturers to offset excise paid on inputs used to produce a good, from excise paid on the final product.

Simply put, manufacturers are allowed to take credit on excise duty paid on inputs, reducing the cascading effect on duties. Cenvat credit can be used to pay excise duty on the final product.

The government has also allowed set-off of taxes paid on goods with that paid on services and vice-versa as a step towards integrating taxation of goods and services.

Cenvat credit utilisation in capital goods has seen a massive spurt in the current fiscal.

What causes concern is the mismatch between growth in Cenvat credit offtake and excise revenues, signalling possible misuse.

The 1,10,000 odd-excise assesses filing monthly returns only indicate the total amount of Cenvat credit availed. It is reckoned that the information is insufficient to detect evasion, given the large number of invoices being generated to claim Cenvat credit.

Fake invoices can be generated or manufacturers can claim credit and sell the inputs in market.

Large manufactures can procure inputs from the SSI units — which are exempt from excise duty — and take credit on the basis of duty payment documents generated elsewhere.

Earlier, there were ways to cross-check Cenvat credit claims, as manufacturers were required to maintain statutory records, which had details like raw material consumption, etc .

Statutory records were dispensed with as a trade facilitation measure, though manufacturers paying duty of over Rs 1 crore maintain these details in private records.

The government now wants to have procedures in place to track Cenvat credit offtake to detect evasion.

Large companies in select sectors will be targeted. Officials, however, maintain that the system of self-assessment and clearance will continue.

Arvind Virmani, director, ICRIER, in a policy paper on Cenvat (’03) had made out a case for comprehensive computerisation of returns, which allows cross-checking of inputs, outputs value-added and Cenvat paid to detect evasion.