Answer Posted / kushal gampale

Service Tax Credit is the credit available to a service provider, at the time of paying the service tax on his output services, of the service tax paid by him on his input services.
eg -
et us consider this example-

Vivek is an architect. He renders services to his client and collects the service tax amounting to Rs. 10,000.

He also uses the services of a CA who helps him in maintaining accounts and gives his tax advices. He pays Rs. 2,000 as service tax to his CA for such services.

He also purchases goods from a local supplier for his office. The supplier charges him VAT of Rs.500 on the goods purchased.

He has purchased few equipments directly from the local manufacturer who charged him excise duty of Rs.1000.

So here we have-

Output taxes collected - Rs.10,000 as service tax (collected by central government)
Input taxes paid-
Rs.2000 as service tax (collected by central government)
Rs.500 as VAT (collected by state government)
Rs.1000 as excise duty (collected by central government)

So now while paying the service tax of Rs.10,000 Vivek would ask the government for set off of all the taxes paid by him previously which comes to Rs. 3,500 (sum of all the input taxes above).

However, as mentioned earlier that Central and State governments are different entities, only set off of service tax and excise duty shall be allowed for paying service tax liability, as VAT was previously paid to the state government.

Thus, a set off of Rs.3,000 would be available, thereby making the net liability of Rs.7,000 as service tax.

This set off is nothing but CENVAT credit. Which in simple words would mean the set off of all the indirect taxes paid to the central government previously.

Hence, while paying excise, customs, service tax to the central government, these taxes if paid previously are to be allowed as set off against the net liabilities.

This is how it works.
pl correct me if i am wrong.

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