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Central
Excise duty is an indirect tax, collected by the manufacturers of
goods. Essentially it is a duty on manufacture of goods. The duty
incidence is passed on to the ultimate consumers who bar the duty
incidence. Thus the manufacturers who are made liable to pay the
duty of excise, at the time of removal of the goods from their
factories, on the goods manufactured by them act as agents to
collect and pay the duty to the Government. It is a major source
of revenue to the Central Government and accounts for 25.31% of
the total gross revenue as per Finance Bill 1999-2000. The Excise
Duty incidence is shared almost by every citizen of this country
and thus he is the ultimate taxpayer. Common examples are
Toothpaste, Fuels etc.
As
per Article 265 of Constitution of India, no tax can be levied
without the authority of Law. Accordingly, the Seventh Schedule of
the Constitution provides three lists, which define the powers of
the Legislature. The validity of the tax is decided in terms of
the nature of the tax and the entry in the above list of Seventh
Schedule. List I deals with the Legislative posers exclusively
conferred to the union (i.e. Central Government). In this list
Entry 84, gives powers to impose Central Excise Duty by Union
Government.
Under
Industrial Development Regulations, the Government recognised the
role of certain industries based on their size, supply, dependence
on other major industries and investment in plant and machinery.
Based on these factors they are identified as Ancillary Industrial
Undertaking, Tiny Units and Small Scale Industries. In order to
term an industry as a small-scale industry; the parameter laid
down is the investment in plant and machinery. In order to compute
the investment limit, certain inclusions and exclusions are
provided in the notification. The classification under the
Industrial Development regulations has no bearing in the
administration of Excise Exemption provided to various products.
Central Excise duty exemptions do not take cognizance of the
status of the unit viz. Ancillary/Tiny/Small Scale Industries.
In
order to encourage Small Scale Sector, which provides for
large-scale employment and dencentralise the concentration of
wealth from few to many, the Government has been formulating
various policies and programmes to accelerate its growth. Major
incentives offered by Central and State Governments are as
follows:
- Reservations of products for exclusive manufacture by
small-scale industries.
- Excise duty exemptions and concessional rate of duty based
on value of clearances.
- Income-tax concession under section 80-1A.
- Priority lending from Banks and other financial institutions
like SIDBI etc.
Important
Provisions :
The
Central Excise Duty is leviable only if there is a manufacturing
activity and duty liability has to be discharged by the
manufacture before removal of goods from his factory. What is
‘manufacture’ and who is the ‘manufacturer’ is defined
under section 2(f) f the Central Excise Act, 1944 which reads as
follows:
"Manufacture"
includes and process,-
- incidental or ancillary to the completion of a manufactured
product; and
- which is specified in relation to any goods in the Section
or Chapter Notes of the Schedule to the Central Excise Tariff
Act, 1985 as amounting to manufacture,
and
the word " Manufacture" shall be construed accordingly
and shall include not only a person who employs hired labour in
the production or manufacture of excisable goods, but also any
person who engages in their production or manufacture on his own
account.
From
the above definition it can be seen that the term manufacture has
two limbs viz. (a)any process that results in completion of a
manufactured product.
(b)
the activities specified in the Section Note or Chapter Note of
the Central Excise Tariff.
The
first part of the definition is rather vague and not fully
defined. In this connection there are so many judgements in
various cases. As per these judgements, it can be concluded that
in order to deem a product as manufactured one, the new article
must have a different name, character and use. Mere changes in the
form or size of the same article would not amount to manufacture.
The
second limb of the definition to section 2(f) refers to certain
activities listed in the Section Notes and Chapter Notes wherein
certain activities are specified as amounting to manufacture. e.g.
Chapter
30 Note 5 ( Pharmaceutical Products ) : In relation to products of
Heading Nos. 30.03, conversion of powder into tablets or capsules,
labelling or relabelling of containers intended for consumption
and repacking from bulk packs to retail packs or the adoption of
any other treatment to render the product marketable to the
consumer, shall amount to "manufacture".
The
Excise duty liability has to be discharged by the manufacturer so
it has to be decided who is the manufacturer. The controversy is
whether the manufacturer has taken place on his own account or on
behalf of any other person. The statutory definition given under
section 2(f) is an inclusive one. According to this definition, a
manufacturer is a person who produces goods himself in his own
account and also a person who gets his goods manufactured through
hired labour. The real test is to examine who is actually engaged
in the manufacture of goods. The business entity which actually
fabricates or process the goods alone would be the manufacturer,
liable to discharge the duty liability.
The
Small Scale Industry, by enjoying the various exemptions
available, can effectively compete with major units by virtue of
the lower rate of duty. Also the cost of production will be less
for small-scale industry leading to lesser assessable value. The
marketing expenses, which roughly constitute between 30% and 40%
of the final selling price would also get excluded from the
purview of taxation if the small scale industry is selling the
goods to large business houses, who in turn market them. It will
be an effective tool of tax planning. However, in all these it is
absolutely necessary to prove that the actual manufacturer is the
small-scale industry who can legitimately avail the concessional
rate of duty.
Every
care should be taken to ensure that the unit is not projected as a
front Company created only for exclusive purpose of tax evasion.
In other words, the buyer will be controlling the activities of
the manufacturer/seller is being reduced to the level of a
‘hired labour’ without any proprietary interest in the
manufacture and sale of the goods. In such cases the Department
will try to fix the Excise duty liability on the buyer if
sufficient evidence is available to hold the buyer as
manufacturer.
According
to section 3 of the Central Excise Act, Central Excise Duty on all
excisable goods shall be levied and collected at the rates set out
in the Central Excise Tariff Act, 1985. For deciding the quantum
of duty one has to look at the Central Excise Tariff Act and to
determine the value, sections 4 and 4A of the Central Excise will
come into play.
Effective
from 1.3.1986, the classification of the excisable goods
manufactured in India and its maximum rate of duty are codified
and presented as a separate enactment known as Central Excise
Tariff Act,1985. This is based on the International Nomenclature
known as Harmonised System of Nomenclature. The tariff is divided
into twenty sections with ninety-six chapters. It begins with raw
materials and ends with the finished product.
While
the maximum rate of duty leviable on the goods manufactured are
given in the Tariff, effective rate, which will be less than the
tariff rate, is governed by the exemption notification issued from
time to time for various products under section 5A of the Act. In
order to encourage certain products and the industries, the
Government has been issuing exemption notifications from time to
time. Such exemption notifications have the effect of reducing the
tariff rate of duty. The exemption notifications are
issued/continued based on the representations received from
various chambers of commerce and associations representing the
particular industry etc.
The
exemption relating to small-scale manufacturers are governed by
the notifications issued under the section 5A of the Act.
Notification 8/99 CE, and 9/99 CE have the effect of reducing the
normal tariff rate in a graded fashion based on the turnover of
the manufacturer.
Now
we will go to our topic of discussion.
Rule
174 of Central Excise Rules prescribes the procedure to be
followed by the manufacturers to obtain the registration. Sub-rule
(2) of rule 174, enables the Central Board of Excise & Customs
to exempt person or class of persons, who need not obtain
registration. However this has to be notified in the Official
Gazette subject to conditions or limitations, as may be specified.
Out of the various notifications issued by CBEC which are in
force, Notification 22/98 CE (NT) dated 4.6.1998 is applicable for
SSI. As per this notification, one time declaration has to be
submitted. ( Annexure I ). If the goods are unconditionally
exempted from payment of duty, exemption from Registration is
available. However if the excisable product is exempted from
payment of duty, subject to any one of the following conditions,
then the manufacturer has to observe the procedure prescribed in
the Notification viz. Submission of declaration, which is
elaborated below.
Exemption
based on
- process of manufacture (e.g. Chapter Heading 1701.10 sugar
without aid of power);
- value or quantity of clearances made in a financial year (
e.g. SSI Notification 8/99);
- condition stipulated in the Tariff Heading or the respective
exemption Notification issued under section 5A of the Act (
e.g. 3402.12 soap manufactured without aid of power or steam
for heating).
One time
declaration and exemption
Wherever
the turnover value of the SSI is well within specified limit, the
manufacture has to submit a one time declaration, as given in the
Notification 22/98 (NT), to the Jurisdictional Assistant
Commissioner of Central Excise and obtain an acknowledgement.
‘Specified Limit’ is explained as full exemption limit minus
RS.10 Lakhs i.e. under Notification No. 8/99 RS.50 10 = RS.40
Lakhs. However no declaration need to be submitted, if the unit
remains within the specified limit. It is to be noted that
exemption from Registration is not available if the goods exempted
under Notification 8/99 exceeded RS 50 Lakhs for Home Consumption
(i.e. excluding exports but including exports to Nepal and Bhutan
) either during the previous financial year or during the current
financial year. In other words, once the unit crosses the exempted
limit of RS.50 Lakhs, thereafter it cannot seek exemption from
Registration even though the product may be entitled to fresh
exemption, in subsequent years. Having Excise Registration does
not mean that the SSI can never avail duty exemption after
Registration. Thus the availability of exemption from Registration
and the requirement of Registration and the requirement of
Registration for various exemption notifications is tabulated
below for easy understanding and better appreciation.
| S.No |
Notification No |
Exemption for |
Declaration for availing exemption and or
Registration. |
| 1 |
8/99 CE |
SSI without MODVAT |
(a) To file one time declaration if turnover is likely
to exceed RS.40 Lakhs for Home Consumption.
(b) While crossing the exempted turnover of RS.50 Lakhs,
Registration to be obtained. |
| 2 |
9/99 CE |
SSI with MODVAT |
Registration from the very firsts clearance |
| 3 |
10/99 CE |
Cosmetics and toilet preparations |
(a) To file declaration if turnover is above RS.5 Lakhs
( RS.15 Lakhs minus RS.10 Lakhs).
(b) While crossing the above exempted RS.15 Lakhs limit,
Registration to be obtained. |
| 4 |
10/99 CE |
Refrigerator and Air Conditioner & parts |
(a) To file declaration if turnover is above RS.5 Lakhs
( RS.15 Lakhs minus RS.10 Lakhs).
(b) While crossing the above exempted RS.15 Lakhs limit,
Registration to be obtained. |
Major
Exemption Schemes for SSI
Taking
note of the major role played by Small Scale Industries the
Central Government have been granting exemption from payment of
Central Excise Duty for specified goods over a period of time. The
idea behind such exemption is to encourage Small Scale Industries
by manufactured and marketing their products while competing with
goods manufactured by major units. Basically there are two major
exemption notifications available for the products manufactured by
Small Scale Industries, and the same are elaborated below.
Notification
NO. 8/99 Dated 28.2.1999 without MODVAT facility.
This notification is in force w.e.f. 1.4.1999.
In a nutshell, SSI, which wants to avail the benefit of
Notification, should not avail MODVAT credit upto RS.1 crore
turnover. Turnover upto RS.50 Lakhs is wholly exempted and
thereafter from RS.50 Lakhs to 100 Lakhs is excisable at 5%.
However, capital goods MODVAT credit under rule 57 Q can be
accumulated and the SSI can avail this credit only after the unit
crosses the RS.1 crore turnover. The benefit of Notification is
applicable only for the specified goods finding place in the
Annexure to the notification. ( Annexure III). This would mean
that the exemption is available for all goods appearing in the
Central Excise Tariff Act, 1985 except the goods excluded in the
Annexure to the notification.
Under this notification initially the SSI was
expected to inform in writing to the Assistant Commissioner of
Central Excise with a copy to the Superintendent of Central Excise
giving the following details:
- name and address of the manufacturer;
- location/locations of factory/factories;
- description of specified goods produced;
- date from which option under this Notification has been
exercised;
- aggregate value of clearances of specified goods till the
date of exercising the option;
The said requirement has been dispensed with
now by Notification NO. 16/99 dated 31.3.99.( Annexure IV)
Notification
NO. 9/99 CE Dated 28.2.1999 with MODVAT facility.
This notification came into force w.e.f.
1.4.1999. The basic features are:
- MODVAT input credit can be availed both on the inputs and on
the capital goods from the ver first clearances.
- The rate of duty read with exemption would be as follows:-
Turnover Rate of Duty
RS.0 to 50 Lakhs 60% of the normal duty.
RS.50 to 100 Lakhs 80% of the normal duty.
Assuming the normal Rate of Duty is 15 %, the
effective Rate of Duty in terms of exemption notification would be
9% of the first slab and 12% for the second slab, of course with
MODVAT input credit on the inputs. Once the option is exercised,
it cannot be changed during the same financial year.
Besides the two notifications mentioned above
there are other notifications also with reference to specific
goods and conditions.
Cosmetics and Toilet Preparations
The notification No. 140/83-CE dated 5.5.1983
was to grant exemption for cosmetics and Toilet Preparations. The
same has been amended by 10/99-CE dated 28.2.21999. As per this
amendment the exemption limits have been substantially enhanced
from RS.15 Lakhs to 30 Lakhs. Besides this the turnover limit has
also been increased from RS.50 Lakhs to RS.100 Lakhs. For the
turnover between 30-50 Lakhs the rate of duty is 50 % of the
effective duty and whereas for 50 Lakhs and above the normal rate
of duty. It is for goods falling under Chapter Heading
33.04,33.05,3307.10 etc.The value for the said purpose is as per
section 4A.
Exemption for goods produced without aid of
power
The Notification No. 167/86, dated 1.3.1986
exempts the certain goods from payment of Excise duty irrespective
of the turnover limit and status of manufacturers i.e. be it SSI
or Large Scale. The only condition is no process in or in relation
to manufacture of the specified goods is ordinarily carried on
with the aid of power. e.g.
69.02 Ceramic Building Bricks, Flooring Blocks
83.01 Pad Locks and Locks
Refrigerators/Air-conditioners and its parts
The notification No. 75/87-CE dated 1.3.1987
granting exemption falling above-mentioned goods falling under
Chapter 84,85 and 90 has been amended by 10/99-CE dated 28.2.1999.
The duty structure is just similar to the Cosmetics discussed
above.
Goods produced in Cottage & Village
Industry KVIC
Notification 198/87,dated 29.8.1987 grants
exemption for the goods listed below from payment of excise duty
without any limit or ceiling. The manufacturer has to produce a
certificate from Khadi & Village Industries Commission
regarding:-
- genuineness of products being from village industry.
- Such goods are marketed by or with the assistance of KVIC.
e.g.
1301.90 Lac, gums, vegetable saps and extracts
(without aid of power)
- - Gum, wood or sulphate turpentine and other turpentine
oils.
Goods Manufactured in Rural areas
Notification No. 88/88 CE dated 1.3.1988. e.g.
Ch.34- Laundry and carbolic soaps.
Clubbing of
Clearances
- Common Services:
1989 (43) ELT 81 T The value of clearances of
both the firms can be clubbed. The one firm was said to function
in a garage where there was no sign of manufacturing activity.
1995 (78) ELT 261 T- The value of units can
be clubbed when it was established that the two units which
existed on paper had one roof, common machinery, painting
facility, workers and integrated manufacturing facility.
1987 (32) ELT 94 T Common storage of raw material is not
indicative of the fact that one firm is dummy of another and
hence the value of clearances cannot be clubbed.
1993 (65) ELT 596 T Common Registered Office,
use of telephone and godown is not sufficient to club the
clearances.
- Common staff/Labour.
997 (96) ELT 565T The value of clearances of two units cannot
be clubbed even though employees are interchangeable from one unit
to another, in absence of financial flow from one unit to another.
1987 (32) ELT 204 T A manufacturer, employing
Manager and some of the employees of another unit is not
indicative that two units are one and the same.
1990 (48) ELT 37 T Both the units ( one owned
by husband and another by wife) have entered into separate
agreement with a common labour contractor who supplied the Labour
force to both the units, cannot be considered as adequate ground
to hold that the operations may be colourable and the the value of
clearances cannot be clubbed.
c) Common Directors/Partners
1988 (36) ELT 340 T- The value of clearances of
two firms can be clubbed, if one firm is set by inducting their
wives who are not playing any active role but authorised their
husbands to manage the affair, with only objective of availing SSI
exemption.
1990 (48) ELT 33 T A proprietor will be
separately entitled to avail the exemption even though he is a
partner in a firm which also enjoys the same exemption since a
Partnership Firm is different from partners constituting it.
d)Dummy Units
1988 (33) ELT 636 T The clearances of two units
can be clubbed since it was created for hiding and camouflaging
the manufacturing activities.
- Financial flow back and common funding.
1994 (71) ELT 689 The true test to club the value of
clearances of two or more units is money flow back, profit sharing
and total control of other unit or units.
Job
Work
In a Job Work, the raw material is given to the
Job Worker, who performs the manufacturing activity or processing
and return the same to the original sender. Commercially the
manufacturer is compensated only to the tune of the conversion
cost and his profit margin leaving the raw material cost, which is
owned by the recipient. In view of the huge capital investment
required for certain machinery and opting for job work is more
profitable than resorting to have in-house manufacturing, it has
become imperative to have certain operations done outside one’s
own factory. Excise duty being on the manufacturing activity, the
actual manufacturer has to discharge the duty liability. The cost
of raw material plus conversion cost would be forming part of the
assessable value. The duty liability on the goods manufactured on
job work would depend upon the applicability of exemption
Notification in vogue. If he affixes the Brand Name of the buyer
on the goods manufactured, then the benefit of excise exemption
Notifications 8/99 and 9/99 would not apply.
The Small Scale Industry, as a job worker, can
receive inputs; partially processed goods for further
manufacturing under rule 57 F (4). As per the procedure the
materials will be received by the Small Scale Industry only under
the proper Challan, which has to be accounted properly, to
convince the department as and when required by the Department.
There is no duty liability at the hands of the job worker if he
returns the material received under the challan after due
processing. The Small Scale Job Worker is expected to complete the
processing within 180 days time limit and return the same along
with duplicate copy of the challan.
In the Union Budget 1999 it is contemplated
that Commissioner of Central Excise is empowered under Rule 57F(4)
to permit removal of goods on payment of duty from the premises of
the job worker.
SSI
and Exports
Notification
8/99 exempts from payment of Central Excise duty, where the Small
Scale Industry is having a turnover less than RS.50 Lakhs. Such an
unit may not have registration and would have only filed the
declaration seeking exemption from registration. If such a unit
also exports goods out of India they are exempted from observing
the normal procedure like execution of bond, movement under AR-4,
etc. However the unit must take out the registration once it
crosses the exempted turnover for the home consumption. It is
advisable to obtain the registration in the above situation which
will facilitate availment of MODVAT Credit for inputs, receipt of
non-duty paid inputs under rule 13(1)(b) etc. despite the involved
procedure to be followed.
If a Small Scale Unit is exclusively engaged in
export to countries other then Nepal and Bhutan, the Notifications
8/99 and 9/99 will not have any application. Such units will be
governed by rule 12, 13 or 14 of the Central Excise Rules whereby
the Small Scale Industry can export the goods manufactured without
Excise Duty incidence.
Goods exported outside India (other than Nepal
& Bhutan ) will not form part of the turnover slabs under
Notifications 8/99 or 9/99. Any turnover relating to exports would
be excluded for the purpose of computation of the aggregate value
of the specified goods both for the purpose of computing the
turnover slab as well as the upper turnover for the preceding
financial year viz. RS.300 Lakhs.
In order to encourage exports and relieve the
duty burden on the commodity being exported both in terms of duty
incidence on the inputs and the outputs, several schemes are
contemplated by the Government.
The finished product can be exported, on
payment on normal duty and exported out of India. The amount paid
as Excise duty on the finished product can be obtained by way of
refund. The refund application has to be made by enclosing the
original and duplicate AR-4 Forms along with attested copy of
Shipping Bill and Bill of Lading. This procedure is governed by
rule 12 of the C. Excise Rules.
Central Excise rules 13 and 14 permit
manufacturers to clear goods without payment of duty after
executing the bond. Rule 13 deals with one time export, whereas
rule 14 is meant for exports on continuous basis whereby credits
and debits are made in a bond register indicating the duty amount
involved for each consignment.
Central Excise rule 12 (1) (b) permits refund
of duty paid on inputs contained in the export product. The
manufacturer is supposed to file a declaration to the Commissioner
giving the details of finished products to be exported,
manufacturing formula, ratios of input and output, Tariff
classification and rate of duty on the inputs. This facility is
available only for direct exports. The manufacturer exporter is
required to maintain RG-26 Register for inputs and RG-27 register
for outputs and submit the Quarterly Return in Form RT-14.
Under rule 13(1)(b) the Central Government has
issued the Notification, which facilitates receipt of non-duty,
paid inputs for export manufacturing. The movement of the non-duty
paid material is made under bond as per the procedure prescribed.
Export
and MODVAT
The MODVAT availed on inputs can be used for
the payment of duty on the output. However if the product is
exported under bond, without payment of excise duty, then the
MODVAT Credit accrued on the inputs, can be utilised towards
payment of excise duty for any goods manufactured and cleared for
home consumption. If such utilisation is not possible, the
manufacturer can apply for refund. The refund claims are to be
submitted not more than once in any quarter.
It is already seen that MODVAT Input Credit
cannot be availed under Notification 8/99 till the SSI crosses the
turnover of RS.100 Lakhs slab. Such SSI which is within RS. 100
Lakhs turnover, can avail Modvat Credit exclusively for export
production. It is clarified by the Board’s Circular dated
14.7.97. (Annexure V) According to this Circular the simultaneous
availment of Modvat Credit for exports and non-availment for home
consumption is permissible.
Other
- SSI need not submit monthly RT-12 return. They have to submit
a quarterly return.
- Excise Inspectors, preventive parties and audit parties can
visit SSI unit only with specific permission of Assistant
Commissioner.
- Regional Advisory Committee- specially for Small Scale sector.
The meeting of the committee are held every quarter.
Union
Budget proposal - 1999 ..............................................................
Para 67 of Speech of Finance Minster on
27.2.1999 in the Lok Sabha "Under the current procedure, all
manufacturing units are required to pay excise duty at the time of
clearance of goods from their manufacturing premises. As a measure
of further simplification of administrative procedures, I propose
to permit SSI units to pay excise duty on a monthly basis with
effect from 1.6.1999. Besides constituting a significant step in
the simplification of procedures, this change will also improve
the liquidity position of the manufacturing units in the SSI
Sector."
he said proposal has given effect by issue of
Notification No.36/99-CE (NT) dated 26.05.99. The procedural part
has been explained in the CBEC’s Circular NO. 458/24/99-CX dated
27.05.99. (Annexure VI).
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