FY-MMSCENTRAL EXCISE ( CENVAT )

Central Excise is a Duty (tax) levied on the Goods Manufactured or Produced in India ( Except SEZ Area).

The Central Excise as a matter of Taxation comes under the purview of Central Government. The legislation governing the subject is Central Excise Act- 1944.The power to levy Excise Duty is derived by Central Govt. from the Constitution. Refer Entry No. 84 to Union List ( List –I ) under the Seventh Schedule to the Constitution, which reads as :

Duties of excise on tobacco and other goods manufactured or produced in India except –

a) Alcoholic liquors for human consumption.b) Opium, Indian hemp and other narcotic drugs and narcotics,

But excluding medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

Accordingly the features of the Excise Duty can be summarized as under :

The duty of Excise is not levied on Goods per say but is levied on the act called “manufacture” of goods.

The obligation on payment of Excise duty, by law, is cast upon the manufacturer or producer of such goods and not on the consumer of the goods. However, incidence of excise duty is shifted by manufacturers to the next level of consumption by charging the same on the face of sale invoice. Further, the players in the trade chain (namely – whole sellers, retailers etc) pass it on to the end consumer, without mentioning on the face of invoice as such, but by resorting to the mechanism of including the same in price. Hence it is an indirect tax.

Though the excise duty is levied on goods manufactured or produced, the actual incidence of tax (i.e. the precise moment at which it is applicable) is immediately upon manufacture / production of the goods i.e. as soon as the finished goods which are distinct and different commercial commodity than as compared to the subject raw material from which they are produced. However, the actual payment of duty is made in practice at much later in point of time i.e. at the time of removal i.e. taking out from the factory premises.

The time lag between the “ incidence or levy ” of excise duty and the actual payment of the duty is attributable only to the operational convenience or administrative convenience offered to the trade & industry by the Authorities.

Different types of Excise Duty :

a) Basic Excise Duty (BED) also known as CENVET (w.e.f. 01.04.2000) i.e. the duty levied u/s 3(1) of Central Excise Act, 1944 on goods manufactured or produced in India at rates specified under Central Excise Tariff Act-1985. The BED can be (i) “ Ad valorem duty ” i.e. duty levied at

Taxation Aspects of Business By - Prof. U.W. Prabhupatkar

FY-MMSspecified rate or as % of the value of goods. (ii) “ Specific duty ” i.e. at specified rate on the unit, weight, volume, length or area of goods.

b) Special Excise Duty also known as “ Auxiliary duty ”. They are in the nature of regulatory duties and work as surcharge (i.e. as % of the BED), levied in respect of specific goods and for specific purpose and are usually operative for specific period. For Example, refer Schedule II of CETA, 1985 or levied on High Speed Diesel Oil through Finance Act, 1999.

c) Additional Duties are the duties leviable on specified goods under the provisions of separate statutes (i.e. other than the Central Excise Act,1944) and serve as a measure of curbing demand of certain products or discourage the demand for the said goods. For example Excise Duty on Coffee under The Coffee Act, 1942 or on the Medicinal Toilet Preparations containing Alcohol or narcotic drugs or narcotics under the Medicinal Toilet Preparations (Excise Duties) Act, 1955.

d) CESS – is also another form of Duty levied for specific purpose & on specific goods and the law casts obligation on the collecting authority to utilize the collection of the said CESS only for the specific cause for which it is levied. For Example CESS on Rubber, CESS on Tea, CESS on manufactured Beedi etc. Further, Finance Act-2004 has introduced Education Cess @ 2% on BED on all the Excisable products.

e) National Calamity Contingency Duty (NCCD). This is again in the nature of Surcharge and was introduced by Finance Act of 2001 on items like Cigarettes, Pan- masala, bidi and miscellaneous tobacco articles, further the scope was expanded by Finance Act of 2003 @ 1% on Polyester filament yarn, motor cars & two -wheelers and Rs.50/- per metric ton on the domestic crude oil.

Having seen the various types of Excise duty, let us understand the Levy of Excise duty as contemplated under the law proper i.e. Central Excise Act, 1944, ( herein after referred to as the Act) .

Sec.3 of the Act specifically provides as follows :“ there shall be levied and collected in such manner as may be prescribed, a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in Special Economic Zones which are produced or manufactured in India, as and at the rates, set forth in the First Schedule to Central Excise Tariff Act, 1985 …..”.

Friends, this peculiar definition throws open the following points which can be considered as “sine-qua-non” or in other words “basic conditions” which articles should satisfy before they are treated as Excisable and brought under the levy of duty.

The Excise duty is levied on goods Manufactured in India (excluding SEZ)

The outcome of manufacture, which is a subject matter of levy that should emerge i.e. Goods, which are Movable

The goods should be Marketable

Taxation Aspects of Business By - Prof. U.W. Prabhupatkar

FY-MMS The goods should be Mentioned in the CETA, 1985

Thus before the goods are held liable for excise duty, they Must satisfy all the aforesaid 4 tests i.e. in other words 4 M’s Test should be satisfied. Even if one of the aspects covered in the aforesaid 4 M’s Test is not satisfied the goods will not be exigible for excise duty.

CENVAT Credit:

The CENVAT Credit scheme is aimed at reducing the cascading effect of the excise duty that may get built up in the final price of goods to the customers. The term Cascading effect means “ Tax on tax ”.

To put it in a simplified form the point of CENVAT Credit can be discussed with a small illustration as Follows :

Particulars Non-CENVAT CENVATA) Raw Materials purchased –X

Add : CENVAT @ 16%10016

10016

TotalCENVAT Credit allowable

116Nil

11616

Net Cost of Raw Mat. – XAdd : Value AdditionNew Product Y emergesAdd : CENVAT @ 16%Total Cost of Y CENVAT Credit allowable

116100216

34.56240.56

Nil

10010020032

23232

Net Cost of – YAdd : Value Addition

240.56100.00

200100

New Product Z emergesAdd : CENVAT @ 16%

340.5654.50

30048

Total Cost of ZCENVAT Credit allowable

394.96Nil

34848

Net Cost of – Z 394.96 300

From the above illustration you can appreciate that the person who purchases product X he pays Rs.116 but under CENVAT Credit scheme is entitled to take benefit of ED paid Rs.16 (as CENVAT Credit) thus effective cost in his hands is Rs.100, like wise for product Y the effective cost turns out to be Rs.200 & for product Z Rs.300 respectively, as against the person who does not operate in CENVAT Credit scheme the cost to him for product X is Rs. 116, product Y Rs.232 & for product Z is Rs.394.96.

Accordingly, the total Cascading effect for product Z is Rs.94.96

Under the CENVAT Credit scheme the credit is applicable with respect to the excise duty paid on “ In-puts ” and also with respect to “ Capital Goods ”, used in or in relation to manufacture of Excisable goods. Capital goods are defined under Rule 2(a) and In-puts are defined u/r 2(k).

Taxation Aspects of Business By - Prof. U.W. Prabhupatkar

FY-MMS

The CENVAT Credit can be utilized for payment of:a) Excise Duty payable on final products, b) Amount of CENVAT Credit availed on in-puts, if such inputs are removed

as such,c) Amount of CENVAT Credit availed on Capital Goods, if such capital goods

are removed as such,While paying the excise duty the CENVAT Credit shall be utilized only to the extent such credit is available on the last day of the month or the quarter as the case may be for payment of duty relating to that month or quarter.CENVAT Credit in respect of “ inputs ” is available and may be taken immediately on receipt of “ inputs ” in the Factory of the manufacturer along with Duty paid documents.

CENVAT Credit with respect to “ Capital Goods ” is available and may be taken upon receipt of such capital goods in the Factory & as soon as they are installed and put to use. However, only 50% of Excise duty paid in respect of such “ Capital Goods ” will be available as CENVAT Credit in the financial year in which such capital goods are received, installed and put to use. The balance 50% will be available in the subsequent financial years.

Further, if manufacturer has availed for CENVAT Credit of Excise duty paid on the said capital goods, he will not be entitled to claim any Depreciation for Income tax purpose on such amount of CENVAT Credit availed.

Following methodology may be adopted to check the availability of CENVAT Credit & to avail it without hassle:

Check eligibility/permissibility of Inputs/ Capital goods under Rule 2 of Central Excise Rules, 2002.

Check in the invoice – a) Authentication, b) Your name appears as Buyer & consignee, c) Amount of Excise Duty payable is mentioned separately on invoice, d) signature of assessee

Check the physical quantity of goods invoiced & received, initiate action in case of non receipt of Invoice & Lorry Receipt and/or physical excess /shortage quantity.

Send Invoice to the concerned department for posting in CENVAT Stock records and CENVAT Credit A/c.

Take instant credit on receipt of material along with duty paid documents and L.R. – For inputs 100% of ED and for Capital goods 50% of ED mentioned in Invoice.

Issue Inputs / capital goods to production department only against Issue Slips.

If any Inputs / capital goods are removed from Factory as such, issue proper Invoice, If issued for Job work – issue against Delivery chalan.

In case of any loss of inputs reported during storage stage, informed concerned for Reversal of proportionate CENVAT Credit.

Posting in relevant columns of CENVAT Stock A/c Ensure that inputs are used for manufacture of final dutiable products.

Taxation Aspects of Business By - Prof. U.W. Prabhupatkar