Basic Concept of Central Excise - Central Excise Practice Manual (OLD) - Central Excise

Basic Concepts 1 Constitution of India - Article 246 - Subject-matter of laws made by Parliament and by the Legislatures of States. (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List"). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State 1*** also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List"). (3) Subject to clauses (1) and (2), the Legislature of any State 1*** has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List"'). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included 2[in a State] notwithstanding that such matter is a matter enumerated in the State List. - Article - 265. - No tax shall be levied or collected except by authority of law. - Entry No. 84 of List 1 (Union List) - Seventh Schedule of Constitution of India 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 including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry. 2 Nature of Excise Duty Central Excise Duty imposed under section 3(1) of the Central Excise Act, 1944 is in the nature of an Indirect Tax. This duty is levied on those commodities which are manufactured or produced. As barred in the Constitution of India (entry no. 84 of the list 1 (union list) of the Seventh Schedule of the Constitution India, Central Government can not levy excise duty on "alcoholic liquors, opium, Indian hemp and other narcotic drugs and narcotics". On these goods on the state government is empowered to levy excise duty 3 Law relating to Central Excise 1 Central Excise Act, 1944 2 Central Excise Tariff Act, 1985 3 Central Excise Rules (Various rules for different purposes) 4 Additional Duties of Excise (Goods of Special Importance) Act, 1957 5 Additional Duties of Excise (Textile and Textile Articles) Act, 1978 6 Medical and Toilet Preparation (Excise Duties) Act, 1955 7 Mineral Products (Additional duties of Excise and Customs) Act, 1958 8 Notifications 9 Circulars 10 Order 11 Cess, etc. 4 Scheme of Excise duty Excise Duty is charged on Goods which are excisable, which are manufactured or produced in India. Excise duty which is called as CENVAT is imposed under section 3 of the Central Excise Act, 1944. Unlike in Income Tax where tax is levied on income earned, and Sales tax is levied when good sold, excise duty is imposed when goods are manufactured. Though excise is levied on manufacture of goods, it is collected at the time of removal from the factor of production. Thus, till the time of removal of goods the collection of duty is deferred and permitted to store without payment of duty within the factory of production. As stated above, excise duty is imposed on manufacturing of goods and collected at the time of removal, therefore, it is not relevant that the manufacturer is the owner of the manufactured goods or not or the goods have been sold or not. Excise duty is payable even if finished goods consumed captively, removed to own depts. / branches, supplied as free gifts or samples, lost / destroyed or manufactured on job work basis. All these aspects are discussed in later chapter of this book in detail. 5 Control on removal of goods Earlier all commodities which were subject to excise duty were covered under physical removal scheme. Under the physical removal procedure (or may be called physical control system), the Excise Inspectors/ Superintendents are present in the factory premises for supervision of manufacturing, storing, accounting and removal of goods. And the goods are removed under the countersignature of the Inspector / Superintendent. But, in the year 1969, the scheme of Self Removal Procedure has been announce. Under this scheme there is no need of any presence of the Excise Inspector / Superintend in the factory and manufacturer is allowed to removal the goods on this basis of self declaration. This scheme is also called as self assessment. Initially this scheme was introduced on selected items and the list of items covered in the self removal procedure scheme was increased gradually. Now a day the scheme of self removal procedure is extended to all the products except one that is Cigarettes. 6 Manner of Calculation and Collection of Duty Central excise which is levied on manufacturing of goods is collected at the time of removal. For calculation and collection of duty, the Central Government has prescribed various procedures and methods for various purposes in the Central Excise. In first method the duty is calculated and collected on the basis of its transaction value. This method is common and used widely. The other method is duty is calculated on the basis of its Maximum Retail Price (MRP). The next method of collection of excise duty is compound levy on select items, which is charged with respect to number of machines and capacity of machines installed in a factory premises. Another method of charging excise duty is fixation of tariff value. In this situation the excise duty is calculated and collected on the basis of its fixed value as notified irrespective of the fact that it is sold in the market at lower or higher price actually. All these methods and procedures are discussed in the next chapters of this book. 7 Exemptions and Effective rate of duty Though excise duty is charged on goods which are manufactured or produced in India at the rate set forth in the first schedule of Central Excise Tariff Act, 1985, there are various notification and scheme announced by the Central Government which provides exemptions or relief fully or partly from payment of excise duty. For example, one scheme is announced for small scale industries (SSI exemption), another scheme is announced for units situated in specific locations / areas, another scheme is announced for units who are in the export sector. Therefore before deciding the any issue on excise duty, all the relevant and effective notifications should be considered and followed. ============== Taxable Event for Excise Duty and Major Aspects thereof Statutory Provisions - Central Excise Act, 1944 Section 3(1) - Levy of Excise Duty There shall be levied and collected in such manner as may be prescribed, -------- Section 2(d) - Excisable Goods "excisable goods" means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt; Explanation. For the purposes of this clause, "goods" includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable. Section 2(f) - Meaning of manufacture "manufacture" includes any 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 First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or which, in relation to the goods specified in Third Schedule involves packing or re-packing of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, and the word "manufacturer" 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; Basic Conditions and Incidence of Excise Duty From the charging section 3 of the central excise it is evidenced that the following situation must exist before levying excise duty: There must be excisable goods Goods must be manufactured or produced in India The meaning of "Excisable Goods" has been given in Section 2(d) of the the Central Excise Act whereas the word "Manufacture" has been defined in section 2(f) of the same act. But in the act, what constitute "Good" has not been defined. On the other side the definition of manufacture is inclusive definition only. It does not give the exact / actual meaning of the term 'manufacture'. What constitute manufacture and what does not, which products are goods and which are not have been announced / clarified in various judicial pronouncements. Accordingly with the help of those pronouncements and definitions the above two situations are categorized into four conditions and all of these must be satisfied together before levying any excise duty: There must be goods The Goods must be excisable The goods must be manufactured or produced Such manufacture or production must be in India. No excise duty on SEZ units Section 3(1) excludes Special Economic Zones (SEZ) from payment of excise duty. In other words, and goods manufactured or produced in a unit situated within Special Economic Zone shall not be liable to pay any excise duty. The reason behind this is that these unit are treated as units situated out India to promote export. However, this exclusion is only for SEZ. Other export promotion zones are parks or unit will continue to pay excise duty. Though there is special method of collection of duty on unit established in FTZ and 100% Export Oriented Units. Manufacture of goods is a Taxable Event Once a good which is manufacture or produced, qualifies all the conditions as discussed above, duty is imposed. Calculation and Collection of duty is shifted to stage of removal. Collection of duty at the sage of removal does not mean that it is imposed on sale or transfer of ownership. It remains an excise duty on goods manufactured or produced in India. Person liable to pay duty of excise In ordinary course the duty is imposed on the manufacture and collected from the manufacture of the goods who actually manufacture the final goods. However, in certain cases the burden to discharge the duty liability is shifted to another person. It is well settled issue that, collection of duty from those who are neither producers nor manufacturers does not affect essence of duty. For example, where the goods stored in a warehouse without payment of excise duty, the liability to pay excise duty will be of the person who stores the goods. Another example is that in case of Molasses produced in Khandsari Sugar factory, the liability to pay excise duty is of procurer of such molasses. Ownership of goods is not relevant It can be envisaged from the basic four conditions discussed above, that duty is on manufacture of excisable goods. It is not necessary that the manufacture must be the owner of such goods. For instances, a job worker undertakes certain processes on goods supplied by the raw material supplier (unprocessed or partial processed) and result of such processes is manufacture of a new goods then such job worker will be liable to pay excise duty. However, there is an exemption notification exempting a job worker from payment of excise duty if the supplier of material is liable to pay excise duty on such goods - Notification No. 214/86 CE dated 25-3-1986. Duty is payable even if goods are not sold Duty of excise is imposed on goods manufactured. Therefore, central excise follows the concept of removal of goods. Though the duty is calculated and collected on the basis of value of the goods removed but it is not necessary that goods must have been sold. Some examples are enumerated here showing that in these circumstances even if goods are not sold duty is payable: - Captive Consumption of intermediate goods Distribution of free samples Dispatch of goods to own depot or branches Lost / destroyed goods after their manufacturing Duty is payable even if not collected A manufacturer is liable to pay excise duty once he removes the goods manufactured from his factory. Later it became irrelevant that the buyer of that goods have not paid amount of duty full or in part. Unlike in sales tax where non receipt of sales consideration within a stipulated period is allowed to be adjusted against the liability of sales tax, in excise no such kind of adjustment is possible. Duty can be levied on Government undertakings Section3(1A) of the Central Excise Act, 1944 states that, "The provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of Government, as they apply in respect of goods which are not produced or manufactured by Government." Therefore, the goods manufactured or produced in a factory owned or controlled by Central or State Government is equally liable to excise duty in the same manner as non government manufacturer.