review of literature -...
TRANSCRIPT
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CHAPTER 3
Review of Literature
3.1 Introduction
After conducting a study of various provisions in tax laws and decisions of
Courts and Tribunals , the researcher conducted exhaustive review of
literature available in the area of indirect taxes and in particular tax planning .
The researcher reviewed following.
Constitution of India with an objective to study the powers to levy and
collect taxes and other measures.
Basic provisions of Central Excise, Customs and Service Tax,
including Acts, Rules and Regulations and notifications issued
thereunder, especially to understand various benefits and exemptions
available to manufacturer and service providers, which contribute to
cost reduction.
Cenvat Credit Rules play an important role in the case of exemptions
under Central Excise and Service Tax. Any exemption under Central
Excise and Service Tax has to be read alongwith Cenvat credit
provisions as it will have direct effect on Cenvat credit.
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Foreign Trade Policy, which provides various measures for export
promotions and facilities to exporters. Availing benefit of the same is
an important measure for cost reduction.
Legal Metrology Act, as it applies to packaged commodities. For
Valuation of goods under MRP provisions , review of Legal
Metrology Act was essential
Special Economic Zone (SEZ) is treated as island within India and
SEZ developers and Units get many tax concessions in Direct as well
as Indirect Taxes and therefore it helps the unit in reduction in cost by
way of tax concessions and also administratively.
Various decisions of Court and Tribunals in the area of indirect taxes
deciding many aspects of tax planning, valuation, manufacture,
classification etc.
Generally Accepted Cost Accounting Principles and Cost Accounting
Standards provide guidelines regarding accounting and determination
of cost and cost elements.
Cost Accounting Records Rules and Cost Audit Rules have direct
linkage with central excise and service tax. Usefulness of cost audit
mechanism in the area of indirect taxes is well recognized. The cost
audit mechanism provides great support in the area of tax
management.
Review of Committee and Task Force reports on Tax Reforms gives
an idea on the developments in the taxation provision and tax reforms.
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Research articles.
Report of the Comptroller and Auditor General of India for the year
ended March 2012, on Indirect Taxes contains useful information as to
how tax planning and tax management has failed and resulted in heavy
penalties.
PhD Thesis.
Website of Central Board of Excise &Customs (CBE&C), Ministry of
Commerce, SEZ gives broad idea about various provisions,
amendments etc.
Review of the above is presented in this chapter of Review of Literature.
3.2 CONSTITUTION OF INDIA.1
Constitution of India, which came into effect on 26th January, 1950, is the
supreme of all laws in India and Government actions are subordinate to the
constitution. Power to levy and collect tax is derived from constitution. Any
Act, Rule, Regulation, Notification, Circular cannot be issued overriding the
scope and powers granted in Constitution, otherwise it will be ultra virus the
constitution.
Powers to levy and collect tax is derived from constitution. Statutory
provisions cannot override constitutional provisions and therefore the
researcher felt it necessary to review Constitution with an objective to
understand the powers of Central Government, State Governments and Local
Bodies to make rules, functioning of three organs namely Legislative Organ,
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Administrative Organ and Judicial Organ, the mode of passing Act,
Ordinance, Notification and its effective date.
The structure of Government is federal in nature. In the basic scheme of
taxation, Article 246 of Seventh Schedule to Constitution indicates bifurcation
of powers to make laws between Union of India and State Governments.
Parliament has exclusive powers to make laws in respect of matters given in
List No. I, called as Union List. State Government’s powers are given in List
II, called as State List and List III, which is called as Concurrent List contains
entries where both Union as well as State Government can exercise powers.
All the three taxes Central Excise, Customs duty and Service Tax are in the
list I and Central Government has exclusive powers to make rules and changes
in these three taxes.
3.3 CENTRAL EXCISE
3.3.1. Central Excise Act 1944.2
Central Excise Act, 1944 is the basic Act, containing basic provisions related
to charging of excise duty, valuation of excisable goods, powers of officers,
penalties, adjudication and appeals, settlement of cases, advanced ruling etc.
The Central Excise Act, 1944, in the present form contains 40 sections. The
Act was known as Central Excises and Salt 1944. The word ‘salt’ was
dropped in 1996.
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3.3.2. Central Excise Rules, 20022.
Sec 37 of the Central Excise Act, 1944, grants power to Government to frame
rules to carry into effect the purposes of Central Excise Act. Sec.38 of the Act
provides that rules should be made by issue of notification and should be
placed before Parliament for 30 days when Parliament is in session. The
Central Excise Rules do prescribe certain procedures and Returns. For
Contravention of any rules and procedures, stringent penalties have been
prescribed under Central Excise and therefore review of Rules was considered
important for the purpose of tax management.
3.3.3. Central Excise Valuation Rules, 20002
Sec. 4 of the Central Excise Act, 1944 contains the basic provisions related to
determination of value of the excisable goods for the purpose of charging
excise duty. However, in certain cases, value cannot be fixed under Sec 4 of
the Act. Where the value cannot be determined u/s 4 of the Central Excise
Act, Valuation Rules have been prescribed u/s 4(1) (b) of the Central Excise
Act 1944.
The Valuation Rules contain following areas where tax planning is possible
Claiming deduction of freight and insurance from the assessable value
and thereby reduce the excise duty liability as per Rule 5 of the
Valuation Rules.
Concept of additional consideration as envisaged in Rule 6 of the
Valuation Rules.
Determination of correct Cost of Production according to CAS4 as
prescribed in Rule 8 of the Valuation Rules.
Related party transactions in Rule 9 and 10 of the Valuation Rules.
Valuation of the goods in the case of Job Work, as per Rule 10A of the
Valuation Rules.
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3.3.4. Cenvat Credit Rules, 20042.
Cenvat Credit Rules, 2004 are common for Central Excise and Service Tax.
These rules are framed with the basic objective of minimizing the cascading
effect of duties and service tax. These rules make provision for availing VAT
credit of excise duty paid on inputs and capital goods and service tax on input
services. The credit is interchangeable and can be utilized for making payment
of excise duty on manufactured goods and service tax on taxable output
services.
While reviewing various Exemption Notifications under Central Excise and
Service Tax and Cenvat provisions that every exemption under central excise
and service tax has to be studied alongwith its impact on Cenvat credit.
Cenvat Credit on inputs and input services is not available if final product or
output service is exempt from excise duty or service tax. Where the
manufacturer is manufacturing both dutiable goods and exempted goods or
service provider is providing taxable services and exempted services, there
may be common inputs and input services used for manufacturing dutiable
goods and exempted goods or taxable and exempted services. In such cases,
following four options have been provided under Rule 6 of the Cenvat Credit
Rules.
i) Rule 6(2) of CCR: - Maintain separate inventory and accounts of
receipt and use of inputs and input services used for exempted goods,
exempted services.
ii) Rule 6(3) (i) of CCR: - Pay amount equal to 6% of exempted goods /
exempted services.
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iii) Rule 6(3)(ii) of CCR :- Pay an amount equal to proportionate Cenvat
credit attributable to exempted final product / exempted output service
as provided in Rule 6(3A).
iv) Rule 6(3) (iii) of CCR: - Maintain separate accounts for inputs and
pay amount as determined under rule 6(3A) in respect of input
services.
The option has to be exercised in respect of all exempted goods manufactured
and all exempted output services provided. As per explanation I to Rule 6(3)
of the Cenvat Credit Rules, the option once exercised shall not be changed in
remaining part of financial year. Therefore exercising correct option is an
important measure of tax planning.
The another important area for tax planning is removal of inputs and capital
goods as such. In case of removal of capital goods after use, paying correct
amount is also an important area for tax management.
Highlights of Cenvat Credit Scheme
Intents to avoid cascading effect of Excise Duty and Service Tax.
Credit of duty paid on inputs, input services and capital goods
available to manufacturer of excisable goods and provider of taxable
output services.
No credit of service in Jammu and Kashmir.
Inputs, moulds, dies, jigs and fixtures can be sent to Job Worker.
Removal of used capital goods as scrap or second hand capital goods
on payment of appropriate amount.
Credit on motor vehicles available to specified output service
Credit on basis of specified documents.
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Credit available instantly in case of input goods and input services.
Cenvat credit of capital goods in two stages, upto 50% in the year of
receipt and balance in any subsequent financial year.
Cenvat to manufacturer available only if there is a ‘manufacture’.
Cenvat Credit is available in respect of specified duties only such as
basic excise duty, service tax, education cess and higher education
cess, countervailing duty, special additional duty.
Cenvat Credit of special additional duty is not available to service
provider.
Utilization of Cenvat credit for payment of duty on final product as
well as service tax on output services. Cenvat Credit interchangeable.
Cenvat Credit is indefeasible.
One-to-one correlation between inputs and final product is not
required.
No input credit if final product / output service exempt from excise
duty/ service tax.
No cash refund, except in case of export or supply to SEZ.
Unutilized Cenvat Credit is transferable in case of transfer of location,
sale, and merger of the manufacturing unit.
Accounting entries not relevant for eligibility of Cenvat Credit.
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3.3.5. Central Excise Tariff Act 1985.3
Excise duty is on excisable goods manufactured or produced in India. The
liability of payment of duty is on manufacturer of the goods. To determine
correct duty payable following two steps need to be followed.
1. Classify the goods correctly to find out rate of excise duty.
2. To determine assessable value of the goods, to which rate of duty is to
be applied for calculating amount of duty payable.
The Classification of goods, rate of duty and principles of classification are
given in the Central Excise Tariff, Schedules thereof. The Central Excise
Tariff Act, 1985 (CETA) classifies goods under 96 Chapters. A specific code
is assigned to each item. The classification forms basis for classifying the
goods under a particular chapter head / sub head to prescribe duty to be
charged on that particular product.
Central Excise Tariff Act, 1985 deals with the classification of goods and rate
of excise duty payable on it. Predominantly the classification of goods is
based on Harmonious System of Nomenclature and trade parlance i.e. a word
in statute should be construed in its popular sense and not in strict or technical
sense. Popular sense means that which people conversant with the subject
matter with which statute is dealing, would attribute to it. In CCE Vs Vicco
Laboratories-2005(179)ELT17(SC 3 member bench), Hon. Supreme Court
held that the burden of proof that a product is classifiable under a particular
tariff head is on the revenue and must be discharged by proving that it is so
understood by the consumers of product in common parlance.
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Exemption Notifications are issued by the Central Government providing
concessions and exemptions from duty. The effective rate of duty is to be
found from the relevant notification issued under Central Excise Tariff.
3.3.6. Notifications3.
Under Sec.5A and 11C of the Central Excise Act, 1944 powers have been
granted to Government for granting partial or full exemptions from excise
duty. Central Excise Rules also provide for issue of notifications in respect of
various matters. The Rules and Notifications have full legislative backing and
are treated as part of the Act.
3.3.7. CBEC’s Excise Manual of Supplementary Instructions2.
The manual of supplementary instructions was issued by the Central Board of
Excise and Customs in 2005. Only general provisions and procedures
applicable to manufactured goods have been incorporated in this manual. The
manual is divided into 19 chapters and contain instruction related to following
Registration under Central Excise,(Chapter 2).
Assessments, Classification, valuation, provisional assessment,
manner of duty payment, account current, scrutiny (Chapter 3).
Invoice System (Chapter 4).
Cenvat Credit (Chapter 5).
Records and Returns under Central Excise (Chapter 6).
Export without payment of duty (Chapter 7)
Export under claim of rebate (Chapter 8)
Refund(Chapter 9)
Warehousing (Chapter 10).
Samples (Chapter 11).
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Special Procedure for specified goods (Chapter 12).
Demand / Show Cause Notice, Adjudication, Interest, Penalty,
Confiscation, Seizure, Duty payment under protest. (Chapter 13).
Bonds and Letter of Undertaking (Chapter 14).
Excise Audit (Chapter 15).
Appeals (Chapter 16).
Search, Seizure, Arrest and Prosecution (Chapter 17).
Remission of duty, Return of duty paid goods to factory, Job Work
(Chapter 18).
Advance Ruling (Chapter 19).
3.3.8 Circulars issued by CBE & C4.
Central Board of Excise and Customs issues circulars and clarifications from
time to time. Trade Notices are issued by the Commissioners. Generally
circulars are issued to clarify the views of the Government in respect of
specific points under Act, Rules or Notifications or to give some information.
The circulars do not have any legal force and are not binding on assessee,
quasi judicial authorities and courts. If any circular or trade notice is beyond
the provisions of Act or Rules, they cannot be binding on Government also.
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3.4 CUSTOMS.
3.4.1 Customs Act 1962, Rules and Regulations made thereunder5.
Customs Act 1962, contains basic provisions related to imports and exports
and customs duty. The Rules and Regulations framed thereunder contain
procedural aspects, valuation for the purpose of determination of customs
duty, person responsible for payment of duty, penalties, appeals etc. Like
Central Excise, Rules and Regulations are issued under Customs Act to carry
into effect the purposes of Customs Act, 1962. Notifications are issued
granting partial or full exemptions from Customs Duty.
3.4.2 Customs Tariff Act 19756.
Customs Tariff Act, 1975 deals with the classification of goods and rate of
customs duty payable on it. Predominantly the classification is based on
Harmonious System of Nomenclature and trade parlance. Exemption
Notifications are issued by the Central Government providing concessions and
exemptions from duty. The principles of classification of goods under Central
Excise and Customs are same.
3.4.3. Customs Manual-20115.
Customs Manual was released by Central Board of Excise and Customs on
27.01.2011. The manual gives an overview of Customs Law and Procedures.
Though it is useful guide to taxpayers and it does not substitute for the rules,
regulations, notifications, circulars and instructions.
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3.5. SERVICE TAX7.
3.5.1. Finance Act, 1994
Sec 64 to Sec 99 of Finance Act 1994 , contain provisions related to Service
Tax. There is no separate Act for service Tax. Service Tax Rules and other
Rules are also issued under the powers granted under Finance Act 1994.
3.5.2 Rules relating to service tax.
Following are the important rules related to service tax.
Service Tax Rules,1994
Cenvat Credit Rules,2004
Point of Taxation Rules, 2011.
Service Tax (Determination of Value) Rules, 2006.
Service Tax (Advance Ruling) Rules, 2003.
Service Tax (Settlement of cases) Rules, 2012.
Place of provision of Service rules, 2012.
Service Tax (Registration of Special Category of Persons) Rules,
2005.
Service Tax (Publication of Names) Rules, 2008.
Service Tax (Provisional Attachment of Property) Rules, 2008.
Service Tax (Compounding of Offences) Rules, 2012.
Service Tax (Removal of Difficulty) Order, 2012.
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3.5.3 Education Guide issued by Central Board of Excise and Customs.
This contains clarifications and explanations on various issues related to
service tax and provide useful information to tax payers.
3.6 Foreign Trade Policy8
Under powers of Sec 3 and Sec 5 of Foreign Trade (Development and
Regulation) Act, 1992, Ministry of Commerce issues policy for import and
export. Usually it is issued for five years but is amended from time to time.
The policy was earlier termed as EXIM policy. It was renamed as “Foreign
Trade Policy” for 2004 onwards.
Generally, policy announced by Ministry of Commerce is not followed by
customs and excise department unless there is corresponding excise or
customs notification.
The Foreign Trade Policy provides the overarching framework for catalyzing
India’s Exports. The Foreign Trade Policy for the year 2009-2014 was
announced on 27th August 2009.
The Foreign Trade Policy contains policy and procedures related to Special
Focus Incentives, Board of Trade- its composition and Terms of Reference,
General Provisions regarding imports and exports, Export Promotional
Measures, Deemed Exports, etc.
The Duty Exemption and Remission Schemes under Foreign Trade Policy
include following
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Advance Authorization Scheme,
Duty Free Import Authorization (DFIA) Scheme,
Duty Entitlement Passbook (DEPB) Scheme,
Export Promotion Capital Goods (EPCG) Scheme,
Export Oriented Units (EOU), Electronics Hardware Technology Parks
(EHTPs), Software Technology Parks (STPs) and Bi-Technology Parks
(BTPs).
Special Economic Zones.
Free Trade and Warehousing Zones.
Availing benefits of the various schemes under Foreign Trade Policy is an
important measure of tax planning and contributes to cost reduction activities
substantially.
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3.7 Special Economic Zone Act
Special Economic Zone (SEZ), Act 2005 is an Act to provide for
establishment, development and management of the Special Economic Zones
for the promotion of Exports and for matters connected therewith or incidental
thereto. As spelt out is Sec 5 of the Special Economic Zone Act ,2005
following are the guiding factors in approving proposals to establish SEZ.
a) Generation of additional economic activity;
b) Promotion of exports of goods and services;
c) Promotion of investment from domestic and foreign sources;
d) Creation of employment opportunities;
e) Development of infrastructure facilities; and
f) Maintenance of sovereignty and integrity of India, the security of the
State and Friendly relations with foreign states.
Special Economic Zones offer well developed enclaves of industrial
infrastructure with plots, built up space, power, water supply, transport,
housing , social infrastructure etc. The Special Economic Zones are
specifically delineated areas wherein units may be set up for specified
purposes of manufacturing or trading or rendering services or for providing
warehousing facilities for export.
As per Sec 2(i) of the SEZ Act, the domestic tariff area (DTA) means the
whole of India including its territorial waters and continental shelf but not
including areas of the SEZ.
Sec 53 of the SEZ Act provides that SEZ shall be deemed to be a territory
outside the Customs territory of India. The legal implication is that the SEZs
are treated as foreign territory for the purposes of trade operations, duties and
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tariffs . In other words goods and services going into the SEZ from DTA are
treated as exports and goods and services coming from SEZ are treated as
Imports. Therefore, domestic laws do not generally apply to the SEZs and the
units therein. Sec 51 of the SEZ Act provides that SEZ Act will have
overriding effect over other laws.
Vide Finance Act, 2002, changes were brought in the Customs Act, 1962 and
Central Excise Act,1944 in the context of the SEZs.
3.8 Review of Committee Reports.
3.8.1 A Task Force on Direct Taxes Reforms10.
Ministry of Finance and Company Affairs, with an objective to rationalize and
simplify Direct Taxes Laws and re-design procedures to bring them at par
with best international practices, so as to encourage voluntary compliance and
reduce compliance cost, vide Notification No. 153/191/2002-TPL dt.6th
November 2002, constituted a Task Force on Direct Taxes, under the
chairmanship of Dr. Vijay Kelkar.
The consultation paper of the Task Force on Direct Taxes was made available
on the website of the ministry of Finance & Company Affairs on 2nd
November 2002 inviting comments and suggestions of all concerned.
The Task Force submitted its final report to the ministry, recommending
various measures of simplification in tax provisions with respect to annual
information return, search and seizure, assessments, dispute resolutions, tax
administration, personal tax reforms, corporate tax reforms, taxation of capital
gains etc. The task force recommended more autonomy to CBDT.
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It was expected that the recommendations of the task force will have
following impact.
1. Individual taxpayers of all categories and in every income group benefit
substantially from the package of recommendations. (Para 9.8)
2. Overall, the recommendations are revenue neutral at the existing level of
compliance. To the extent the new simplified and liberalized tax regime
will introduce compliance, the revenue gains are likely to be substantially
higher and it will enhance buoyancy by widening the personal and
corporate income tax bases.(Para 9.14)
3. The recommendations for eliminating the exemptions, the extensive use of
technology and privatization of non core activities of the tax
administration will result in sharp reduction in transaction cost. A 10 %
reduction in transaction cost for personal income tax would help taxpayers
to save an estimated Rs.4000/- Crores. Such reduction in transaction cost
is progressive.
The Task Force Recommendations were mainly on simplifications in tax
provisions and reducing the complications, resulted in helping taxpayers in
tax planning.
3.8.2 A Task Force on Indirect Taxes10.
Ministry of Finance and Company Affairs, with an objective to take advantage
of information technology and bring the indirect tax systems and procedures
at par with the best international practices , and thus , encourage compliance
and reduce compliance cost, vide Notification No. 201/65/2002-CX6 dt. 3rd
September 2002, constituted a Task Force on Indirect Taxes, under the
chairmanship of Dr. Vijay Kelkar.
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On 25th October 2002, the Task Force presented the consultation paper to
the Government with a request that the same may be made available to the
public at large for discussion on the proposals contained therein.
The response was overwhelming; By and large the proposals contained in
the consultation paper were appreciated. However, there was also
constructive criticism to some proposals, particularly tax rates of some
items.
It was expected that with the proposed reforms, the reduction in the
transaction costs could be as much as 50%, the potential gains to the
economy would be Rs.4000-5000 Crores per annum.
The basic reforms recommended by the task force include following.
Customs Procedures and Trade Facilitation
1. Trust Based System (TBS); Universal Green Channel.
2. Liberal steps in Licensing of Customs House Agents. (CHA).
3. For improved Customs Administration, following measures were
recommended
Intelligence, investigations and audit sections of the customs house
may be strengthened.
Functioning of Special Valuation Branch should be reviewed to
provide time bound finalization of cases in practice. Further pre
deposit of duty should be dispensed with.
There should be sharing of merchant overtime fees for activities done
in customs area.
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Export valuation rules should be framed for export promotion
schemes.
Customs should allow abandonment of warehoused goods.
Customs duty payment may be through cheques.
Expansion of scope of confiscation provisions to include non dutiable
goods as well as goods not covered under drawback scheme.
To accept Export Obligation Discharge Certificate issued by DGFT by
customs without delay.
Customs officers may be empowered to enforce IPR by a suitable
amendment to the Trade and Merchandise Marks Act and the
Copyright Act.
Central Excise
The recommendations aimed at comprehensively changing the essence of
central excise administration with the twin objective of tax payer facilitation
and encouraging compliance for increased revenue.
Following are the highlights of the recommendations made by the Task Force.
Manufacture
Levy of Central Excise should be progressively based upon value
addition to be applied only to the processing stage of manufactured
goods.
In order to prevent any misuse of the MRP provisions, it was
recommended that wherever MRP based levy is applied on an item,
the act of repacking, re-labelling and putting the item into unit
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container for retail sale may be deemed to be amounting to
manufacture.
Valuation
Guidelines for determination of cost of production should be issued at
the earliest.
Value of the goods, when removed to sister units should be 105% of
cost of production.
The system of MRP based valuation may be expanded.
Cenvat
Abolish the distinction between capital goods and inputs and allow
credit on all inputs brought into factory except for those figuring in a
small negative list, such as office furniture, motor vehicles, MS, HSD
etc.
To allow full credit of the duty paid on capital goods immediately on
receipt, as in the case of inputs.
An explanation may be inserted in rule 16 of the Central Excise Rules,
to the effect that the amount paid on removal of returned goods can be
taken as Cenvat credit in the hands of the recipients.
A specific provision may be introduced to charge duty on the
dismantled capital goods when removed from the factory.
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Cenvat Credit should not be allowed on deemed credit basis.
Rule 12 of the Cenvat Credit Rules, 2002 should be amended to
provide recovery of Cenvat credit erroneously refunded.
Cenvat inputs may be allowed to be stored outside the factory in an
identified place of storage subject to procedural safeguards for due
accountal of the inputs.
Export
Sealing of export consignments by Central Excise Officers should be
replaced by self sealing by the exporter, as a matter of right.
Improvement in the system of grant of rebate.
Manner of payment of duty
Fortnightly payment of duty may be replaced by monthly payment.
The date of payment of central excise duty may be prescribed as the
date of presentation of the cheque to the bank subject to its realization.
In the case of default in payment of duty, the provision of withdrawing
the facility of payment of duty in installments in case of defaults
should be revoked.
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There should be automatic charge of interest and penalty in the event
duty is not paid on time.
In the event it is decided to retain the provision of withdrawing the
facility, the assessee should be allowed to pay duty during this period
through Cenvat credit.
Other important recommendations include the reforms in the Assessments,
Dispute Resolution, Filing of Returns, Voluntary filing of documents by tax
payers, Arrests, Tax clinics for small scale sector manufacturers.
Researchers Observations and Comments:-
The consultation paper was presented in October 2002. It has been observed
that during the last twelve years, the provisions under Central Excise Act,
Central Excise Rules and Cenvat Credit Rules have been amended to give
effect to almost all the recommendations made by the Task Force. Following
are the examples.
1. Section 2(f) of the Central Excise Act, 1944 has been amended to
include packing, repacking, labeling, relabeling, putting the item
into unit container for retail in the definition of “manufacture.”
2. Schedule III, to the Central Excise Act has been issued to provide
list of items where packing, repacking, labeling, relabeling, putting
the item into unit container for retail amounts to “manufacture.”
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3. Notification No. 49 has been issued to provide for abatement in the
MRP to arrive at the assessable value of the items covered under
MRP Provisions.
4. Rule 16 of the Central Excise Rules, 2002 has been amended to
provide that the amount paid on removal of returned goods can be
taken as Cenvat credit in the hands of the recipients.
5. Cenvat Credit Rules have been amended to provide that Cenvat
Credit is not allowed on deemed credit basis.
6. Fortnightly payment of duty is replaced by monthly payment.
7. The date of payment of central excise duty is prescribed as the date
of presentation of the cheque to the bank subject to its realization.
In fact, e-payment is made mandatory where the duty liability is
more than Rs.10 Lacs annually.
8. Sec 11A of the Central Excise Act has been amended to provide
for automatic charge of interest and penalty in the event duty is not
paid on time.
The amendments made in the excise, in line with the recommendations of the
Task Force has removed many complications and made the compliance, tax
management and tax planning easier.
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Service Tax
The task force recommended the following:
1. To the extent possible, Service Tax should be levied in a
comprehensive manner leaving out only few services by including
them in a negative list.
2. There should be complete integration of Cenvat credit and service tax
credit schemes.
3. Credit of central duties (on goods and services) should be utilized for
payment of service tax collected and appropriated by the Central
Government.
4. The rate of service tax should be suitable enhanced so as to achieve
parity with the Cenvat rate by 2006-07. However, there should be two
rates, one for service providers who avail credit and a lower rate for
those who do not.
5. Threshold limit of Rs.10 Lakhs for small service providers.
6. Separate enactment for service tax.
7. Service should be classified on the basis WTO classification, which
should be made a part of Service Tax legislation.
8. The task force also recommended measures of early settlement of
disputes.
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9. It was also recommended that there should be a time bound review of
the automation needs of service tax administration and in like manner
as proposed for other indirect taxes steps should be taken to automate
the processes and allow online filing of returns and payment of service
tax.
Researchers Observations and Comments:-
The consultation paper was presented in October 2002. It has been observed
that during the last twelve years, the provisions related to Service Tax have
been amended to give effect to almost all the recommendations made by the
Task Force. Following are the examples.
1. Service Tax based on Negative List has been made effective from
01.07.2012.
2. “Service” has been defined in Sec 65(44) of the Finance Act, 1994.
3. Cenvat Credit Rules, 2004 made applicable to manufacturing and
service sector providing interchangeability of Cenvat Credit
Utilization.
4. Service Tax Rate and Cenvat Rate (Central Excise Duty rate) are at par
from 01.04.2011.
5. Threshold limit of Rs.10 Lakhs for small service providers.
The new law, (w.e.f. 01.07.2012) provides more area for tax planning.
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Others
The Task Force also recommended various simplification measures in the area
of Export Promotion, SEZ and EOU schemes, Drawback Scheme, Automation
of indirect tax systems and procedures, improving indirect tax administration,
CBEC Administration, Revenue augmentation, Tax levies and rates, Central
Excise Duty Structure for Petroleum and Textile sector, Small Scale Sector
duty exemption, and VAT. As regards Central Excise Duty Exemptions, it
was recommended that the following factors must be taken into account while
considering the grant of a duty exemption.
Income elasticity of the product cost of compliance, international best
practices, and cannon of transparency.
Instead of duty exemption whether it is possible to extend the same
benefit through a budgetary mechanism.
If an exemption is issued, it should indicate the period of its validity
with a proviso that changed circumstances may warrant a mid-term
review.
On perusal of the recommendations made by the task force and the Central
Excise, Customs and Service Tax law in the present form, it can be seen that
most of the recommendations made by Task Force have been implemented
and the law has been amended suitably.
In the opinion of the researcher, the amended provisions do help in tax
management and tax planning in Indirect Tax areas. It has brought
simplification and clarity in the law and left very little scope for different
interpretation and confusion.
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3.8.3 Advisory Group on Tax Policy and Tax Administration for Tenth
Plan10
The Planning Commission set up the Advisory Group in July 2000 under the
chairmanship of Shri Parthsarathi Shom to study tax policy and Tax
Administration issues and make appropriate recommendations at different
levels of government with the purpose of granting resources for the tenth Five
Year Plan.
Challenges before Advisory Group
The Advisory Group faced two challenges.
1. The parameters for the tenth plan were not finalized so far. The group
considered 15% growth target for its recommendations and suggestions.
2. While various aspects of tax structure have improved over time, many
deficiencies remained. Correction of such deficiencies would have
negative revenue impact in the short to medium term. The group took
option of analyzing such aspects and recommending corrective action
despite their potential negative impact. This implies that major
complimentary revenue yielding measures are needed to improve the
overall revenue productivity of the tax system, comprising both tax policy
and tax administration, and including all levels of government – Central,
State and Local.
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Recommendations
Following major recommendations related to Indirect Taxes, were given by
the group.
Union Excise
1. It was recommended in the Interim Report that a two-rate structure of 16
percent together with a higher rate should be introduced. An increasing
number of items were to be converged to fall under the 16 percent rate to
minimize classification problems. This would be economically desirable
and administratively simple. The rates would have to be adjusted for
inclusion of services in the CENVAT. The 2001-02 Union Budget has
moved clearly towards a two-rate duty structure of 16 percent and 32
percent. However, the lingering lower rates of 4 percent and 8 percent
should now be merged with 16 percent in the next budget.
2. There is also a multiplicity of levies that include, apart from the excise
rate structure, additional excise duty (goods of special importance) in lieu
of sales tax on sugar, fabrics and tobacco; additional duty on motor
spirit (petrol and diesel); additional duty on textiles and textile articles
(fibers, yarn and fabric) under a subsidy scheme for "controlled cloth";
and cesses leviable under miscellaneous enactments. Separate accounts
are to be maintained for each of these levies, increasing administrative
and compliance costs. It is difficult to work out effective tax rates since
CENVAT credit is not given for all of them. It was recommended that
there should be a single levy under the Central Excise Act.
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Base of Union Excises
The base of excise is manufacture. While many disputes have occurred over
the definition of manufacture, the effective twin test is: (a) a new article
should come into existence; and (b) it should be marketable. The current
definition—that does not include activities that may be deemed to be
manufacture such as labeling or printing a brand name—encourages
segregation of manufacturing activities to avoid tax. It was recommended in
the Interim Report that the definition of manufacture be widened to include
the chain of value addition by or on behalf of the manufacturer (undertaken
before marketing the product) to be charged to duty. The 2001-02 budget has
accepted this principle though only in the case of branded garments. This now
needs to be extended to other items like shoes, electrical gadgets etc.
Cenvat
It is recommended that both capital goods and other inputs "used in the
factory of the manufacturer" should be allowed CENVAT credit. Thus, capital
goods and other inputs should not be distinguished for purposes of input tax
credit.
Cenvat credit on capital goods should be immediately restored by giving the
credit in the year of purchase itself.
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Exemptions
The Group observed that the excise base is eroded by exemptions, inter alia,
for: (a) small scale industry (SSI); (b) village industry marketed with KVIC
assistance; (c) specified goods supplied to various types of public institutions;
(d) goods produced without power; (e) cooperative society produced tea; (f)
goods produced in the North-East; (g) a number of food items including
bread, spices, coffee, khandsari sugar, cereals, edible oils and several
unbranded food items; (h) fertilizers; (i) unregistered branded garments,
clocks, watches upto Rs.500, electric bulbs upto Rs.20; (j) aircraft, ship and
boat; etc.
Further, the formulation of exemptions is extremely complex. Of the standard
publication of tariffs of 720 pages, 220 pages are devoted to exemptions.
There are 90 exemptions for textiles. For small scale industry, there are 5; for
exports, there are 20; for job work, there are 5, and so on. Each exemption has
many entries, conditions and lists, in turn, containing hundreds of items in
each list.
Credit is given on inputs manufactured in the North East even though no duty
is paid on such inputs. This is said to cause considerable leakage.
In the main notification which combines all exemptions for the different
chapters (3/2001CE), there are now 262 entries while in the previous year’s
notification (6/2000-CE), there were 259 entries. Thus, the list has expanded,
though marginally.
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The Interim Report recommended that an intensive effort is necessary to
rationalize exemptions on the same subject through abolition and merger.
Conditions for exemptions must be minimized. When an item is covered
under the SSI exemption scheme, there should not be any separate exemption
except for some very valid reasons. SSI exemption should be extended to
textiles also by replacing the individual exemptions. Overall, there has been
no significant change in the area of exemptions.
SSI units receive concessional duty as well as full CENVAT credit. SSI units
below a turnover of Rs.3 Crores should pay a duty of 85-90 percent of the
normal rate if they opt for CENVAT credit. The 3 Crores turnover calculation
should not exclude exports and exempted goods produced by a SSI unit. SSI
units must maintain all records and give a declaration. Only really small units
with a turnover of Rs.15-20 lakhs should be exempted from
declaration/maintenance of records. The unutilised credit should lapse once
the Rs.1 Crores exemption limit is reached.
An important issue in expanding the base is the inclusion of services in the tax
net through comprehensive taxation of services. It is important to integrate
services as early as possible with the CENVAT to arrive at a full fledged VAT
at the Centre, perhaps as early as in the Budget of 2002-03, rather than to
continue with a separate structure of service taxation that cascades and causes
economic distortions. The Centre should also allow states to tax services so
that they can integrate services into their VAT base. A mechanism that would
make this feasible is elaborated below (see Section 7e).
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Administration
While the VAT mechanism reduces tax induced economic distortions by
reducing cascading (of "tax on tax"), the aspect of input tax credit tends to
pose particular demands on administration. A substantially faster growth in
MODVAT credit vis-á-vis growth in gross revenue has caused concern
regarding potential misuse of MODVAT credit invoices. A field survey has
indicated that, besides procedural and technical offenses, other violations
included: (1) undervaluation of goods; (2) non-reversal of credit in respect of
returned rejected inputs; (3) misuse of facility of job work; and (4) availing of
credit on exempted final products; twice on the same invoice; without
payment of duty; by using fraud/fake documents. It appears that 10 percent of
revenue may be lost from these factors. There is also the perception that the
exempted SSI sector exacerbates the misuse of CENVAT credit invoices. As
the SSI sector has no interest in CENVAT credit invoices, the invoices
relating to their purchases have been misused by the non-exempted sector.
Thus rationalization of SSI exemptions from CENVAT should check evasion
over and above improving the excise structure.
The depot or other places of removal should be made into duty paying
agencies, with accounts-based checks and audits at regular intervals.
The fortnightly payment should be replaced by monthly payment to enhance
the liquidity of units and to reduce excessively stringent accounting needs.
Despite the move towards financial control, vestiges of physical restrictions
remain. When goods are returned by buyer to seller, in certain circumstances,
approval is necessary from the Chief Commissioner for re-entry of goods to
the factory. This is time consuming and unnecessarily exacerbates the need for
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tax official—taxpayer contact. Reentry should be allowed on accounts based
self declaration or simple intimation to the Department.
Manufacturers may acquire spare parts for use or they may resell them. For
such trading activities, approval of the Department is needed which is
generally not given. Resale should be allowed on the basis of maintenance of
accounts and penalty imposed in case of misuse. On the whole, therefore,
excise administration should complete its movement towards financial control
from physical control based methods.
Researcher’s Observations
The recommendations made by the Advisory Group were very useful in
bringing simplicity in tax administration. The Government has accepted some
of the suggestions and accordingly changes were made in the following areas.
1. Concept of Deemed manufacture was introduced in the definition of
Manufacture u/s 2(f) of the Central Excise Act, 1944.
2. Rationalization in exemptions by merging the various exemption
notifications and issuing a mega notification No.12/2012-CE for
granting various exemptions.
3. The fortnightly payment replaced by monthly payment.(Rule 8 of
Central Excise Rules,2002)
4. Reentry of goods allowed on accounts based self declaration or simple
intimation to the Department.(Rule 16 of the Central Excise
Rules,2002).
5. Resale of goods allowed on the basis of maintenance of accounts.
However no changes were made in Cenvat Credit Provisions
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Taxation of Services
1 An interim method that should enable states to tax services with
cooperation from the Centre and without the need for a Constitutional
amendment could be one where the Centre may levy the service tax on
them and authorize the states to administer/collect them. However, the
Centre and states must first arrive at a consensus on the list of services
that can be administered by the states.
2 The service tax collected by the states would have to first go to the
Consolidated Fund of India as per Article 266(2). After that, the
Centre would disburse an equivalent amount to the states. This interim
method has found favour with the Chief Ministers of states with whom
the Group discussed the matter.
3 The states should be given the powers to tax services whose
consumption is of an intrastate nature.
4 After the initial introduction, services could be incorporated into the
VAT.
5 The rate structure for the VAT on services should be identical to those
for goods to obviate distortions in producer and consumer decisions.
6 The state taxes like luxury and entertainment tax on restaurants, hotels
and other lodgings, professions tax, motor vehicles tax, goods and
passengers tax and electricity duty should be integrated with the state
level VAT.
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7 Various public utility services that have scope for corporatization
should be brought within the state level VAT on services.
8 The VAT on services should be fully integrated with the VAT on
goods, both in its design and administration, with an appropriate
mechanism to set off service input tax against goods output tax and
vice versa. Therefore, a destination based, invoice credit method, dual
VAT—one at the central level and another at the level of states—
comprising both goods and services could be envisaged by the end of
the Tenth Plan.
9 The assignment of the powers to tax services to states must be viewed
as adequate compensation for revenue loss on account of abolition of
the central sales tax.
3.8.4 Task force on Direct Taxes10:
A Task Force on Direct Taxes was formed under the chairmanship of Dr.
Vijay Kelkar. The Task Force presented the consultation paper to the
Government on 2nd November 2002. The Task Force gave many
recommendations on Reform of Tax Administration, Search and Seizure,
Personal Income Tax, Corporate Tax Reforms, Taxation of capital gains.
The Task Force recommended the abolition of Wealth Tax. The Task Force
also recommended merger of tax on expenditure in hotels with service tax.
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3.8.5 Tax Reforms Committee headed by Prof. Raja J. Chellaiah10:
The economic liberalization initiated in 1991 by the Government carried a
special focus on Tax Reform as it was felt that complexities in levy and
collection of tax could fetter economic activity. The Tax Reforms Committee
headed by Prof. Raja J. Chellaiah examined the Tax System and
Administration in the country. The Committee concluded that a simple,
credible and progressive system was necessary to improve Tax compliance.
The need for better relations between the Tax Collectors and Taxpayer was
also emphasized. The need to achieve both equity and efficiency in Taxation
was thought to be important.
3.9 Research papers presented in conferences or published in
Journals.
3.9.1 Research Paper: Federalism in India: Political Economy and
Reform:
M. Govinda Rao and Nirvikar Singh had authored a paper in Conference on
“India: Ten Years of Economic Reform”, at the William Davidson Institute,
University of Michigan, September 2001. According to the study 1999-2000
the central indirect tax to GDP ratio is 6.23 percent. The Tax Reform
Committee of 1991 had also recommended minimizing exemptions and
concessions, simplification of laws and procedures, development of modern,
computerized information system and improvements in administration and
enforcement (Rao, 2000a). Work in the mid -1990s by Das - Gupta and
Mookherjee (198, Chapter 6) detailed the problems with Indian tax
administration both in terms of incentives for paying taxes and those
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enforcing them. A reform that more directly affects India’s federal system lies
in Indirect taxes, which, as noted have not increased proportionately with
GDP in the last decade. As Rao (2000a) mentioned “The most important
challenge in restructuring the tax system in the country is to evolve a
coordinated consumption tax system.” This problem has been recognized for
some time, and is clearly in need of correction, as also recommended by the
Eleventh Finance Commission in its report.
3.9.2 Revenue Forecasting and Estimation – Techniques and
Applications
Mr. Graham Glendy, Mr. Gangadhar Shukla and Mr. Robino Sugana
presented paper in Duke University (U.S) on the subject “Revenue
Forecasting and Estimation- Techniques and Applications”.
The study material contains information on Principles of Taxation and Tax
Reforms, Revenue Forecasting, Revenue implications of Excise Tax, Trade
Tax, VAT and Income Tax.
In the said presentation they have defined Taxation as “Taxation is the transfer
of real economic resources from the private sector to the public sector to
finance public sector activities.”
Regarding Excise Tax, the presentation contains useful information about
Economic Incidence of Excise Tax, Effect on revenue when tax rate changes,
Effect on revenue when income increases.
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3.9.3 Public Finance in Open Economics (Duke University (USA)
Mr. Gangadhar Shukla and Mr. Graham Glendy presented paper in Duke
University on “Public Finance in Open Economics”.
The paper contains information on Public Finance, Principles of Tax Reforms,
Economic Principles of Tax Revenue Tax incidence and Tax Burden,
Taxation of Income and Wealth, Indirect Taxation, Trade Taxes, Taxation of
State owned enterprises, Impact of Inflation, Tax Incentives.
On the Tax Incentives, the paper contains useful information about Cost
Effectiveness of Tax incentives, Impact of Tax incentives, Types of Tax
incentives and Tax Holidays, Tax Neutrality and Neutral Tax Structure.
As regards tax incentives, the resource persons observed that if a country or
region has poor infrastructure and public services, then the loss of tax
revenues from cost ineffective tax incentives can be expected to make this
situation worse by lowering the government revenues needed to improve these
infrastructure and public services. Investment tax incentives may well be self-
defeating.
The authors reproduced the following thoughts of Arnold C. Harberger, in
“Tax Neutrality in investment Incentives”, in Aaron and Boskin (eds).
Economics of Taxation, (1980)
The design of incentives requires a good deal of care. Three aspects of the
design of tax incentives are covered. The first aspect is the cost effectiveness
of a tax incentive. A basic question is whether the tax incentive costs more in
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forgone tax revenues than the tax revenues gained from the incremental
induced activity? The second feature is the actual impact of the tax incentive
on the effective tax rate of the investor. Given tax incentives are structured in
a number of different ways, it is not always clear by how much the effective
tax rate on the investment income has been reduced. The third design feature
that is investigated here is whether a tax incentive is neutral. A neutral
investment tax incentive picks the next best investment that would otherwise
not have been undertaken. A non-neutral investment incentive may result in
investments with low rates of return of return being made financially feasible
and not some investments with higher rates of return. This arises because the
low-rate-of-return investments get relatively larger incentives than the high-
rate-of-return investments. The loss of output through non-neutrality is clearly
economically inefficient. Neutrality is achieved when an incentive does not
induce new investments with low rates of economic yield, while failing to
induce investments with higher rates of economic yield.
3.10. GACAP and Cost Accounting Standards issued by the Institute of
Cost Accountants of India.
The Institute of Cost Accountants of India is set up under an Act of Parliament
and is an apex body in the area of cost and management accountancy. The
Institute has issued Generally Accepted Cost Accounting Principles and
following 18 Cost Accounting Standards with the objective to bring
uniformity in Cost Accounting.
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Table 3.1. Cost Accounting Standards issued by the Institute of Cost
Accountants of India.
CAS No. Subject Date of
release
CAS1 Classification of Cost 08.04.2002
CAS2(Revised) Capacity Determination 21.07.2012
CAS3(Revised) Overheads 22.01.2012
CAS4 Cost of Production for Captive
Consumption
03.01.2003
CAS5 Determination of average (equalized) cost
of transportation
21.07.2005
CAS6 Material Cost 12.12.2008
CAS7 Employee Cost 12.09.2009
CAS8 Cost of Utilities 12.09.2009
CAS9 Packing Material Cost 14.12.2009
CAS10 Direct Expenses 14.12.2009
CAS11 Administrative Overheads 27.03.2010
CAS12 Repairs and Maintenance Cost 27.03.2010
CAS13 Cost of Service Cost Centre 25.02.2011
CAS14 Pollution Control Cost 31.03.2012
CAS15 Selling and Distribution Overheads 17.01.2013
CAS16 Depreciation and Amortization 20.05.2013
CAS17 Interest and Financing Charges 20.05.2013
CAS18 Research and Development Cost 08.10.2013
CAS19 Joint Cost 21.01.2014
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3.11 Cost Accounting Records Rules - 2011
In exercise of the powers conferred by clause (b) of sub-section (1) of section
642 read with clause (d) of sub-section (1) of section 209 of the Companies
Act, 1956 (1 of 1956), The Ministry of Corporate Affairs issued The
Companies (Cost Accounting Records) Rules, 2011 on 3rd Jane 2011.
As per the said Rules, every company, including a foreign company as defined
under section 591 of the Act, which is engaged in the production, processing,
manufacturing, or mining activities and wherein, the aggregate value of net
worth as on the last date of the immediately preceding financial year exceeds
five Crores of rupees; or wherein the aggregate value of the turnover made by
the company from sale or supply of all products or activities during the
immediately preceding financial year exceeds twenty Crores of rupees; or
wherein the company’s equity or debt securities are listed or are in the process
of listing on any stock exchange, whether in India or outside India is required
to maintain cost records as per Generally Accepted Cost Accounting
Principles and Cost Accounting Standards issued by the Institute of Cost
Accountants of India .
These Rules do not apply to a company which is a body corporate governed
by any special Act;
The Rules define the manufacturing, processing, mining and production
activities as per the following.
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“Manufacturing Activity” includes any act, process or method employed in
relation to -
(i) Transformation of raw materials, components, sub-assemblies, or parts
into semi-finished or finished products; or
(ii) Making, altering, repairing, fabricating, generating, composing,
ornamenting, furnishing, finishing, packing, re-packing, oiling,
washing, cleaning, breaking-up, demolishing, or otherwise treating or
adapting any product with a view to its use, sale, transport, delivery or
disposal; or
(iii) Constructing, reconstructing, reconditioning, servicing, refitting,
repairing, finishing or breaking up of any products. (k) “Mining
Activity” includes any act, process or method employed in relation to
the extraction of ores, minerals, oils, gases or other geological
materials from the earth’s crust, including sea bed or river bed.
“Mining Activity” includes any act, process or method employed in relation to
the extraction of ores, minerals, oils, gases or other geological materials from
the earth’s crust, including sea bed or river bed.
“Processing Activity” includes any act, process, procedure, function,
operation, technique, treatment or method employed in relation to-
(i) Altering the condition or properties of inputs for their use,
consumption, sale, transport, delivery or disposal; or
(ii) Accessioning, arranging, describing, or storing products; or
(iii) Developing, fixing, and washing exposed photographic or
cinematographic film or paper to produce either a negative image or a
positive image; or
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(iv) Printing, publishing, finishing, perforation, trimming, cutting, or
packaging; or
(v) Pumping oil, gas, water, sewage or any other product; or
(vi) Transforming or transmitting, distributing power or electricity; or
(vii) Harboring, berthing, docking, elevating, lading, stripping, stuffing,
towing, handling, or warehousing products; or
(viii) Preserving or storing any product in cold storage; or
(ix) Constructing, reconstructing, reconditioning, repairing, servicing,
refitting, finishing or demolishing of buildings or structures; or
(x) Farming, feeding, rearing, treating, nursing, caring, and stocking of
living organisms; or
(xi) Telecasting, broadcasting, telecommunicating voice, text, picture,
information, data or knowledge through any mode or medium; or
(xii) Obtaining, compiling, recording, maintaining, transmitting, holding or
using the information or data or knowledge; or
(xiii) Executing instructions in memory to perform some transformation
and/or computation on the data in the computer's memory.
“Production Activity” includes any act, process, or method employed in
relation to -
(i) Transformation of tangible inputs (raw materials, semi-finished goods,
or sub-assemblies) and intangible inputs (ideas, information, know
how) into goods or services; or
(ii) Manufacturing or processing or mining or growing a product for use,
consumption, sale, transport, delivery or disposal; or
(iii) Creation of value or wealth by producing goods or services.
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The rules provide for maintenance of productwise, unitwise cost records and
annually product groupwise compliance, to be submitted to Ministry of
Corporate Affairs.
“Product” means any tangible or intangible good, material, substance, article,
idea, know-how, method, information, object, service, etc. that is the result of
human, mechanical, industrial, chemical, or natural act, process, procedure,
function, operation, technique, or treatment and is intended for use,
consumption, sale, transport, store, delivery or disposal.
“Product Group” in relation to tangible products means a group of
homogenous and alike products, produced from same raw materials and by
using similar or same production process, having similar physical or chemical
characteristics and common unit of measurement, and having same or similar
usage or application; and in relation to intangible products means a group of
homogenous and alike products or services, produced by using similar or
same process or inputs, having similar characteristics and common unit of
measurement, and having same or similar usage or application.
Following Separate set of rules have been prescribed to the activities or
products.
(a) Cost Accounting Records (Pharmaceutical Industry) Rules, 2011
(b) Cost Accounting Records (Fertilizer Industry) Rules, 2011
(c) Cost Accounting Records (Sugar Industry) Rules, 2011
(d) Cost Accounting Records (Electricity Industry) Rules, 2011
(e) Cost Accounting Records (Petroleum Industry) Rules, 2011
(f) Cost Accounting Records (Telecommunication Industry) Rules, 2011
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The product groups are based on the classification under Central Excise and
the base for quantitative information is excise records and excise Returns.
Therefore maintenance of cost records helps in tax management to a great
extent.
3.12 The Companies (Cost Audit Report) Rules, 2011.
In exercise of the powers conferred by clause (b) of sub-section (1) of section
642 read with sub-section (4) of section 233B, and sub-section (1) of section
227 of the Companies Act, 1956 (1 of 1956), and in supersession of the Cost
Audit Report Rules, 2001, the Central Government issued The Companies
(Cost Audit Report) Rules, 2011 on 3rd June 2011.
These rules apply to companies in respect of which an audit of the cost
records has been ordered by the Central Government under sub-section (1) of
section 233B of the Act. Accordingly The Ministry of Corporate Affairs have
issued following orders.
Cost Audit Report
The Companies Cost Audit Report Rules 2011, prescribes the Cost Auditor to
submit Cost Audit report alongwith his observations and suggestions and
Annexures to the Central Government in the prescribed form.
The Maintenance of Cost Accounting Records and Cost Audit have been
prescribed in respect of companies engaged in Manufacture; Production,
Processing, and Mining activities vide the Various Cost Accounting Records
Rules 2011 and Cost Audit Report Rules 2011. The activities covered under
Cost Accounting Records Rules and Cost Audit Report Rules are either
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covered under Central Excise or Service Tax. The entire mechanism of Cost
Accounting Records and Cost Audit is based on the concept of Product
Groupwise reporting.
The product / activity groups have been classified under 267 groups.
Wherever a product is identified under first schedule to Central Excise Tariff
Act 1885, the same has been identified with reference to the 4 digit Chapter
Heading of the product. As per Notes to Annexure to the Compliance Report
under Cost Accounting Records Rules 2011, for produced / manufactured
product groups, the nomenclature as used in the Central Excise Act / Rules is
to be used and for service groups, the nomenclature as used in Finance Act /
service tax rules , as applicable to be used. Thus, the cost compliance is
closely linked with the Central Excise and Service Tax classification. Similar
is the case with Cost Audit.
As per Rule 22(3) of the Central Excise Rules, 2002, every assessee shall, on
demand, make available Cost Audit Reports to the officer empowered under
sub rule (1) or the audit party deputed by the commissioner. Cost Audit
Report is considered as one of the important tool for conducting the Central
Excise Audit , in particular EA 2000, as it provides quantitative and financial
details regarding production, clearance, capacity utilization, input output ratio,
related party transaction, valuation of captively consumed goods.
Due to change in format of information to be given in Schedule 6 to the
Annual Report, the quantitative details are not available in the Annual Report.
Therefore Cost Audit Report is the only authentic document which provides
quantitative as well as financial details regarding production, clearance, stock
etc.
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The Annexures (Paras) to the Cost Audit Report help the assessee to ensure
tax compliance. It also helps in finding out revenue leakages.
The Annexures (Paras) to the Cost Audit Report contain following
information.
Annexure 1 :-
Annexure 1 contains the general information about the Company and Cost
Auditor.
Annexure 2 :-
The annexure contains information about cost accounting policy adopted by
the Company keeping in view the requirements of the Companies (Cost
Accounting Records) Rules, 2011, the Companies (Cost Audit Report) Rules,
2011, Cost Accounting Standards and its adequacy or otherwise to determine
correctly the cost of production/operation, cost of sales, sales realization and
margin of the product/activity groups under reference separately for each
product/activity group.
The information in this annexure is useful in complying with various
provisions of various Excise / Cenvat Rules such as
1. Treatment on non moving, obsolete goods in accounts:- Rule 3(5B) of the
Cenvat Credit Rules,2004, provides that if inputs or capital goods , before
being put to use , are written off fully or partly or any provision is made in
books of account to write off fully or partially , the manufacturer or
service provider is required to pay an “amount” equal to Cenvat credit
taken in respect of such inputs or capital goods . In case, the company has
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a policy to write off / down the value of inputs periodically on account of
non moving nature of goods, the reversal of corresponding Cenvat credit
needs to be done.
2. Treatment of R & D Expenses :- as per rule 6 (1) of the Cenvat Credit
Rules, 2004, Cenvat Credit shall not be allowed on such quantity of input
used in relation to the manufacture of exempted goods or for provision of
exempted services. If company is engaged in any research activities,
which has not resulted in manufacture or clearance of excisable goods, and
if the company has availed Cenvat credit on inputs used in research
activities, it needs to be reversed.
3. Methodology for valuation of inter unit / intercompany and related party :-
In case of multi-locational companies, where the partly processed goods
are transferred to other units for further use in manufacture of goods, the
transfer price needs to be worked out as per Rule 8 of the Central Excise
Valuation Rules, 2000. CBE&C has clarified that the cost of production of
the captively consumed goods has to be determined as per Cost
Accounting Standard 4 (CAS4) issued by the Institute of Cost Accountants
of India.
4. Treatment of abnormal and non-recurring costs including classification of
other non-cost items:- the information about abnormal costs on account of
accident, theft etc is useful to verify whether the proportionate Cenvat
credit on the inputs and capital goods damaged / lost has been reversed or
remission of duty has been sought.
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Annexure 3
The information in this annexure is to be submitted for a Company as a whole.
This Annexure contains following information.
Manufactured product group. The product group is linked with the
nomenclature as per Central Excise Tariff Act 1985
Service Groups – for Service group, nomenclature as per Finance Act /
Service Tax Rules is being used.
Product group wise details of Trading Activities.
Details of other Income
Net Sales (net of taxes and duties) to be specified and coverage of Cost
Audit to be mentioned
The Total Income shown in this annexure should match with the
income shown in the Profit & Loss A/c
The information in this annexure is useful in Tax Compliance in the
following manner –
1. Value reported in this Annexure may be compared with ER1 details.
This may not match with ER1 always because of different methods of
valuations adopted by the assessee, such as duty is paid on MRP, duty
paid under specific duty rate method etc. However, where the duty is
paid on the transaction value as per section 4 of the Central Excise Act
and where there are no stock transfers, the value shown in the said
annexure may be compared with the value shown in ER 1. The
analysis of difference in value shown in ER1 and value shown in this
annexure may help in finding out the mistakes, wrong accounting or
even removal of goods without payment of excise duty.
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2. Amount shown in this Annexure in respect of service income should
match with the value of taxable services shown in ST3 Returns
submitted by the assessee. Analysis and reasons for difference may
help in finding nonpayment, short payment of service tax.
3. Details of trading activities are useful in verifying whether Cenvat
credit is availed on traded goods if the traded goods are similar to
inputs. Details of traded goods are also useful in verifying ratio used
for reversal of Cenvat credit under Rule 6(3) of the Cenvat Credit
Rules, 2004 since trading is considered as exempted service.
4. Details of other income may help in verifying the applicability of
excise duty, service tax on it.
Annexure 4
This annexure provides following Information, separately for each product
group
Capacity – installed, enhanced during the year, available through
leasing arrangement, loan licenses, third parties to be specified
Actual Production under each category to be given
Analysis of actual production and capacity vis-à-vis in house capacity
utilization can be made in Performance Appraisal Report
Details of stock purchased for trading from indigenous sources and
imports to be given separately.
Production as per excise records to be separately given and
observations on reconciliation to be made in the Audit Report.
131
The information in this annexure is useful in comparing –
1. The details of installed capacity with the information submitted to
Central Excise in ER7 Return. The details of addition /reduction in
installed capacity are useful in verifying the details of addition /
removal of capital goods and payment of excise duty / reversal of
Cenvat credit thereon under Rule 3(5) of the Cenvat Credit Rules
2004.
2. Actual production quantity with production quantity reported in
monthly Returns ER1. The Annexure provides the information in
respect of actual production and production as per excise records. The
reasons for difference in the production quantity as per production
reports and details submitted in ER1 Returns is useful in finding
removal of goods without payment of duty.
3. Details of stock purchased for trading may be useful in verifying
admissibility of Cenvat credit. Details of traded goods also help in
verifying ratio used for reversal of proportionate Cenvat credit under
Rule 6(3) of the Cenvat Credit Rules, 2004.
4. Details of captive consumption may be useful in ascertaining the duty
liability of the goods captively consumed if final product is exempt
from duty.
5. Details of quantity sold may be used in verifying details of quantity of
clearances as per Excise Returns ER1.
132
Annexure 5
Annexure 5 contains details of cost of production, cost of sales, profit / loss on
goods sold. This Annexure is to be submitted separately for each product /
activity group. Proforma and item of cost shown in the proforma can be
modified to meet the requirement of industry / product / activity group without
losing materiality factor. In case company follows Standard Costing System
element of cost to be reflected at actual after adjusting the variances therefore
the information contained in this annexure provides actual cost of production,
cost of sale, sales realization and profit / loss.
Usefulness in Central Excise Compliance
1. In case of goods captively consumed, Cost of Production can be
compared with the same given in CAS4 certificate by the assessee
from time to time. The cost of production reported at line item number
17 of the annexure may be useful in comparing the cost of production
submitted to the excise department. The information may be used to
find out differences on account of inclusion / non inclusion of various
overheads as prescribed in Cost Accounting Standard 4 issued by the
Institute of Cost Accountants of India. The information is useful in
finding out undervaluation of the goods captively consumed and
working of differential duty to be paid on it.
2. The comparison of cost details with the previous year may help in
understanding the changes in cost composition and analyzing the
reasons thereof.
133
Annexure 6
This Annexure contains operating ratio analysis in Tabular Format for each
product group separately. Ratio of operating expenses to cost of sales to be
worked out from following cost element.
1. Material cost
2. Utilities cost
3. Direct employees cost
4. Direct expenses
5. Consumable stores and Spares
6. Repairs and Maintenance cost
7. Depreciation /Amortization Cost
8. Packing Cost
9. Other Expenses
10. Stock Adjustment
11. Production Overheads
12. Administrative Overheads
13. Selling and Distribution Overheads
14. Interest and Financial Charges
The information in this annexure may be used for comparing value addition
and Cenvat / PLA payment ratio.
Annexure 7
The information in this Annexure is to be reported for company as a whole.
The annexure contains information about profit as per cost accounts, various
incomes and expenses not considered for costing and reconciliation of profit
134
as per cost accounts with profit before tax shown in the annual accounts of the
company.
As per generally accepted cost accounting principles (GACAP), income and
expenses that are abnormal in nature or purely financial in nature are not
considered as a part of cost accounts for computation of cost of production
and sales.
The details provided in this annexure may be useful in following:-
1. To ascertain applicability of excise duty / service tax on various other
income accounted in the books of account.
2. The information with respect to profit / loss on sale of capital goods may
be used in verifying applicability of Rule 3(5) of Cenvat Credit Rules,
2004.
Annexure 8
The information in this annexure contains statement of value addition and
distribution of earning for company as a whole. Value addition is to be
computed based on audited financial data and not based on cost data. The
information in this annexure is useful in comparing the ratio of payment of
excise duty from Cenvat credit and PLA payment.
Annexure 9
This Annexure contains information in respect of financial position and ratio
analysis for the company as a whole. The information may be useful in
understanding the trend analysis.
135
Annexure 10
This Annexure contents details of transactions with related party and is to be
reported for company as a whole. The report is considered as incomplete in
absence of the information on normal price & basis thereof. The information
given in this Annexure is to be in line with Accounting Standard AS-18 issued
by the Institute of Chartered Accountants of India. The Prices shown in this
annexure are inclusive of the Excise Duty, VAT/CST and other levies, as
applicable. Normal Market Price means the price at which transaction has
been made with other non-related parties at the time of transaction.
The information in this annexure may be useful in following,
1. Ascertaining applicability of Central Excise Valuation Rules, 2000, in
particular valuation of goods transferred to other units for captive
consumption or trading.
2. Working out Service Tax liability in the case of services provided to or
received from Associated Enterprises.
Annexure 11
The information for the said Annexure is required to be given for company as
a whole. This Annexure contains information with respect to duties and taxes
payable, paid and recovered and also interest, penalties paid by the assessee.
The information in this annexure contains details of Assessable Value, Excise
Duty, Service Tax, and Education Cess & Higher Education Cess on Excise
duty & VAT, CST. Since Tax Base for Excise & VAT are different the same
needs to be shown separately. The details in this annexure need to be reported
chapter heading wise. The information about taxes payable & paid through
Cenvat & PLA is also available in this annexure.
136
The details in respect of duties and taxes paid and recovered are to be shown
separately in this annexure. The difference in taxes/ duty paid, payable and
recovered are mainly on account of following reasons –
1. Cenvat Credit utilised/reversed but corresponding entry for the same has
not passed in books of account.
2. Refund of Cenvat credit under Rule 5 of the Cenvat Credit Rules, received
from excise not accounted correctly in Cenvat credit register / books of
account.
3. Interest, penalty, Misc Charges paid through PLA Not accounted for in
ledger.
4. Debit Notes & Credit Notes issued but not accounted properly while
determining the duty liability, service tax.
5. Duties and Taxes recovered from the customers but not accounted
correctly.
6. Excise duty payable on free samples.
This Annexure is specifically designed for Indirect Tax Compliance.
Performance Appraisal Report
The Companies (Cost Audit Report) rules 2011 notified by the Ministry of
Corporate Affairs vide GSR 430(E) dated 3rd June 2011 mandates submission
of Performance Appraisal Report in Form III to the Board of Directors of the
Auditee Company and is not required to be filed to the Central Government
alongwith the Cost Audit Report. The Performance Appraisal Report is
popularly referred as Form-III reporting to Board. This is a landmark in the
history of companies in India, as this is the first time that a statutory
prescription has been notified for an external Auditor to prepare and submit a
Performance Appraisal Report to the Company management. Performance
137
Appraisal Report contains performance measures about the company’s
products, services and the processes. Form-III reporting contains performance
indicators such as knowing how well the company is doing, where it is
meeting its goals, whether its customers are satisfied, and whether appropriate
actions have been taken to improve the efficiency and whether improvements
are necessary etc. It is concerned with providing the Board with information
that it “should know” to take suitable actions to improve business
performance. The Performance Appraisal Report is more on principal based
than format driven. The Report helps the management in tax compliances.
3.13 Review of thesis presented as a part of study
3.13.1 Student Works- LLM thesis - University of Georgia School of Law
Title: The Challenges of Tax Collection in Developing Economies (with
Special Reference to India) by Pramod K. Rai, University of Georgia School
of Law
Page no 1052 The Chartered Accountant, January 2006.
Most developing and underdeveloped countries, including India, are
characterized by the existence, in greater degree of unutilized manpower on
the one hand and of unexploited natural resources on the other, but they have
aspirations to become developed countries. Developing countries are trying to
fulfill the increasing developmental needs of their country and people by way
of public expenditure within their limited resources. Indirect taxes are a major
contributor of the revenue in developing economies.
138
Central Excise Duty on goods manufactured/produced domestically and
Customs Duties on imported goods constitute the two major sources of
indirect taxes in India and represent more than 60 percent of central tax
revenue. But revenue receipts from Customs and Excise are on the decline due
to World Trade Organization (WTO) commitments and rationalization of
commodity duties. Therefore, governments of developing economies must
find alternative sources of revenue and must pay more attention especially to
direct taxes. The tax systems of these countries should be designed to reduce
the risks of macroeconomic instability by improving the organization and
operation of tax administration.
This paper has focused on the dispute resolution system of central excise
cases. The dispute resolution systems of other taxes are the same with minor
variations.
3.13.2 An Analytical Study for Redesigning of Central Excise Audit
Procedure for SSI Units with reference to Nasik Industrial Estate
A thesis submitted to Yashwantrao Chavan Open University, Nasik for the
Degree of Doctor of Philosophy in Management by Mrs Shilpa Parkhi. The
thesis mainly discusses the aspects related to audits of small scale units but no
discussion on the tax planning was found in it.
139
3.14 Report of the Comptroller and Auditor General of India on
Indirect Taxes (Central Excise and Service Tax) for the year ended
March 201211.
Report of the Comptroller and Auditor General of India on Indirect Taxes
(Central Excise and Service Tax) for the year ended March 2012 was laid on
the table of Lok Sabha and Rajya Sabha on 23rd August 2013.
The Audit of Revenue Receipts – Indirect Taxes of the Union Government is
conducted under Sec 16 of the Comptroller and Auditor General of India’s
(Duties, Powers and conditions of Service) Act, 1971 and the Report has been
prepared for submission to the President of India under Article 151(1) of the
Constitution of India.
The Report contains 239 audit observations pertaining to Central Excise
Duties and Service Tax, having a total revenue implication totaling Rs. 569.55
Crores.
Following significant findings are reported in the said Report.
a) Indirect Tax revenues as a percentage of Gross Domestic Product
decreased from 5.24% in FY2002-03 to 4.38% in FY 2011-12. During
the same period, Central Excise Revenues (PLA) as a percentage of
GDP declined from 3.25in FY03 to 1.61 in Fy12 and Service Tax
revenues as a percentage of GDP rose to 1.09% from 0.16%.
140
b) Revenues forgone on account of Central Excise exemptions continued
during FY12. Exemptions u/s 5A(1) of the Central Excise Act
amounted to Rs. 1,95,590/- Crore which consist of Rs. 1,79,453/-
Crore in general exemptions and Rs.16137/- Crore in area based
exemptions which is 135% of the revenues from Central Excise.
c) Cases involving Central Excise Duty of Rs.54172.65 Crore were
pending as on 31st March 2012 with different authorities for
adjudication / final decision. The figure in respect of service tax was
even higher at Rs. 73274.74 Crore.
d) Nearly 50% of Service Tax Assessee paying revenue over Rs. 1 Crore
annually and due for audit by Central Excise and Service Tax
department remained unaudited during FY 2011-12.
e) 634 audit paragraphs involving Central Excise duty totaling
Rs.1429.42 Crore were reported during the last five years. The
Government had accepted audit observations in 502 paragraphs
involving Rs.533.08 Crore and had recovered Rs.185.09 Crore.
f) 858 audit paragraphs involving service tax totaling Rs.1519.42 Crore
were reported during the last 5 years. The Government had accepted
audit observations in 793 audit paragraphs involving Rs.1208.26 Crore
and had recovered Rs.353.85 Crore.
141
g) Instances of incorrect availing/ utilization of Cenvat credit, short
payment of duty / tax and nonpayment of interest on delayed payments
involving revenue implications of Rs. 61.44 Core and Rs.478.04 Crore
in Central Excise and Service Tax respectively were observed.
h) Instances of deficiencies, in scrutiny and internal audit process,
ineffective call book review and non recovery of Government dues by
departmental officers were also observed. Duty / Tax involved were
Rs.30.07 Crore were observed.
i) Following major causes were observed.
Non reversal of Cenvat credit in respect of inputs and input
service used in generation of electricity not used in
manufacture.
Short payment of duty on petroleum products sold to oil
companies.
Nonpayment of service tax by Manpower Recruitment and
Supply agency services.
Incorrect availing of exemption under Service Tax.
Nonpayment of service tax in respect of import of services.
Premature availing and utilization of Cenvat credit.
Non maintenance of separate account for dutiable and
exempted products.
Non reversal of Cenvat credit relating to exempted services.
142
The following table traces the growth of Central Excise Collections during
FY03 to FY12. During FY12, Central Excise collections grew by 5.23%over
previous year. However, the share of Central Excise in gross revenues has
decreased from 38.06% (FT03) to 16.20% (FY12) during the period. Central
Excise revenues expressed as a percentage of GDP has suffered a similar
decline.
Table 3.2 – Revenue from Central Excise
Year CE(PLA) %Growth
Over
Previous
year
GDP CE as %
of GDP
Gross Tax
Revenues
CE as
a % of
Gross Tax
Revenue
FY03 82310 - 2530663 3.25 216266 38.06
FY04 90774 10.28 2837900 3.20 254348 35.69
FY05 99125 9.20 3242209 3.06 304958 32.50
FY06 111226 12.21 3693369 3.01 366152 30.38
FY07 117613 5.74 4294706 2.74 473512 24.84
FY08 123611 5.10 4987090 2.48 593147 20.84
FY09 108613 -12.13 5630063 1.93 605298 17.94
FY10 102991 -5.18 6477827 1.59 624527 16.49
FY11 137701 33.70 7795313 1.77 793307 17.36
FY12 144901 5.23 8974947 1.61 889118 16.30
From the above table, it can be inferred that Cenvat credit utilization shows
increasing trend.
143
The Report also observes that following are Top Revenue Yielding
Commodities and Services.
Table 3.3 -Revenue share of major commodities in FY12
Commodity Revenue share
Petroleum 46%
Tobacco 11%
Iron and Steel 9%
Motor Vehicles 6%
Chemicals 6%
Cement 5%
Machinery 4%
Others 13%
Table 3.4 -Revenue share of Services in FY12
Service Revenue Rs. Cr.
Banking and Financial Services 5875.91
Telecommunication Services 5402.45
Business Auxiliary Services 5255.64
General Insurance 5233.57
Business Support Services 4344.88
Renting of Immovable Property 4339.77
Works Contract 4179.00
Manpower Recruitment 3847.14
Maintenance and Repair Services 3494.98
Goods Transport by Road / GTA 3407.24
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Central Excise and Service Tax receipts and Cost of Collection
The report provides information on Cost of Collection of Indirect Taxes. It is
observed that cost of collection of Indirect Taxes is always less than 1% of the
tax collection.
Table 3.5 – Cost of Collection of Indirect Taxes.
Year Central
Excise
Service
Tax
Total
Receipts
Cost of
Collection
As a% of
Total
Receipts
FY03 82310 4122 86432 703 0.81%
FY04 90774 7891 98664 751 0.76%
FY05 99125 14200 113324 826 0.73%
FY06 111226 23055 134281 895 0.67%
FY07 117613 37598 155211 975 0.63%
FY08 123611 51302 174912 1107 0.63%
FY09 108613 60941 169554 1650 0.97%
FY10 102991 58422 161413 2127 1.32%
FY11 137901 71016 208917 2072 0.99%
FY12 144540 97356 241896 2262 0.94%
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3.15 Official Website of Central Board of Excise and Customs -
www/cbec.gov.in
This is an official website of Central Board of Excise and Customs. It
provides very useful updated information with respect to Central Excise,
Service Tax and Customs Notifications, Circulars, Instructions, Budget
Provisions, Baggage Rules, Exchange Rate Notifications, Information under
Right to Information Act, Frequently Asked Questions and Transfers and
Postings of officers.
Observations
Out of all the sources those are explored for Review of Literature it has been
observed that various committees and scholars have addressed some aspects
of Indirect Taxes. However systematic efforts have not been made to study
various areas available for tax planning under Indirect Taxes and its impact on
the cost of production. An attempt therefore has been made by the researcher
to study these aspects in detail and offer suggestions for effective tax planning
and decision making at corporate level. The researcher has identified certain
areas where systematic efforts can be made by way of tax management and
tax planning which will help in reducing cost of product or service by non
conventional way .Thus, this chapter provides foundation on the basis of
which the objectives and hypothesis of the study are formed.
146
3.16 Exemptions under Central Excise
Introduction
The scope of Tax planning is much wider. It aims at reducing tax liability to
the minimum. Though it is an ongoing activity, it is futuristic in its approach
and results in substantial benefits over a period. It includes availing all
concessions and reliefs permissible under the law and arranges business
activities in the manner which will minimize the incidence of tax. Under
Central Excise, Customs and Service Tax, concessions are given either by
way of providing Nil rate of duty in the Tariff or by issuing exemption
notifications. Some exemptions are unconditional whereas in some cases, to
avail benefit certain conditions need to be fulfilled.
Central Excise Duty is payable on excisable goods manufactured or produced
in India. Excisable goods are those goods specified in the First Schedule to
Central Excise Tariff Act,1985. Goods which attract excise duty as per first
schedule to Central Excise Tariff are known as dutiable goods. Goods which
attract “Nil” rate of duty are called as non dutiable goods. Goods on which
duty is payable under notification issued by the government are called as
exempted goods. All dutiable, non dutiable and exempted goods are excisable
goods. Excise provisions are applicable to all dutiable or non dutiable. Excise
provisions are not applicable to non excisable goods as they are not mentioned
in tariff at all.
Central Excise Rules grant exemption from duty if goods are exported under
bond / undertaking except exports to Bhutan.
147
Since Special Economic Zones are governed by special SEZ Act, goods
manufactured in SEZ are ‘excluded excise goods’ and therefore no duty is
payable on goods manufactured in SEZ.
About Exemption Notifications
Section 5A (1) of the Central Excise Act, 1944 authorizes Central
Government to exempt excisable goods from excise duty if it is in the interest
of public. Based on the various provisions and analysis of decisions of Courts
and Tribunals, following information is compiled by the researcher for easy
understanding.
a) The exemption can be general or specific either absolute or subject to
any condition which is to be fulfilled before removal of goods.
b) The exemption can be from whole or part of excise duty leviable.
c) The exemption notification becomes effective on the date on which it
is issued for publication in gazette.
d) Exemption applies only to duty levied under Central Excise Act and
not to duty imposed under any other statute.
e) Since Notifications are issued under delegated legislative powers and
has legislative character, they have statutory force.
f) Notifications cannot have primacy over statutory rules.
g) Exemption is a concession given under legislative powers, it can be
withdrawn any time under the same powers.
h) Exemption can be granted with retrospective date but can be
withdrawn retrospectively only by the Parliament.
i) Some exemptions are optional but absolute exemption is compulsory.
148
j) If there are two provisions under which an assessee can claim some
benefit, the assessee can choose any one of it.
k) Simultaneous availment of two exemptions is permissible.
l) An exemption notification should be construed strictly. There is no
scope for any intendment or extended meaning. Also the interpretation
should be strict.
Presently there are more than 135 exemption notification in effect. The
various exemption notifications issued under Central Excise can be
classified as per following.
a) Exemption to small scale manufacturers.
b) Exemption to Job Work.
c) Exemption to goods captively consumed i.e. goods used within the
same factory of production.
d) Exemption to goods manufactured by village industry and marketed by
or with the assistance of Khadi and Village India Corporation or
certain specified goods manufactured in rural area.
e) Exemption to specified goods meant for repairing, reconditioning and
re engineering.
f) Exemption to goods sent abroad for exhibition in International Trade
Fair or for demonstration or carrying out tests or trials.
g) Exemptions to goods produced in or for technical, educational and
research institutes.
h) Exemptions to goods manufactured in Government factories, mines,
mints and prisons and defense production etc.
i) Exemption for goods cleared by four specific refineries in the North
East India.
j) Exemptions to solar and other natural energy, chulhas and nuclear fuel.
149
k) Exemptions to Export Oriented Units, Software Technology Park and
EHTP.
l) Exemption to goods meant for use in Export Goods / Services.
m) Exemption to Ship, Ship’s Stores and Ship Breaking.
n) Set off of duty on specified goods.
o) Exemptions to goods for specific use or purpose.
p) Exemptions to goods produced in specific areas like North East, J &K,
Uttarakhand, Himachal Pradesh, Sikkim and Kutch.
q) Effective rates of duty for goods of various chapters.
r) Export Promotion Schemes.
s) Miscellaneous Exemptions.
The important notifications are analyzed and researcher has made an attempt
to present how these are used effectively in tax planning.
3.16.1 Excise Exemption to Small Scale Industries. (SSI)
To encourage the growth of small scale industries, various benefits including
subsidies, grants, and exemptions from excise duty are given to SSI.
Notification No.8/2003-CE dt. 01.03.2003 is the basic notification granting
concessions to SSI under Central Excise.
Eligibility:-
SSI units having turnover less than Rs.4 Crores in the previous financial year
can avail benefit of the said notification. All industries irrespective of their
investment or number of employees are eligible for concession.
150
The SSI unit intending to avail benefit of the said Notification is not entitled
to avail Cenvat credit on inputs and input services. However, he can avail
Cenvat credit on capital goods but can utilize the same only after he starts
paying excise duty on the goods produced or manufactured by him.
Goods manufactured with other’s brand name are not eligible for the benefit
of the said notification. However, simultaneous availment of Cenvat and SSI
exemption permissible when SSI manufacturing with other’s brand name but
not in other case.
Following items are not eligible for SSI Exemption.
Chapter
Head
Item
0902 Tea, whether flavoured or not.
2101 Extracts , Essences and concentrates of coffee, tea, mate or
preparations thereof
2102 Yeast.
2103 Sauces and preparations thereof.
2104 Soups and broths and preparations thereof.
2105 Ice cream
2106 9020 Pan Masala
23 Residues and waste from food industries, Prepared Animal
Fodder.
24 Tobacco Products
30 Sterile absorbable surgical or dental yarns and sterile surgical
or dental adhesion barriers.
33012937 Sandalwood Oil
3605 Matches (except Bengal light)
151
Chapter
Head
Item
3701, 3702 Photographic plates and films.
3703 Photographic paper and paper board.
39 Articles of polyurethane foam.
50 to 63 Specific Textile products.
69 Ceramic Tiles
72 Stainless Steel Patties / pattas
7403 Refined copper and copper alloys
7407 Copper bar of refined copper and copper alloy.
7408 Copper wire with over 6 mm cross section.
7409 Copper plates, sheets, circles and strips exceeding).15 mm.
7414 Cloth, grill and netting of copper wire, expanded metal of
copper.
76 Aluminum circles whether trimmed or not.
84 Power driven pumps for water not confirming to BIS.
8701 to
8706
Tractors, Motor Vehicles, cars, chassis.
8711 motorcycles and mopeds.
9101, 9102 Watches having retail price more than Rs.500/-
9302 Revolvers and Pistols.
9303 Other firearms and similar devices.
9304 Other arms such as spring, gas or airguns and pistols.
96050010 Travel Sets for personal toilet.
Observation:- Most of the above items are eligible for concessional rate of
duty or exemption under other exemption notifications, though not under SSI
exemption.
152
Method of calculation of Turnover
SSI benefit is available to those manufacturers having turnover of less than
Rs.400 Lacs in the previous financial year. The notification uses the words
“first clearance on or after 1st April in any financial year”. Therefore the
exemption limit has to be calculated from the beginning of the year only.
Inclusions and Exclusions while calculating limit of Rs.400 Lakhs.
Exclusions
1. Export Turnover, except export to Nepal and Bhutan.
2. Export under Bond through merchant exporter.
3. Deemed export such as goods cleared to EOU, EHTP or STP unit
under CT3 form.
4. Turnover of non excisable goods.
5. Goods manufactured with other’s brand name cleared on payment of
duty.
6. Intermediate products or captive consumption when final product
eligible for SSI exemption.
7. Job work amounting to manufacture done under Notification Nos.
214/86-CE, 83/94-CE and 84/94-CE.
8. Job work or any other process or any activity, which does not amount
to manufacture.
9. Turnover of clearance of inputs as such.
10. Trading turnover.
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Inclusions
1. Turnover of goods exempted under other notifications.
2. Goods manufactured in rural area with other’s brand name.
3. Captive consumption if used in manufacture of final product which is
exempt under any other notification.
4. Export to Nepal or Bhutan.
5. Goods cleared with payment of duty.
SSI exemption is available to first clearances upto Rs. 150 Lakhs. SSI units
having turnover of less than Rs.400 Lakhs in the previous year are eligible to
avail benefit. These units are exempted from payment of excise duty upto first
clearances of Rs.150 Lakhs in the current year. Generally provisions for
calculation of turnover of Rs.400 Lakhs and Rs.150 Lakhs are similar.
However, the major distinction between the calculations of Rs.400 Lakhs and
Rs.150 Lakhs turnover is for the purpose of calculating Rs.150 Lakhs,
turnover of goods exempted under other notifications is not to be considered.
Clubbing of Turnover
As per Notification No.8/2003-CE SSI exemption is available if aggregate
value of clearances of all excisable goods for home consumption by a
manufacturer from one or more factories, or from a factory by one or more
manufacturers does not exceed the prescribed limit.
Sometimes, as a tax planning, a manufacturer starts another unit by same
name or even under another name by the same owner to avail benefit of SSI
Concession. If the other unit belongs to same proprietor or same partnership
154
firm or same company, the turnover of both units will be added together for
purpose of SSI concession. If such other unit is genuinely separate or
independent, their turnover is not required to be clubbed. However, if the
other unit is bogus or sham unit, the turnover of all such units will be clubbed
for the purpose of calculating SSI exemption limit. This is called as clubbing
of turnover.
It is pertinent to note that, there are various forms of ownership of an
undertaking such as proprietorship, partnership firm, private limited company,
public limited company, co operative society, trust etc. All these forms of
ownership have separate legal status and existence. Clubbing provisions can
be applied if units belong to the same entity such as same proprietor, same
company or same firm. Turnover of two different units owned by different
form of organizations cannot be clubbed. Even turnover of subsidiary cannot
be clubbed with the holding company.
The researcher has observed that opening a dummy unit is very common
method used by many assesees. This is not a proper tax planning but a
method. The researcher in one of the case has observed that a person engaged
in manufacture of PVC pipes and pipe fittings started 14 different units in the
name of his family members but the control, signing powers etc was with only
one person. There was financial flow back also amongst these units. The
manufactured goods were supplied to one customer only. The excise
department clubbed the turnover of all 14 units and ultimately he had to pay
duty, interest and 100% penalty on the turnover during last five years. The
wrong method used for tax planning proved to be costly. Therefore, while
availing benefit of SSI Exemption, one has to be very careful.
155
Procedural Concessions to SSI
1. SSI units have to pay excise duty on quarterly basis by 5th of the
following quarter. This benefit is available to SSI units who avail the
benefit of SSI Notification or even otherwise also. This helps SSI unit
to arrange cash flow and save interest cost.
2. SSI units not covered under excise provisions have to follow
simplified procedure for export.
3. Rule 4(2) (a) of Cenvat credit Rules provides that Cenvat credit on
capital goods is to be availed in two installments. One upto 50% in the
year of receipt of capital goods and balance 50% in any subsequent
following year. However as per second proviso to the Rule 4(2)(a) of
Cenvat Credit Rules, SSI units can avail entire Cenvat credit on capital
goods in first year. This helps SSI unit to arrange cash flow and save
interest cost.
4. SSI units availing exemption under Noti. No.8/2003-CE having
turnover below Rs.150 Lakhs are exempt from registration under
central excise and do not have to follow any excise formality. Thus
SSI units can save in administrative cost.
5. Excise officers including inspectors, preventive officers and audit
parties can visit SSI units only with the prior approval and specific
permission of the Assistant Commissioner. Thus SSI units can save
administrative cost and time in attending excise officials.
156
6. Government has established help centers for SSI units in associations
with local chamber of commerce / associations.
Options available to SSI unit
1. SSI unit can avail full exemption upto Rs.1.5 Crores and pay normal
duty thereafter. Such units can avail Cenvat credit on inputs and input
services only after reaching turnover of Rs.1.5 Crores in the financial
year,
2. SSI unit can pay full excise duty (i.e. 12.36% on AV) and avail Cenvat
credit.
3. SSI unit can opt out from SSI exemption scheme anytime during the
year. However, once he opts out from the scheme, he can not avail
benefit during the said financial year.
Suitability of option 1
For Manufacturer:-
1) When final product is sold to ultimate consumer, who does not use
it in further processing and / or where no Cenvat credit is available
to buyer, the product becomes cheaper approximately by 3 to 4 %
to buyer and therefore sale of the product can be increased. By
increasing sale of goods, production and capacity utilization can be
improved and fixed cost per unit is reduced. Thus the manufacturer
achieves two benefits- a) increase in sale and b) reduction in fixed
cost per unit. Examples of the products under this category are
157
small hand tools which are generally used by mechanics or
carpenters, printing ink used by printers, soaps, cosmetic articles,
toothpaste, toothbrush, furniture etc. This option is generally
followed by the manufacturers who do not clear their products to
industrial consumer but are sold in the market only.
2) In case of substantial exports by SSI unit, he can avail Cenvat
credit; pay duty and claim rebate after export of goods or can claim
refund of unutilized Cenvat credit under rule 5 of the Cenvat credit
rules. However, such refund is only of Cenvat of inputs and input
services.
3) However, compliance cost of SSI , i.e. salary, time spent by top
management , stationery, legal advisor , litigations etc as a
percentage of duty paid was found to be 4.68% in the case of small
scale industry, whereas it was found to be 0.84% in case of large
units where turnover was more than Rs.200 Crores (Ref
V.S.Datey- Central Excise -5.3).
For Buyer:-
1) Branded Goods:- SSI exemption is available to branded goods
manufactured in rural area. If branded goods are manufactured in
rural area, no duty is payable upto first clearances of Rs.150 Lacs.
But if the same branded goods are manufactured in urban area,
benefit of SSI exemption is not available and therefore excise duty
is payable from the first rupee. Therefore buyer, who sells his
products under brand name can use this for make or buy decision.
The buyer can provide necessary technical support to SSI units and
158
procure the goods at a cheaper rate at least by 4 %. Buyer can sell
such products under trading and become competitive in the market.
Observations
The researcher noticed that this option has been used by the following
persons in a different capacity.
Buyer
1. A leading Branded Tools Manufacturer of hand tools such as
screwdrivers, spanners etc. has used this option. Their products
are mainly purchased by the service providers such as electricians,
carpenters, motor mechanics. Generally these service providers do
not avail Cenvat credit and therefore prefer buying tools at a
cheaper rate. The Company provided necessary technical support
to buyers and also ensures quality of the tools manufactured by
their vendors / job worker. The Company sells their goods under
brand name.
2. A Company is engaged in manufacture of home appliances such as
mixers, juicers, tea makers etc. Their products are generally sold to
domestic users and are using this method in make or buy decision.
3. A Company is engaged in manufacture of electrical fans. Generally
Cenvat credit on fans is not available as they are used in office.
Also the product is generally sold to domestic users. The Company
is procuring Fans from SSI units under the brand name. The
Company has been using this method in make or buy decision.
159
4. A company is engaged in manufacture of PVC pipes and fittings.
Their product is generally sold to farmers or construction industry
where customers are not entitled to avail Cenvat credit on pipes
and pipe fittings. The Company is using this method in getting the
products manufactured from SSI units.
Government:-
It is administratively inconvenient and costly to collect revenue from
numerous small and tiny units. (1998(104) ELTA29).Therefore
providing concessions to SSI units also provides administrative
benefits to Government.
Suitability of option 2:-
1) When buyer is an industrial unit and uses the goods procured from
SSI as inputs or capital goods and can claim Cenvat credit on it,
the effective cost will be lower as SSI unit can claim Cenvat credit
on his inputs, input services and capital goods. Also in case of SSI,
administrative cost, employee costs are lower than big units.
Therefore buyers can buy goods from SSI at lower prices. This
option is used by the buyers who are in a position to avail Cenvat
credit of the duty paid by the SSI units.
160
3.16.2 Area Based Exemptions
To encourage development in backward area, as a policy exemption from
excise duty, for the period of ten years has been granted to goods
manufactured by new units or existing units undertaking substantial expansion
in the following areas.
Table 3.6 – Area Based Exemptions
Area Notification Numbers.(Effective as of
date).
Kutch District of Gujarat 39/2001-CE dt.31.01.2001
Jammu and Kashmir 1/2010-CE dt.06.02.2010
North Eastern Region and Sikkim 20/2007-CE dt.25.04.2007
Himachal Pradesh 49/2003-CE dt.10.06.2003
Uttarakhand 50/2003-CE dt. 10.06.2003
Scheme for exemption in Kutch, Jammu & Kashmir and North Eastern
Region & Sikkim
Till 31.03.2008, the scheme provided that the units in the said area can avail
Cenvat credit and pay excise duty on the final products. Entire duty paid in
cash / through Personal Ledger Account (PLA) is refunded next month or self
credit was allowed. The provision is that duty should be paid first and then
refund can be claimed. The exemption notifications provide for refund of
excise duty paid under Central Excise Act. Refund of Education Cess and
Higher Education cess is not permissible since Education Cess and Higher
Education Cess are levied under Finance Act.
161
From 01.04.2008, the scheme has been amended to provide refund only to the
extent of duty payable on value addition. Standard productwise value addition
has been specified in the circulars / notifications issued by CBE & C. If any
manufacturer claims that his actual value addition is much higher than what is
specified, he can apply to Asst. / Deputy Commissioner of Excise to get value
addition rate fixed for his product.
The exemption does not apply to following goods.1
i) Pan Masala falling under Chapter 21 of the First Schedule to CETA.
ii) Goods falling under Ch 24 of the first Schedule to CETA, i.e. Tobacco
and manufactured Tobacco Substitutes.
iii) Plastic carry bags of less than 20 microns as specified by the Ministry
of Environment and Forests Notification No. S.O.705 (E)dt. 2nd
September 1999 and S.O. 698 dt. 17th June 2003.
The exemption does not apply to goods manufactured by following .1
i) Numaligarh Refineries Ltd. (NRL).
ii) Bongaigaon Refinery and Petrochemicals Ltd (BRPL).
iii) Indian Oil Corporation, Guwahati.
iv) Assam Oil Division, Indian Oil Corporation, Digboi.
The Exemption does not apply to such goods which have been subjected to
only one or more of the following processes, namely.1
i) Preservation during storage.
ii) Cleaning operations.
iii) Packing and repacking of such goods in a unit container or
iv) Labeling or relabeling of containers,
v) Sorting,
vi) Declaration or alteration of retail price
162
vii)Have not been subjected to any other process or processes amounting
to manufacture in the States of Assam or Tripura or Mizoram or
Manipal or Nagaland or Arunachal Pradesh or Sikkim.
Exemption to New Units in Himachal Pradesh and Uttarakhand.
Notification No.49/2003-CE and 50/2003-CE provide exemption from duty
to goods manufactured by units in Himachal Pradesh and Uttarakhand
respectively. The salient features of the scheme enumerated in the said
notifications and subsequent clarifications issued by Central Board of Excise
and Customs (CBE&C) are as per the following.
Applicability
Scheme for Exemption in J& K, Kutch and North East Area availment of
Cenvat credit and Refund of duty paid through PLA (Personal Ledger
Account). Whereas in case of units in Himachal Pradesh and Uttarakhand
there is a direct exemption from excise duty on the goods manufactured by
units in Uttarakhand and Himachal Pradesh.
The benefit is available to new industrial units, which have commenced
commercial production on or after 07.01.2003 but not later than 31st March
2010. Vide circular No.939/29/2010-CX dt. 22.12.2010, CBE&C has clarified
that any new unit which has undergone substantial expansion that commences
commercial production before the cut-off date is entitled to excise duty
exemption in respect of excisable goods (other than appearing in negative list)
manufactured and cleared for a period of ten years from the date of
commencement of commercial production. The provisions of these
notifications do not place a bar or restriction on any addition/ modification in
163
the plant or machinery or on the production of new products by an eligible
unit after the cut-off date and during exemption period of ten years as per the
notification. The benefit of excise duty exemption under the notifications
would continue to be available to eligible industrial units. However, the period
of exemption would remain ten years and would not get extended on account
of such modifications or additions under any circumstances.
Industrial units existing before 7th Jan 2003, but which have undertaken
substantial expansion by way of increase in installed capacity by not less than
twenty five percent, on or after 7th January 2003, but have commenced
commercial production from such expanded capacity, not later than 31st
March 2010 will be eligible for exemption.
The exemption shall apply to units for a period not exceeding ten years from
the date of publication of the said notifications in the official gazette or from
the date of commencement of commercial production, whichever is later.
Vide circular No.960/03/2012-CX dt. 17.02.2012, CBE&C has clarified that
as the exemption is extended to a unit, any change in the ownership would not
jeopardize the admissibility of exemption for the remaining part of the ten
year exemption period subject to the condition that a new owner exercises his
option in writing to avail the benefit of the notification before effecting the
first clearance.
It is further clarified that when a unit availing the exemption physically shifts
to new location within the areas specified in the exemption notification, the
exemption should be available for the residual period of exemption.
164
The Exemption does not apply to such goods which have been subjected to
only one or more of the following processes, namely.1
i) Preservation during storage.
ii) Cleaning operations.
iii) Packing and repacking of such goods in a unit container or
iv) Labeling or relabeling of containers,
v) Sorting,
vi) Declaration or alteration of retail price
vii) Have not been subjected to any other process or processes amounting
to manufacture in the States of Uttarakhand and Himachal Pradesh.
Notification Nos. 49/2003-CE and 50/2003-CE contain a list of goods not
eligible for the exemption. This includes the Tobacco and tobacco products
including cigarettes and pan masala, thermal power plant, floor mill or rice
mill , coal washeries, foundries using coal, mineral fuels, mineral oils and
products of their distillations, bituminous substances, mineral waxes,
Synthetic rubber products, cement clinkers, Explosives, mineral and chemical
fertilizers, Insecticides, fungicides, herbicides and pesticides, Fiber Glass and
articles thereof, pulp and paper, Branded aerated water or non fruit based soft
drinks, Plastics and articles thereof etc.
Observations:-
From the data collected, it was observed that the said benefit has been availed
successfully by many manufacturing units. The details of the same are given
as case studies in the Chapter – Data Analysis.
165
3.16.3 Export Oriented Units. (EOU)
Export Oriented Undertaking (EOU) schemes are under control of Ministry of
Commerce. Chapter 6 of Foreign Trade Policy contains basic policy of EOU
and Chapter 6 of Handbook of Procedures – Volume I contains procedural
aspects.
Customs Manual, issued by CBE& C contains basic provisions related to
EOU.
EOU can import inputs and capital goods without payment of customs duty.
EOU can procure indigenous inputs and capital goods without payment of
excise duty. EOU have to export their final product. However they are
allowed to sell part of their final product within India. Sale in India is called as
sale in Domestic Tariff Area (DTA). Every EOU has to achieve positive net
foreign Exchange Earning (NFE).
Tax provisions relating to EOU
The provisions related to EOU are scattered in Foreign Trade Policy, Central
Excise Act, Customs Act, Income Tax Act and various other Acts and
Notifications. All these statutes have to be read as a whole and not in isolation
since they are series of statutes relating to same subject matter.
EOU units have to import inputs and capital goods and also have to export
their final product. Therefore Customs Law is very closely involved in
implementation and execution of EOU. Exemption Notifications are issued u/s
25(1) of the Customs Act.
166
Following are the important exemptions and clarifications related to EOU.
Exemption from Customs Duty- Noti. No. 52/2203-Cus Dt.31.03.2003
Exemption from Anti Dumping Duty Noti. No.5/94-Cus dt.18.01.1994.
Exemption to goods supplied to EOU/STP/EHTP- Noti. No.22/2003-CE
dt.31.03.2003.
Warehousing under EOU/EHTP/STP/BTP schemes. - Circular
No.851/9/2007-CX dt 03.05.2007 by CBE&C.
Exemption to Goods exported by EOU – Noti. No. 24/2003-CE
dt.31.03.2003.
Excise provisions and benefits available to EOU
EOU can procure inputs and capital goods from Indian manufacturer
without payment of Central Excise Duty.
EOU can sell their final product in India at the rate applicable to
imports of such goods. Part of their product, within the prescribed
limit, can be sold in India at a concessional rate of duty.
EOU have to follow Central Excise Procedures and file monthly
Return ER 2.
Supplies by Indian manufacturers to EOU are treated as deemed
exports and the supplier is entitled to get benefits of deemed exports.
Supplier to EOU can clear their final product to EOU without payment
of Excise Duty.
Supplier of EOU can avail Cenvat credit on inputs, input services and
capital goods. He can utilize the Cenvat credit for payment of duty on
other final products.
167
EOU can avail Cenvat credit on inputs, input services and capital
goods.
EOU can claim Refund of Cenvat credit of excise duty paid on inputs
and service tax paid on input services under Rule 5 of the Cenvat
Credit Rules, 2005.
EOU can export without payment of duty only. They cannot export
under Rebate Claim.
EOU can supply goods under Advance Authorization.
Supply to another EOU is not treated as DTA Sale.
EOU are entitled to reimbursement of duty paid on Fuel procured from
domestic oil companies as per the drawback rate.
The buyer from EOU can avail Cenvat credit of duty paid by EOU on
domestic clearances, as per the formula.
Sale of surplus electricity generated by EOU will not be counted
against domestic sale entitlement.
Basic provisions of scheme of Export Oriented Units (EOU), Export
Hardware Technology Park (EHTP), Software Technology Park (STP)
and Bio-Technology Park (BTP) are identical, with some variations.
3.16.4 Job Work under Central Excise
Job Work means supplying the material by a customer to a job worker who
carries out certain processes and returns the material to customer after
carrying out the processes.
In engineering industry, it is called as job work or sub contracting. In
Chemical and Textile Industry, it is called as processing and in Pharma and
Drug industry, it is a Loan License Scheme.
168
As per Rule 2(n) of the Cenvat Credit Rules,2004- Job work means processing
or working upon of raw material or semi finished goods supplied to job
worker , so as to complete a part or whole of the process resulting in the
manufacture or finishing of an article or any operation which is essential for
the aforesaid process. Same definition is given in the Explanation I to Noti.
No. 214/86-CE dt.25.03.1986.
Rule 4(5) (a) of the Cenvat Credit Rules, 2004 also provides that intermediate
product can be manufactured by a job worker. Material received by a
manufacturer under Cenvat can be sent to job worker for processing and can
be brought back by the manufacturer for further processing under Cenvat
Credit Rule 4(5)(a). In such case there is no duty liability on the job worker
and he is exempted from the same.
The supplier of manufacturer undertakes payment of duty on final products.
Hence, goods manufactured under Cenvat Provisions are nor exempted goods
and therefore proportionate reversal of Cenvat credit on inputs and input
service used in job work is not required to be reversed under Rule 6(3) of the
Cenvat Credit Rules,2004.
Salient features of Job work under Central Excise.
Job worker can use of own material or incidental material in the job
work.
Job work is permissible even if identity of inputs get lost in the
process.
Duty liability is of a job worker as he is a manufacturer. As per Rule
10A of the Central Excise Valuation Rules, duty is payable on the
basis of price at which raw material supplier sells the final product in
169
the market. However, if supplier of raw material is not selling the
product but consuming himself , duty can be paid on the basis of
material cost plus job charges , as held by Hon. Supreme Court in the
case of Ujagar Prints Vs UOI – 1989(38)ELT535 (SC 5 Member
Bench).
If no duty is payable on final product, exemption under Noti.
No.214/86-CE and exemption to job worker is not available. In such
cases, duty liability is on the job worker and not on the raw material
supplier. Where the final product is dutiable, the liability to pay excise
duty is on the supplier of raw material.
Direct dispatch from the place of job worker is possible with
permission of the jurisdictional Assistant / Dy. Commissioner of
Central Excise.
Job worker can take Cenvat credit on the basis of invoice but job
worker cannot avail Cenvat credit if raw material supplier has already
availed the same.
Relevant Rules and Notifications
Rule 4(5)(a) of the Cenvat Credit Rules,2004.
Rule 4(6) of the Cenvat Credit Rules, 2004, if goods are to be cleared
from job workers premises.
Noti. No.214/86-CE dt.25.03.1986 - Exemption to job work when
excise duty is payable on final product.
Noti.No.83/94-CE dt. 11.04.1994 and Noti. No.84/94-CE
dt.11.04.1994 – Exemption to Job work if material sent by exempted
SSI units.
170
3.16.5 Captive Consumption.
Excise Duty is on manufacture of goods. Therefore, duty is payable as soon as
goods are manufactured within the factory even as an intermediate products, if
they are marketable at that stage. If intermediate product is used in continuous
process, duty is not payable. Use of goods within the factory in called as
captive consumption. Duty is payable on captive consumption also. Duty is
payable when intermediate goods or partly processed goods are transferred to
other factory of the same manufacturer also.
Considering the inconvenience to manufacturer, if duty has to be paid on
intermediate products also, exemption has been granted under Noti. No.
67/95-CE dt. 16.03.1995. As per the said notification , if the intermediate
product manufactured within the factory and consumed captively for
following purpose is exempt from duty :-
a) For manufacture of capital goods as defined in Cenvat Credit Rules i.e.
capital goods eligible for Cenvat credit.
b) Used for in or in relation to manufacture of final products eligible for
Cenvat, made from inputs which are eligible for Cenvat.
In following cases, excise duty is payable on intermediate products.
a) If final product is exempt from excise duty, excise duty is payable on
intermediate products.
b) When goods are transferred from one factory to another factory of the
same manufacturer for further manufacturer.
171
Valuation in case of captive consumption
As per Rule 8 of the Central Excise Valuation Rules, 2000, in case of captive
consumption, value for the purpose of excise duty shall be one hundred and
ten percent of the cost of production or manufacture of such goods.
CBE&C, vide circular No. 643/34/2002-CX dt. 01.07.2002 has clarified that if
same goods are partly sold by the assessee and partly consumed captively,
goods sold have to be assessed on the basis of transaction value and goods
captively consumed should be assessed on basis of rule 8.
The rule 8 has been amended vide Notification No. 14/2013-CE(NT) to
provide that “ where whole or part of the excisable goods are not sold by the
assessee but are consumed by him or on his behalf in the production or
manufacture of other articles, the value of such goods that are consumed shall
be one hundred and ten percent of the cost of production or manufacture of
such goods.”.
The Institute of Cost Accountants of India has issued Cost Accounting
Standard 4 – CAS4 titled “Cost of Production for Captive Consumption”,
which deals with determination of cost of production for captive
consumption. As per CAS4, Cost of Production shall consist of cost of
material consumed, direct wages and salaries, direct expenses, works
overheads, quality control cost, research and development cost, packing cost,
administrative overheads relating to production. Necessary adjustments
CBE&C vide circular No.692/8/2003 dt. 13.02.2003 has clarified that in case
of captive consumption, cost calculations should be as per CAS4 only.
172
Captive Consumption – Relevant Notifications
Exemption to all capital goods and specified inputs if captively consumed
within the factory of production of excisable goods. –Noti.No.67/95-CE
dt.16.03.1995.
Exemption to excisable goods used within the factory of production for
manufacture of final product subject to certain specified notifications. –
Noti.No.83/92-CE dt.16.09.1992.
3.16.6 Exemption in case of International Competitive Bidding.
Goods Supplied against International Competitive Bidding are exempted from
excise duty vide Noti. No.6/2006-CE dt.01.03.2006.
If goods are supplied against the international competitive bidding,
proportionate reversal of Cenvat credit is not required as per Cenvat Credit
Rules,2004.
Exemptions under Central Excise
The researcher has compiled details of various exemptions under Central
Excise, available to manufacturers.
The following table shows the details of various exemptions under Central
Excise, available to manufacturers.
173
Table 3.7 - General Exemptions under Central Excise Tariff
Sr.No
Particulars GENo
Notification No.
Remark
A Small Scale Exemption 1 8/2003CE dtd 1.3.2003
SSI Exemption to first clearance of specified goods upto the value of Rupees One Crore and fifty Lakh and full exemption to captive consumption for manufacturers having clearances not exceeding rupees four Crores in the preceding financial year and not availing Cenvat schemes.
B Job Work 2 83/94CE dtd11.4.1994
Exemption to goods specified in the SSI Exemption Notification No. 8/2003-C.E. and 9/2003-C.E., If manufactured on job work basis
3 84/94CE dtd11.4.1994
Exemption to goods specified in the SSI Exemption Notification No. 8/2003-C.E. and 9/2003-C.E., If cleared for Job Work
4 214/86CE dtd
25.3.1986
Exemption to specified items if manufactured in a factory as a job work and used in the manufacture of final products or cleared as such from the factory of supplier of raw
174
Sr.No
Particulars GENo
Notification No.
Remark
materials or semi-finished goods.
5 70/92CE dtd
17.6.1992
Exemption to goods manufactured in a factory as a job work and used by the specified undertakings in the manufacture of goods for supply of Ministry of Defence.
C Captive Consumption (Goods used within factory of production)
6 67/95CEdtd
16.3.1995
Exemption to all capital goods and specified inputs if captively consumed within the factory of production.
7 83/92CEdtd
16.9.1992
Exemption to all excisable goods used within the factory of production for manufacture of final product subject to the condition of certain specified notifications
8 10/96CEdtd
23.7.1996
Exemption to goods consumed within the factory of their production in the manufacture of specified goods.
D Cottage and Village Industry Products
9. 198/87CE dtd
23.7.1996
Exemption to genuine specified products of village industry, marketed by or with the assistance of K.V.I.C
175
Sr.No
Particulars GENo
Notification No.
Remark
10 88/88CEdtd
1.3.1988
Exemption to certain specified goods manufactured in rural areas by Co-operative/ K.V.I.C., etc.
E Repairing, Reconditioning and Re-Engineering
11 138/94CE dtd
10.11.1994
Exemption to specified goods meant for repairing, reconditioning and re-engineering.
F Exhibition and Trade Fairs
12 263/79CE dtd
22.9.1979
Exemption to goods sent abroad as exhibits for exhibition in International Trade Fair or for demonstration or carrying out tests or trials.
G Technical Educational and Research Institute
13 167/71CE dtd
11.9.1971
Exemption to goods procured in a technical, educational and research institute
14 10/97 CE dtd 1.3.1997
Exemption to certain goods supplied to specified research institute
15 13/99 CE dtd
28.2.1999
Exemption to goods designed and developed by public funded research institution, national laboratories and universities and manufactured by an Indian company.
176
Sr.No
Particulars GENo
Notification No.
Remark
H Goods Produced in Government Factories, Mines, Mints and Prisons and Defence production etc.
16 62/95CE dtd16.3.1995
Exemption to goods manufactured by Central Government factories.
17 63/95CE dtd16.3.1995
Exemption to goods manufactured by specified Units/ Institutions for use by Government Department or Defence Purpose.
18 64/95 CE dtd
16.3.1995
Exemption to goods supplied for defense and other specified purposes.
19 74/93CE dtd28.2.1993
Exemption to specified goods manufactured in a State Government factory and intended for use in any of its department.
I Gas and Oil Authorities/ Companies
20 29/2002CEdtd 13.5.2002
Effective rates of duty for goods cleared by 4 specified refineries in theNorth-East.
J Solar and other Natural Energy, Chulhas and Nuclear Fuel
21 62/91CE dtd25.7.1991
Exemption to improved chulhas (including smokeless chulhas) capable of burning wood, agro waste, cow dung, briquettes and coal.
22 130/94CE dtd
21.9.1994
Exemption to goods required for Nuclear Fuel Complex.
177
Sr.No
Particulars GENo
Notification No.
Remark
K Export Oriented Units, STP & EHTP
23 22/2003CE dtd
31.3.2003
Exemption to goods brought into EOU/STP/EHTP Units
24 23/2003CEDtd
31.3.2003
Exemption to DTA clearances of specified goods procured in EOU/ EHTP/STP
25 24/2003CE dtd
31.3.2003
Exemption to goods procured in EOU
L Goods Meant for use in Export Goods/ Services
26 147/89CE dtd
19.5.1989
Exemption to excisable capital goods, components etc. brought for use in the manufacture of jewellery for export.
27 34/2006CE dtd
14.6.2006
Exemption to good supplied to service provider under Served from India Scheme.
M Ship, Ship’s Stores and Ship Breaking
28 82/84CE dtd
31.3.1984
Exemption to capital goods, components and raw materialscleared for repair of goods falling under Heading 89.01, 89.02, 89.04, 89.05 (excluding floating or submersible drilling or production platforms) and 89.06
N Set-Off of Duty 29 221/86CE dtd
31.3.1984
Sett- off of duty on specified goods of Chapters 33,39,68,69 and 91 if manufactured from specified duty paid inputs
178
Sr.No
Particulars GENo
Notification No.
Remark
O Goods for specific use or purpose
30 65/95CE dtd16.3.1995
Exemption to goods manufactured in factories workshop and used for maintenance of the machinery installed in the factory.
31 108/95CE dtd
28.8.1995
Exemption to goods supplied to UN or specified International Organization.
32 3/2004 CE dtd 8.1.2004
Exemption to machinery, instrument, equipments and pipes used in water supply plants for agriculture and industrial use.
33 15/2010CE dtd
27.2.2010
Exemption to all items of machinery etc. for initial setting up of solar power generation project or facility.
34 33/2005CE dtd
8.9.2005
Exemption to machinery/ components for initial setting up of power generation project using non-conventional material.
P Goods produced in specific areas like North-East, J&K, Uttarakhand, Himachal Pradesh, Sikkim and Kutch (Gujarat)
35 32/99CE dtd
8.7.1999
Exemption to North-East States from excise duty and additional excise duty to goods cleared from a unit located in Growth Centre or Integrated
179
Sr.No
Particulars GENo
Notification No.
Remark
Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estates or Industrial Area or Commercial Estates or Scheme Area.
36 33/99CE dtd
8.7.1999
Exemption to specified goods of factories in North-East (Assam, Tripura, Meghalaya, Mizoram, Manipur, Nagaland, or Arunachal Pradesh)
37 Omitted38 39/2001CE
dtd31.7.2001
Exemption to all goods (except those specified in Annexure) cleared from units in Kutch (Gujarat)
39 56/2005CE dtd
4.11.2002
Exemption to all goods (except cigarettes, cigars, tobacco and its products and soft drinks and their concentrates) produced in Jammu & Kashmir by units located in Industrial Growth Centre, Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or
180
Sr.No
Particulars GENo
Notification No.
Remark
Commercial Estate Scheme Area
40 57/2002CE dtd
14.11.2002
Exemption to specified goods produced by units in Jammu and Kashmir.
40A 1/2010 CE dtd 6.2.2010
Exemption to all goods except Cigarettes, Cigars, tobacco products and soft drinks or their concentrates cleared from new units (established / Expended after 6-2-2010) in J&k
41 49/2003 CE dtd
10.6.2003
Exemption to specific goods cleared from new units in Uttarakhand and Himachal Pradesh
42 50/2003CEdtd
10.6.2003
Exemption to goods other than specified goods cleared from units located in the Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Estate or Industrial Area or Commercial Estate or Scheme Area of Uttarakhand and Himachal Pradesh.
43 56/2003 CE dtd
25-6-2003
Exemption to specified goods cleared from new units in Sikkim
181
Sr.No
Particulars GENo
Notification No.
Remark
44 71/2003 CE dtd
9-9-2003
Exemption to all goods (except tobacco, tobacco products; specified plastic carry bags; mineral oils; Branded aerated beverages; or pollution causing paper and paper products) cleared from specified areas of Sikkim by unit in Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area, from excise duty other than duty paid on account of Cenvat credit.
45 20/2007CE dtd
25-4-2007
Exemption to North East including Sikkim on all goods (except as specified) cleared from Assam, Tripura, Meghalaya,Mizoram, Manipur,Nagaland, Arunachal Pradesh or Sikkim from duty paid other than by utilization of Cenvat credit
182
Sr.No
Particulars GENo
Notification No.
Remark
Q Effective Rates of Duty for Goods of various chapters
46 1/2011 CE dtd
1.3.2011
Effective rate of duty of 2% for specified goods when no Cenvat credit on inputs or input services availed
47 2/2011 CE dtd
1.3.2011
Effective rate of duty of 6% for specified goods
48 27/2011CE dtd
24.3.2011
Exemption to waste, parings and scrap arising during manufacture of goods having effective rate of 1% duty under Noti. No.1/2011-C.E and 20/2011-C.E.
49 Omitted50 12/2012CE
dtd17.3.2012
Effective rates of duty for specified goods of chapter 1 to 98
51 OmittedR Export promotion
schemes & Exemptions51A 29/2012CE
dtd9.7.2012
Exemption to all excisable goods when procured against a Focus scheme (FPS) duty credit scrip
51B 30/2012CE dtd
9.7.2012
Exemption to all excisable capital goods from Excise duty when procured against a Focus Market Scheme (FMS) duty credit scrip.
51C 31/2012CE dtd
9.7.2012
Exemption to specified excisable capital goods from Excise Duty when
183
Sr.No
Particulars GENo
Notification No.
Remark
procured from domestic manufacturer against Agri. Infrastructure Incentive Scrip duty credit scrip
51D 32/2012CE dtd
9.7.2012
Exemption to all excisable goods when procured a VKGUY (Special Agriculture and Village Industry Scheme) duty credit scrip
51E 33/2012CE dtd
9.7.2012
Exemption to excisable capital goods when procured against a Status Holder Incentive Scheme duty credit scrip
51F 2/2013CE dtd
18.2.2013
Exemption to all excisable goods from excise duty, additional duties and special duty when cleared against post export EPCG duty credit scrip (0% EPCG variant)
51FF 3/2013CEdtd
18.2.2013
Exemption to all excisable goods from excise duty, additional duties and special duty when cleared against Post Export EPCG duty
184
Sr.No
Particulars GENo
Notification No.
Remark
credit scrip (3% EPCG variant)
51G 14/2013CE dtd
18.4.2013
Exemption to goods cleared against a Post Export EPCG duty credit scrip from Excise duty & additional duty
S Miscellaneous Exemptions
52 17/2011CE dtd
1.3.2011
Exemption to Handicraft, Scented Chunnam, Vibuthi, Contraceptive, Enamelware, Pyrites (agricultural), Coke-oven gas and blast furnace gas, Sludge, Animal drawn vehicles and their wheels and axles, Erasers and Spent fuller’s earth.
53 89/95CEdtd
18.5.1995
Exemption to waste, pairings and scrap arising during manufacture of exempted goods
54 15/2010CE dtd
27.2.2010
Exemption to all items of machinery etc. for initial setting up of solar power generation project or facility.
55 33/2010CEdtd
19.10.2010
Exemption to Petrol and HSD, from specified Additional duties and Spl. Additional Excise duty when supplied to UN or an international organization for its
185
Sr.No
Particulars GENo
Notification No.
Remark
official use.56 19/2012CE
dtd23.5.2013
Exemption to goods supplied to Duty Free Shops at International Customs Airport.
186
3.17 Exemptions under Service Tax:-
Central government can grant partial or total exemption in public interest, by
issuing an ‘exemption notification’ under section 93 of Finance Act, 1994.
Such exemption may be partial or total. Exemption may be conditional or
unconditional. Exemption cannot be granted by Central Government with
retrospective effect.
a) Mega Exemption Notification.
Central Government has issued Mega Exemption Notification No. 25/2012-
ST dtd 20.06.2012, giving exemption to following services from service tax:-
1. Services provided to the United Nations or a specified international
organization;
2. Health care services by a clinical establishment, an authorized medical
practitioner or para-medics;
3. Services by a veterinary clinic in relation to health care of animals or
birds;
4. Services by an entity registered under section 12AA of the Income tax
Act, 1961 (43 of 1961) by way of charitable activities;
187
For this purpose, “charitable activities” means activities relating to -
i. public health by way of -
a. care or counseling of (i) terminally ill persons or
persons with severe physical or mental disability, (ii)
persons afflicted with HIV or AIDS, or (iii) persons
addicted to a dependence-forming substance such as
narcotics drugs or alcohol; or
b. public awareness of preventive health, family planning
or prevention of HIV infection;
ii. advancement of religion or spirituality;
iii. advancement of educational programmes or skill development
relating to,-
a. abandoned, orphaned or homeless children;
b. physically or mentally abused and traumatized persons;
c. prisoners; or
d. persons over the age of 65 years residing in a rural area;
iv. preservation of environment including watershed, forests and
wildlife;
5. Services by a person by way of-
a) renting of precincts of a religious place meant for general public;
or
b) conduct of any religious ceremony;
“Religious place” means a place which is primarily meant for
conduct of prayers or worship pertaining to a religion,
meditation, or spirituality
188
6. Services provided by-
a. an arbitral tribunal to -
i) any person other than a business entity; or
ii) a business entity with a turnover up to rupees ten lakh in the
preceding financial year;
b. an individual as an advocate or a partnership firm of advocates by
way of legal services to,-
i) an advocate or partnership firm of advocates providing legal
services ;
ii) any person other than a business entity; or
iii) a business entity with a turnover up to rupees ten lakh in the
preceding financial year; or
c. a person represented on an arbitral tribunal to an arbitral tribunal;
7. Services by way of technical testing or analysis of newly developed
drugs, including vaccines and herbal remedies, on human participants
by a clinical research organization approved to conduct clinical trials
by the Drug Controller General of India;
8. Services by way of training or coaching in recreational activities
relating to arts, culture or sports;
9. Services provided to an educational institution in respect of education
exempted from service tax, by way of,-
a. auxiliary educational services; or
b. renting of immovable property;
189
“auxiliary educational services” means any services relating to
imparting any skill, knowledge, education or development of course
content or any other knowledge – enhancement activity, whether for
the students or the faculty, or any other services which educational
institutions ordinarily carry out themselves but may obtain as
outsourced services from any other person, including services relating
to admission to such institution, conduct of examination, catering for
the students under any mid-day meals scheme sponsored by
Government, or transportation of students, faculty or staff of such
institution;
(Till 01.04.2013, services provided by educational institute were also
exempted.)
10. Services provided to a recognized sports body by-
a) an individual as a player, referee, umpire, coach or team manager
for participation in a sporting event organized by a recognized
sports body;
b) another recognized sports body;
“recognized sports body” means - (i) the Indian Olympic Association,
(ii) Sports Authority of India, (iii) a national sports federation
recognized by the Ministry of Sports and Youth Affairs of the Central
Government, and its affiliate federations, (iv) national sports
promotion organizations recognized by the Ministry of Sports and
Youth Affairs of the Central Government, (v) the International
Olympic Association or a federation recognized by the International
Olympic Association or (vi) a federation or a body which regulates a
190
sport at international level and its affiliated federations or bodies
regulating a sport in India;
11. Services by way of sponsorship of sporting events organized,-
a) by a national sports federation, or its affiliated federations, where
the participating teams or individuals represent any district, state or
zone;
b) by Association of Indian Universities, Inter-University Sports
Board, School Games Federation of India, All India Sports Council
for the Deaf, Paralympics Committee of India or Special Olympics
Bharat;
c) by Central Civil Services Cultural and Sports Board;
d) as part of national games, by Indian Olympic Association; or
e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA)
Scheme;
12. Services provided to the Government, a local authority or a
governmental authority by way of construction, erection,
commissioning, installation, completion, fitting out, repair,
maintenance, renovation, or alteration of –
a) a civil structure or any other original works meant predominantly
for use other than for commerce, industry, or any other business or
profession;
b) a historical monument, archaeological site or remains of national
importance, archaeological excavation, or antiquity specified
under the Ancient Monuments and Archaeological Sites and
Remains Act, 1958 (24 of 1958);
191
c) a structure meant predominantly for use as (i) an educational, (ii) a
clinical, or (iii) an art or cultural establishment;
d) canal, dam or other irrigation works;
e) pipeline, conduit or plant for (i) water supply (ii) water treatment,
or (iii) sewerage treatment or disposal; or
f) a residential complex predominantly meant for self-use or the use
of their employees or other persons specified in the Explanation 1
to clause 44 of section 65 B of the said Act;
13. Services provided by way of construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation,
or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by
general public;
(b) a civil structure or any other original works pertaining to a scheme
under Jawaharlal Nehru National Urban Renewal Mission or Rajiv
Awaas Yojana;
(c) a building owned by an entity registered under section 12 AA of
the Income tax Act, 1961(43 of 1961) and meant predominantly
for religious use by general public;
(d) a pollution control or effluent treatment plant, except located as a
part of a factory; or a structure meant for funeral, burial or
cremation of deceased;
14. Services by way of construction, erection, commissioning, or
installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
192
(b) a single residential unit otherwise than as a part of a residential
complex;
(c) low- cost houses up to a carpet area of 60 square metres per house
in a housing project approved by competent authority empowered
under the ‘Scheme of Affordable Housing in Partnership’ framed
by the Ministry of Housing and Urban Poverty Alleviation,
Government of India;
(d) post- harvest storage infrastructure for agricultural produce
including a cold storages for such purposes; or
(e) mechanized food grain handling system, machinery or equipment
for units processing agricultural produce as food stuff excluding
alcoholic beverages;
15. Services provided by way of temporary transfer or permitting the use
or enjoyment of a copyright
(a)covered under clause (a)of sub-section (1) of section 13 of the
Indian Copyright Act, 1957 (14 of 1957), relating to
original literary, dramatic, musical, artistic works or
(b) of cinematograph films for exhibition in a cinema hall or
cinema theatre;
16. Services by a performing artist in folk or classical art forms of (i)
music, or (ii) dance, or (iii) theatre, excluding services provided by
such artist as a brand ambassador;
17. Services by way of collecting or providing news by an independent
journalist, Press Trust of India or United News of India;
193
18. Services by way of renting of a hotel, inn, guest house, club, campsite
or other commercial places meant for residential or lodging purposes,
having declared tariff of a unit of accommodation below rupees one
thousand per day or equivalent;
19. Services provided in relation to serving of food or beverages by a
restaurant, eating joint or a mess, other than those having (i) the
facility of air-conditioning or central air-heating in any part of the
establishment, at any time during the year, and (ii) a license to serve
alcoholic beverages;
19A. Services provided in relation to serving of food or beverages by a
canteen maintained in a factory covered under the Factories Act, 1948
(63 of 1948), having the facility of air-conditioning or central air-
heating at any time during the year. (Inserted by Notification
No.14/2013 ST, dtd 22.10.2013)
20. Services by way of transportation by rail or a vessel from one place in
India to another of the following goods –
a) relief materials meant for victims of natural or man-made
disasters, calamities, accidents or mishap;
b) defence or military equipments;
c) newspaper or magazines registered with the Registrar of
Newspapers;
d) railway equipments or materials;
e) agricultural produce;
f) foodstuff including flours, tea, coffee, jaggery, sugar, milk
products, salt and edible oil, excluding alcoholic beverages; or
g) chemical fertilizer and oilcakes;
194
21. Services provided by a goods transport agency by way of transport in
goods carriage of –
a) Agricultural produce;
b) Goods, where gross amount charged for transportation of goods
on a consignment transported in a single carriage does not exceed
one thousand five hundred rupees;
c) Goods, where gross amount charged for transportation of all such
goods for a single consignee in the goods carriage does not
exceed rupees seven hundred fifty;
d) foodstuff including flours, tea, coffee, jaggery, sugar, milk
products, salt and edible oil, excluding alcoholic beverages;
e) chemical fertilizer and oilcakes;
f) newspaper or magazines registered with the Registrar of
Newspapers;
g) relief materials meant for victims of natural or man-made
disasters, calamities, accidents or mishap; or
h) defence or military equipments;
22. Services by way of giving on hire –
a) to a state transport undertaking, a motor vehicle meant to carry
more than twelve passengers; or
b) to a goods transport agency, a means of transportation of goods;
23. Transport of passengers, with or without accompanied belongings, by
a) air, embarking from or terminating in an airport located in the
state of Arunachal Pradesh, Assam, Manipur, Meghalaya,
Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in
West Bengal;
195
b) a contract carriage for the transportation of passengers, excluding
tourism, conducted tour, charter or hire; or
c) ropeway, cable car or aerial tramway;
24. Services by way of vehicle parking to general public excluding
leasing of space to an entity for providing such parking facility;
(omitted with effect from 01.04.2013.)
25. Services provided to Government, a local authority or a governmental
authority by way of –
a) carrying out any activity in relation to any function ordinarily
entrusted to a municipality in relation to water supply, public
health, sanitation conservancy, solid waste management or slum
improvement and up gradation; or
b) repair or maintenance of a vessel or an aircraft;
26. Services of general insurance business provided under following
schemes –
a) Hut Insurance Scheme;
b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojana
(earlier known as Integrated Rural Development Programme);
c) Scheme for Insurance of Tribal’s;
d) Janata Personal Accident Policy and Gramin Accident Policy;
e) Group Personal Accident Policy for Self-Employed Women;
f) Agricultural Pumpset and Failed Well Insurance;
g) premia collected on export credit insurance;
h) Weather Based Crop Insurance Scheme or the Modified National
Agricultural Insurance Scheme, approved by the Government of
India and implemented by the Ministry of Agriculture;
196
i) Jan Arogya Bima Policy;
j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima
Yojana);
k) Pilot Scheme on Seed Crop Insurance;
l) Central Sector Scheme on Cattle Insurance;
m) Universal Health Insurance Scheme;
n) Rashtriya Swasthya Bima Yojana; or
o) Coconut Palm Insurance Scheme;
26A. Services of life insurance business provided under following
schemes-
(a) Janashree Bima Yojana (JBY) or
(b) Aam Aadmi Bima Yojana (AABY)
(Inserted by Notification No.49/2012 ST dtd 24.12.2012)
27. Services provided by an incubatee up to a total turnover of fifty lakh
rupees in a financial year subject to the following conditions,
namely:-
a) the total turnover had not exceeded fifty lakh rupees during the
preceding financial year; and
b) a period of three years has not been elapsed from the date of
entering into an agreement as an incubatee;
28. Service by an unincorporated body or a non- profit entity registered
under any law for the time being in force, to its own members by way
of reimbursement of charges or share of contribution –
a) as a trade union;
b) for the provision of carrying out any activity which is exempt
from the levy of service tax; or
197
c) up to an amount of five thousand rupees per month per member
for sourcing of goods or services from a third person for the
common use of its members in a housing society or a residential
complex;
29. Services by the following persons in respective capacities –
a) sub-broker or an authorised person to a stock broker;
b) authorised person to a member of a commodity exchange;
c) mutual fund agent to a mutual fund or asset management
company;
d) distributor to a mutual fund or asset management company;
e) selling or marketing agent of lottery tickets to a distributer or a
selling agent;
f) selling agent or a distributer of SIM cards or recharge coupon
vouchers;
g) business facilitator or a business correspondent to a banking
company or an insurance company, in a rural area; or
h) sub-contractor providing services by way of works contract to
another contractor providing works contract services which are
exempt;
30. Carrying out an intermediate production process as job work in
relation to –
a) agriculture, printing or textile processing;
b) cut and polished diamonds and gemstones; or plain and studded
jewellery of gold and other precious metals, falling under Chapter
71 of the Central Excise Tariff Act ,1985 (5 of 1986);
c) any goods on which appropriate duty is payable by the principal
manufacturer; or
198
d) processes of electroplating, zinc plating, anodizing, heat
treatment, powder coating, painting including spray painting or
auto black, during the course of manufacture of parts of cycles or
sewing machines upto an aggregate value of taxable service of the
specified processes of one hundred and fifty lakh rupees in a
financial year subject to the condition that such aggregate value
had not exceeded one hundred and fifty lakh rupees during the
preceding financial year;
31. Services by an organizer to any person in respect of a business
exhibition held outside India;
32. Services by way of making telephone calls from –
a) departmentally run public telephone;
b) guaranteed public telephone operating only for local calls; or
c) free telephone at airport and hospital where no bills are being
issued;
33. Services by way of slaughtering of animals;
34. Services received from a provider of service located in a non- taxable
territory by
a) Government, a local authority, a governmental authority or an
individual in relation to any purpose other than commerce,
industry or any other business or profession;
b) an entity registered under section 12AA of the Income tax Act,
1961 (43 of 1961) for the purposes of providing charitable
activities; or
c) a person located in a non-taxable territory;
199
35. Services of public libraries by way of lending of books, publications or
any other knowledge- enhancing content or material;
36. Services by Employees’ State Insurance Corporation to persons
governed under the Employees’ Insurance Act, 1948 (34 of 1948);
37. Services by way of transfer of a going concern, as a whole or an
independent part thereof;
38. Services by way of public conveniences such as provision of facilities
of bathroom, washrooms, lavatories, urinal or toilets;
39. Services by a governmental authority by way of any activity in
relation to any function entrusted to a municipality under article
243W of the Constitution.
Article 243W of the Constitution is reproduced below for the ready
reference.
‘Subject to the provisions of this Constitution, the Legislature of a State
may, by law, endow—
(a) the Municipalities with such powers and authority as may be
necessary to enable them to function as institutions of self-government
and such law may contain provisions for the devolution of powers and
responsibilities upon Municipalities, subject to such conditions as may
be specified therein, with respect to—
i. the preparation of plans for economic development and social
justice;
200
ii. the performance of functions and the implementation of schemes
as may be entrusted to them including those in relation to the
matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary
to enable them to carry out the responsibilities conferred upon them
including those in relation to the matters listed in the Twelfth
Schedule.’
Matters listed in twelfth schedule are:
1. Urban planning including town planning.
2. Regulation of land-use and construction of buildings.
3. Planning for economic and social development.
4. Roads and bridges.
5. Water supply for domestic, industrial and commercial purposes.
6. Public health, sanitation conservancy and solid waste management.
7. Fire services.
8. Urban forestry, protection of the environment and promotion of
ecological aspects.
9. Safeguarding the interests of weaker sections of society, including the
handicapped and mentally retarded.
10. Slum improvement and upgradation.
11. Urban poverty alleviation.
12. Provision of urban amenities and facilities such as parks, gardens,
playgrounds.
13. Promotion of cultural, educational and aesthetic aspects.
14. Burials and burial grounds; cremations, cremation grounds; and
electric crematoriums.
15. Cattle pounds; prevention of cruelty to animals.
16. Vital statistics including registration of births and deaths.
201
17. Public amenities including street lighting, parking lots, bus stops and
public conveniences.
18. Regulation of slaughter houses and tanneries.
b) Other Exemption under Service Tax. :-
Other Exemptions not covered in Notification No. 25/2012-ST are as per
following.
Small Scale Exemption to service providers having total clearance
upto 10 Lacs. (Noti. No.33/2012-ST)
Services Provided to SEZ/Export. (Notification No. 12/2013-ST dtd
01.07.2013
R&D Cess (Noti.No.17/2004-ST , 14/2012-ST)
Services to Foreign Diplomatic Mission (Noti.No.27/2012-ST).
Services Provided by Technology Business Incubator (TBI) (Noti.
No.32/2012-ST)
Services provided by Science Technology Entrepreneurship Park
(STEP) (Noti. No.32/2012-ST)
Property Tax in case of “Renting of Immovable Property” (Noti.
No.29/2012-ST).
202
3.18 Central Excise provisions applicable to Service tax.
The researcher observed that many of the Central Excise Provisions are made
applicable to Service Tax. The following table shows summery of the same.
Table 3.8 - Central Excise provisions applicable to Service tax.
Excise Sections No.
Contents of the Section Parallel Customs Sections
Section 9A(2) Compounding of Offences Section 137(3)Section 9AA Offences by companies Section 140Section 9B Powers of Court to publish name, place of
business etc. of the persons convicted under the Act
Section 135B
Section 9C Presumption of Means rea in offences 138ASection 9D Relevancy of statements made before
excise officers138B
Section 9E Application of Section 562 and the Code of Criminal Procedure and Probation of
Offenders Act
Section 140A
Section 11B Claim of refund of duty, including those in respect of unjust enrichment
27
Section 11BB Interest on delayed refund 27ASection 11C Power to Central Govt. not recover duty as
a result of general practice28A
Section 12 Central Government can make certain provisions of Customs Act applicable to
Service Tax
N.A.
Section 12A Invoice to indicate amount of duty paid thereon
28C
Section 12B Presumption that burden of duty has been passed on to buyer
28D
Section 12C Consumer Welfare Fund 2(21A) adopting
definition in CESection 12D Utilization of Consumer Welfare Fund N.A.Section 12E Powers of Central Excise Officer can be
exercised by any person senior to him, but not by Commissioner (Appeals)
5
203
Excise Sections No.
Contents of the Section Parallel Customs Sections
Section 14 Power to summons to give evidence and produce documents
108
Section 15 Officers required to assist Central Excise Officer
151
Section 32,32A to 32P
Settlement of Case by Settlement Commission (inserted w.e.f. 28-05-2012)
Sections 127A to 127N
Section 33A Adjudication procedure 122ASection 34A Confiscation or penalty not to interfere
with other punishments127
Section 35EE Revision by Central Govt. of order passed by Commissioner (Appeals) [Inserted
w.e.f. 28th May, 2012]
129DD
Section 35F Deposit pending appeal 129E
Section 35FF Interest on refund of pre-deposit if delayed beyond three months [section inserted vide
Finance Act 2008 w.e.f. 10-5-2008]
Section 129EE
Section 35G to 35K
Appeal to High Court on substantial question of law
130 to 130D
Section 35L and 35M
Appeal to Supreme Court 130E and 130F
Section 35N Sums due to be paid even in reference is made or appeal is filed
131
Section 35-O Exclusion of time for filing appeal, spent on getting copy
131A
Section 35Q Authorised Representative before Appellate Authority
146A
Section 35R Appeal not to be filed in certain cases 131BASection 36 Definition of High Court and President of
CESTAT131C
Section 36A Presumption of documents 139(i)Section 36B Admissibility of microfilms, FAX and
computer print outs138C
Section 37A Delegation of powers by Central Government to Board, Chief Commissioner , DC/AC etc.
152
Section 37B Instructions by Board to Central Excise Officers for uniformity in classification
and valuation151A
204
Excise Sections No.
Contents of the Section Parallel Customs Sections
Section 37C Mode of service of decisions, orders, summons
153
Section 37D Rounding off duty 154ASection 38A Protecting actions taken under rules and
notifications that existed prior to changes in rules and notifications (Inserted by Finance Act, 2007 w.e.f. 11-5-2007)
159A
Section 40 Protection to CE Officers of actions taken in good faith
155
205
3.19 Parallel Provisions in excise, customs and service tax.
It was observed that there are many similar / parallel provisions applicable to
Central Excise, Customs and Service Tax. Following is the summery of the
same.
Table 3.9-Parallel Provisions in Central Excise, Customs and Service Tax.
Topic Excise Customs Finance Act,1994 (Service Tax)
Entry in List I of Seventh
Schedule of Constitution
84 83 97
Administrative Control
CBE&C CBE&C CBE&C
Departmental Organizational
Same from top Same from top Same as Central Hierarchy upto AC
ExciseClassification CETA based on
HSNCustoms Tariff based on HSN
Section 66F introduced w.e.f. 1-
7-2012.Valuation based on transaction
value
Section No. 4 Section No. 14 Section No. 67
Related person concept for valuation
Yes Yes No provision, but concept of piercing corporate veil can
apply.Power to Central
Govt. to grant exemption
Section No. 5A Section No. 25 Section No. 93
Criminal Offences
Section No. 9 Section Nos. 132 to 135
Section No. 89
Court can order forfeiture of property to
Section No. 10 No provision No provision
206
Topic Excise Customs Finance Act,1994 (Service Tax)
GovernmentRecovery of duty
and taxSection No. 11 Section No. 142 Section No. 87
Demand of duty Section No. 11A
Section No. 28 Section No. 73
No penalty if duty/tax with
interest is paid before Show Cause Notice
Explanation 3 to section 11A(2B)
No Provision Explanation 2 to section 73(3)
Interest for delayed payment
of duty/tax
Section No. 11AB
Section No. 28AB
Section No. 75
Mandatory penalty in case of
suppression of facts, willful
misstatement etc.
Section No. 11AC
Section No. 114A
Section No. 78
Amount collected
representing as ‘duty’ from
buyer must be paid to Govt.
Section No. 11D
Section No. 28B
Section No. 73A
Interest on aforesaid amount
Section No. 11DD
No provision Section No. 73B
Provisional attachment of
property pending adjudication
Section No. 11DDA
Section No. 28BA
Section No. 73C
Audit by Chartered/Cost
Accountants
Sections 14A and 14AA
Audit of ware-housing records
Section No. 72A
Power to arrest Section No. 13 Section No. 104 No powerAdvance Ruling Section
Nos.23A to 23HSection Nos. 28E to 28L
Section Nos. 96A to 96-I
Adjudication of penalty
Section No. 33 Section No. 122 Section No. 83A
Redemption fine after confiscation
Section No. 34 Section Nos. 125, 126
No provisions of confiscation
207
Topic Excise Customs Finance Act,1994 (Service Tax)
Appeal to Commissioner
(Appeals)
Section No. 35 Section No. 128 Section No. 85
Procedure of Appeal to
Commissioner (Appeals)
Section No. 35A
Section No. 128A
Excise provisions Made applicable vide section No.
85(5)Departmental
appeal to Commissioner
(Appeals)
Section No. 35B(2)
Section No. 129A(2)
No provision
Order of Tribunal
Section No. 35C
Section No. 129B
Excise provisions Made applicable vide section No.
86(7)Departmental
AppealSection No. 35E Section No.
129DSection No. 86
Rule making power of Central
Government
Section No. 37 Section No. 156 Section No. 94
Publication of name relating to any proceedings
Section No. 37E Section No. 154B
Section No. 73D
Search and Seizure
Customs provisions
apply
Section Nos. 105 and 110
Section No. 82
Vexatious search by Officer
22 Section No. 136 No provision
Confiscation of conveyance,
goods
Customs provisions
apply
Section Nos. 115, 118 to 121
No powers
Self assessment Rule 6 Section No. 17(1)
Section No. 70(1)
Provisional Assessment
Rule 7 Section No. 18 Rule 6(4)
Penalties by departmental adjudicating authorities
Rules 25 to 27 Section Nos. 112, 114, 116,
117
Section Nos. 76, 77 and 78
208
The Researcher, consistent with the objectives, collected data from the various
manufacturing units and service provider units, compared with the various
provisions under Central Excise, Service Tax and worked the cost reduction
achieved by various units by availing benefits of various exemptions as a
measure of tax planning. The details are presented in the following chapter in
the case studies.
Review of literature of decisions, provisions, Committee Reports and Report
of the Comptroller and Auditor General of India on Indirect Taxes provided
vital facts, important decisions, arguments listed in this chapter provides the
framework for the present study.
On the basis of this Research Design of Study has been formulated.
209
References
1. Constitution of India.
2. R.K.Jain – Central Excise Law Manual, Centax Publication.
3. R.K.Jain – Central Excise Tariff by Centax Publication.
4. www/cbec.gov.in
5. R.K.Jain- Customs Law Manual, Centax Publication.
6. R.K.Jain- Customs Tariff, Centax Publication.
7. Taxmann’s Service Tax Manual by Taxmann Publications Pvt Ltd.
8. R.K.Jain’s Foreign Trade Policy & Handbook of Procedures –Centax
Publication.
9. Special Economic Zones Act, 2005.
10. Reports on India’s Tax Reforms published by economic India Info
Services, a division of Academic Foundation, New Delhi.
11. Report of CAG on Indirect Taxes for the Year ended March 2012.