CENTRAL EXCISE - SMALL SCALE INDUSTRIES
By Madhukar N Hiregange (DISA, FCA)
& Srikantha Rao T (B.Com, ACA)
A manufacturer who manufactures excisable goods in India is liable to pay Central Excise duty on such goods. The duty is collected on clearances at the rates set out in the First Schedule to the Central Excise Tariff Act 1985 even though the liability arises on manufacture. In order to ascertain liability one would have to look into factors such as process involved and whether it amounts to manufacture, nature of product manufactured i.e whether the same can be regarded as “goods” at all and excisability of the same. The duty of excise by nature is an indirect tax the burden of which can be passed on to the buyer. But having said that a small scale manufacturer also has the option of going in for the exemption benefit wherein he would not be required to pay duty of excise on his clearances and this could be beneficial to a manufacturer whose Cenvat credits are not substantial as a result of which his duty payments would have been in cash but for this exemption. It would also be useful for one who sells the goods in the unorganized sector where the credits are not availed or one who manufactures finished goods consumed by the citizens.
How is the exemption provided to Small Scale Manufacturers?
The exemption is presently governed by a notification issued by the Central Government under section 5A (1) of Central Excise Act 1944. The clearance of excisable goods specified in the said notification up to the value of Rupees 150 lakhs in a financial year have been exempted from payment of basic excise duty under First Schedule to CETA 1985 and special excise duty under Second Schedule to CETA 1985. The exemption would be available provided the aggregate value of clearances of all excisable goods for home consumption during the preceding financial year did not exceed Rs. 400 lakhs. The financial year for the purpose of this exemption begins with the first day of April every year. The exemption is with the condition that no cenvat credit can be claimed by the manufacturer who opts for this exemption, until such exemption ceases. Once The excisable clearances exceed the limit of Rs. 150 lakhs, the manufacturer would commence payment of duty on his clearances and would be entitled to claim Cenvat credits on inputs, capital goods and input services used for manufacture of excisable goods which are cleared on payment of duty.
This exemption is optional and the assessee has to exercise his option before affecting the first dutiable clearance during the financial year.
At the time of exercising the option, the jurisdictional Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise may intimate in writing with the following particulars:
- Name and address of the manufacturer
- Location of factory
- Description of inputs used in manufacture
- Description of the specified goods manufactured
- Date of exercising the option
- Aggregate value of clearances till date of exercising option (excluding clearances which are exempt under any other notification or not liable at all as well as clearances not eligible for exemption, and value of inputs used in further manufacturing of eligible goods within the factory of production/manufacture)
The copy of the intimation may also be sent to the jurisdictional Superintendant of Central Excise.
Where the manufacturer does not opt for this exemption he would be required to pay duty of excise from the very first clearance of excisable goods and would be entitled to claim the benefit of Cenvat credit of excise duty on his inputs and capital goods and of service tax paid on input services.
What is the value of clearances exempted when a manufacturer has more than one factory from which excisable goods are cleared ?
The exemption is in respect of the aggregate value of all clearances of specified goods undertaken from the said factories and the exemption does not apply to each of those factories separately. For instance if a manufacturer has two factories clearing the specified excisable goods, he is entitled to an exemption of only Rs. 150 lakhs and not Rs. 300 lakhs for both the factories put together. Even where the specified excisable goods are cleared by more than one manufacturer from the same factory, the exemption would be Rs. 150 lakhs for both those manufacturers put together.
What are the clearances to be excluded for the purpose of determining the value of clearances under this notification?
The manufacturer is required to calculate the value of clearances during the preceding financial year to ascertain whether he is entitled to claim the SSI exemption benefit for the financial year in question. The aggregate value of clearances of all excisable goods cleared for home consumption during the said preceding financial year should not have exceeded Rs. 400 lakhs. Where the said limit is not exceeded, the manufacturer would be entitled to claim the benefit of exemption of Rs. 150 lakhs in respect of clearance of excisable goods finding a mention in this notification, for the financial year in question. The goods to be cleared by him should be those which qualify for exemption as per this notification and these goods are mentioned in the Annexure to this notification.
The following clearances are excluded for the purpose of determining whether the aggregate value of excisable clearances during the relevant financial year has crossed the exemption limit of Rs. 150 lakhs –
- Value of clearances pertaining to goods exempted by way of any other notification or those goods which are not excisable for any other reason
- Clearances of goods under the brand name or trade name of any other person as these goods are not entitled to any exemption under this notification
- Value of clearances of goods eligible for exemption which are used as inputs for further manufacture of goods eligible for exemption (under this notification), within the factory of production/manufacture i.e. intermediate products used within the factory of manufacture.
For the purpose of ascertaining whether the aggregate value of all excisable clearances for home consumption in the preceding financial year exceeded the limit of Rs. 400 lakhs, the following clearances are excluded -
- Clearances of goods under the brand name or trade name of any other person as these goods are not entitled to any exemption under this notification
- Value of intermediate products used within the factory of manufacture as inputs for manufacture of goods eligible for exemption under this notification.
- Clearances which are exempt from whole of duty of excise under specified notifications – 214/86 CE dated 25.03.86, 83/94 CE dated 11.04.94 and 84/94 CE dated 11.04.94
- Clearances of excisable goods to a unit in SEZ, or to a 100% EOU or a unit in EHTP or STP or to a unit in a Free Trade Zone
- Clearances of excisable goods to United Nations or to an International Organisation for their official use or to projects funded by them which qualify for exemption under notification 108/95 CE dated 28.08.95
It is to be noted that since the phrase used is “clearances of excisable goods for home consumption”, clearances for exports would be excluded for the aforesaid calculation whether it is for ascertaining the limit of Rs. 400 lakhs or Rs. 150 lakhs. But export clearances to Nepal or Bhutan would be included for the purpose of aforesaid calculations.
Whether the benefit of exemption under this notification is not at all available where goods are manufactured under the brand name of another person?
Generally, where the excisable goods qualifying for exemption under this notification are manufactured and cleared under the brand name or trade name of another person (brand name or trade name may or may not be registered), the exemption would not be available in respect of such clearances. This restriction would however not be applicable where the goods are manufactured in a factory located in a rural area.
The restriction would also not apply where the goods happen to be components or parts of machinery, equipment or appliances, and are cleared for use as original equipment in the manufacture of the said machinery, equipment or appliances by following the procedure laid down in the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules 2001.
Besides the aforesaid relaxation, the restriction would also not apply where the brand name or trade name is of the following –
1. Khadi and Village Industries Commission or
2. State Khadi and Village Industries Board or
3. National Small Industries Corporation or
4. State Small Industries Development Corporation or
5. State Small Industries Corporation
The restriction would also not apply to account books, registers, writing pads or file folders falling under Chapter 4820 or 4821 of First Schedule to CETA.
What is the valuation scheme applicable to the specified goods under consideration for exemption under this notification?
The valuation would be as per Section 4 or 4A or under Section 3 (tariff value) as fixed for the goods.
What is meant by “rural area” for the purposes of this notification?
“Rural area” means the area comprised in a village as defined in the land revenue records excluding the following –
- Area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee or
- Any area that may be notified as an urban area by the Central Government or a State Government
Position regarding the Cenvat Credits as on the date of opting for exemption or the date on which goods become dutiable
The manufacturer would have to be careful regarding the treatment to be given to Cenvat credits. Where his clearances become dutiable, he would be entitled to claim Cenvat Credits on the inputs lying in stock as well as in process and contained in the final products lying in stock on the date on which the clearances become dutiable.
Conversely, where he opts for the benefit of this exemption, he should reverse the credits on inputs in stock as well as in process or contained in final products in stock as on the date on which he opts for exemption under this notification. Where after such reversal some balance of credits still exist, such amount would lapse and cannot be utilized.
Clubbing of clearances
Where the manufacturer splits up his clearances in such a way as to undertake them from more than one factory, the clearances from all his factories can be clubbed. But there may be instances where he may be part of the management of more than one undertaking or unit. In such cases, the clearances of all these units cannot straightaway be clubbed. Any decision in this regard would have to be taken on the basis of facts and circumstances of each case. For instance, just because two entities have common partners or common directors, their clearances cannot be clubbed. In extreme cases, a decision can even be taken by resorting to lifting of corporate veil to really ascertain the individuals standing to gain from the concerned units. Normally the reason of financial flow back has been the reason for confirmation of the demand.
Decision to opt or not to opt for exemption
This would depend on one’s customer profile as well as factors like cost of materials in the final product and the quantum of Cenvat Credits available besides growth opportunities. Businesses with good growth prospects would be better off not opting for the benefit of this notification as they can utilize their Cenvat credits especially since the credits are available not just in terms of materials and capital goods but also in terms of service tax on input services. Opting for the exemption by intermediate product manufacturer is not advisable. Customer who are Exporters and 100% EOU enable credit to be refunded where it maybe advisable to avoid the exemption route.
In this article we have examine some of the aspects which are relevant to an SSI. For further details members may write to the association.
----x----
CAclubindia
