GOVERNMENT OF INDIA
MINISTRY OF FINANCE
& COMPANY AFFAIRS
DEPARTMENT OF REVENUE
New Delhi

D.O.F.No.334/1/2003-TRU

Gautam Ray
Joint Secretary (TRU)
Tel : 23092687
Fax : 23092031

Dated: February 28, 2003

Dear Commissioner,

The Finance Minister has introduced the Finance Bill, 2003 in the Lok Sabha on 28th
February, 2003. February, 2003. Changes in excise, customs and service tax have been made through the Finance Bill [clause 97 to 152 and 158 to 161] and through notifications. Details of changes are given in Explanatory Notes. The salient features of the proposals in respect of excise and customs duties are indicated below:

(I) Central Excise

1 Rate Structure:

The general duty structure is proposed at 8%, 16% and 24%. Tobacco products, pan masala and petroleum products will continue to have different rates. For textiles, a separate package has been prescribed. 1.1 The special excise duty (SED) on following items has been reduced from 16% to 8%:

The duty incidence on all these items will be 24% (16% Cenvat + 8% SED) as against 32% earlier. 1.2 The 4% rate of excise duty without Cenvat has been abolished. Some of the items attracting this rate have been exempted from excise duty and rest have been taken to 8% rate. The 8% rate will now be with Cenvat credit. As a consequence, the following items have been exempted from excise duty:

In addition, the following goods have also been exempted from excise duty:

1.3 The following items, which were earlier liable to duty at 4% without Cenvat or 16% with Cenvat, would now attract 8% excise duty with Cenvat credit:

1.4 Excise duty has been reduced from 16% to 8% with full Cenvat on the following items:

1.5 New impositions

Excise duty at the rate of 8% with Cenvat credit has been imposed on the following items:

1.6 Cement

Excise duty on cement has been increased from Rs.350/- per metric tonne to Rs.400/- per metric tonne. Excise duty on cement cleared in bulk has been increased from Rs.332 per metric tonne to Rs.382 per metric tonne. Excise duty on cement clinkers and on cement made by mini cement plants has been increased from Rs.200/- to Rs.250/per metric tonne.

2. Textiles

2.1 Major changes have been proposed in the duty structure applicable for textiles so as to remove a large number of exemptions, withdraw deemed credit scheme and to complete Cenvat chain right from fibre/yarn to the garment stage. In brief, the following are the important changes:

(a) Yarns:

(b) Fabrics:

(c) Garments and other made up articles:

The above list is not exhaustive. For full details, the Explanatory notes, clauses of Finance Bill and the notifications may be referred to.

2.2 While changes in the rates of excise duty in respect of textiles (except where the present duty is nil) will come into effect immediately w.e.f. 1.3.2003, the withdrawal of exemptions, removal of scheme of deemed credit and removal of goods from SSI exemption scheme will come into force w.e.f. 1.4.2003. The Government have also decided that job work facility will be made available to the textile sector and a separate procedure would be devised to ensure that the large number of powerlooms in the decentralized sector are not inconvenienced in any way and are exempted from maintenance of central excise records. The duty liability will be on the supplier of the raw materials to the job workers. The Government is very keen to see to it that there is absolutely no harassment to the manufacturers coming into excise net for the first time. Chief Commissioners and Commissioners are requested to meet all those sectors of the trade who would be liable to pay excise duty w.e.f. 1.4.2003 and get their views and suggestions as how best to implement the provisions. Board desires that you should send a report positively by 10.3.2003 after consultation with the trade so that a suitable procedure convenient to all can be prescribed.

3. National Calamity Contingent Duty (NCCD)

For replenishment of the National Calamity Contingent Fund, duty on following items has been imposed.

This increase has been made by amending the 7 Schedule of the Finance Act, 2001 through clause 126(1) and 161(1) of the Finance Bill. As a result, in addition to the goods already covered under the NCCD levy, these items will also be liable to pay this levy. This levy will apply to imports also. This levy on the additional items will be valid for one year (upto 29.2.2004).

4. AED (Sales Tax) Act, 1957

To enable the States to levy sales tax on sugar, textiles and tobacco products at a rate not exceeding 4% without being denied the 1.5% of total tax revenue, suitable amendments have been made in the above Act. This will come into effect from a date to be notified later [Clause 148 of Finance Bill].

Cenvat Credit Rules, 2002 have been amended to allow credit of AED (GSI) paid for payment of Cenvat duty and special excise duty.

5. Petroleum Products

The Additional Excise Duty on motor spirit (petrol) and high speed diesel oil has been increased from Rs.1 per litre to Rs.1.50 per litre [clause 159 & 160 of the Finance Bill].

Excise duty on light diesel oil (LDO) has been increased by Rs.1.50 per litre [clause 147 (a) of the Finance Bill]. No Cenvat credit will be allowed in respect of the duty paid on LDO.

Excise duty concessions on ethanol doped petrol etc., have been continued for one more year, upto 29.2.2004.

6. Tea

Tea has been exempted from excise duty of Rs. 1 per Kg. In its place, an additional duty of excise of Re. 1 per Kg. by way of surcharge, for development of tea plantation sector, has been introduced. This will apply to imports also [clause 121(1) and 149(1) of the Finance Bill].

7. Health

Drugs and life saving equipments which are exempt from CVD (additional duty of customs) are being exempted from excise duty.
Drug intermediates used captively in the factory of production has been exempted from excise duty.

8. Small Scale Industries Exemption Scheme

8.1 With effect from 1.4.2003, SSI exemption will be withdrawn on –

8.2 Value of exempted goods (excluding exports) will be included for calculating the limit of Rs. 3 crores for eligibility under SSI exemption with effect from 1.4.2003.

9. Medicinal & Toilet Preparations

Changes have been made in respect of duty structure applicable to medicines and toilet preparations containing alcohol under the M&TP Act, 1955. These are given below:

As this levy pertains to the State Governments, it is requested that a copy of the relevant notification is given to the State Government so that duty at the new rates can be levied from 1.3.2003.

10. Matches

Matches made by the non-mechanized sector have been fully exempted from excise duty. Specific duty rates on matches manufactured in the mechanized and semi-mechanized sector, have been replaced by a uniform excise duty of 8% without CENVAT credit. Bengal lights will also now attract duty at 8%. Provision is being made in the Central Excise Rules for giving credit or refund of the central excise stamps available with the assessee, but not utilized.

11. Retail Sale Price (RSP) based assessment:

11.1 The RSP based assessment has been extended to pesticides, insecticides and chewing tobacco and preparation containing chewing tobacco. Sanitary ware and fixtures of ceramics have been excluded from the ambit of RSP based levy.

11.2 Rates of abatement on aerated water, air conditioners, biscuits, boiled sweets, sugar confectionery, scented supari and pressure cookers have been reduced by 5%, consequent to the reduction of excise duty on these items.

11.3 Changes in definition of RSP

12. Service Tax

12.1 It may be recalled that with regard to payment of service tax in respect of Goods and Transport Operators (GTO) and C&F services, certain amendments were made in section 65 and 66 of the Finance Act, 1994 to validate the collection of service tax. Certain further amendments are being made in section 68 and 70 of the Finance Act, 1994 retrospectively along with insertion of a new section 71A for the period 16.7.1997 to 16.10.1998 [clause 150 of the Finance Bill]. Basically, this change will require the assessees (service receiver in respect of GTO and C&F services) to file a fresh return within 6 months from the date of enactment of Finance Bill which can then be assessed. This is a validating provision.

12.2 The Board vide its telexes F.No.No.356/91/97-TRU dated 3.2.97 and 9.2.98 had directed to hold in abeyance the payment of service tax on Goods Transport Operators in respect of factories registered as SSI industries in State Government, companies which are solely and exclusively trading companies registered as private limited companies, and dealers registered with any sales tax authority and whose turnover had exceeded Rs.50 lakhs in the preceding financial year. Exemption from payment of service tax for these categories is now being given a legal backing through suitable amendments in the provisions of Finance Act, 1994 [clause 152(1) of the Finance Bill].

12.3 Service tax will now cover a number of new assesses. It is imperative that the Commissioners apprise the potential assessees of the basic features of Service Tax Scheme, its procedures and obligations well in advance. It would be useful if some meetings with the assessees are also conducted in the Commissionerates to explain the features of Service Tax to them.

13. Default in payment of duty

Under the existing procedure, in certain cases of default in payment of duty assessed under rule 8(3) of the Central Excise Rules, the manufacturer is denied the benefit of utilization of Cenvat credit for certain period. This is being done away with, and even in cases of default, there will be no denial of the credit nor the facility of paying duty in monthly instalments be withdrawn. A system of automatic payment of interest at the rate of 2% per month or Rs.1,000 per day, whichever is higher, has been proposed starting from the date on which the duty was required to be paid till the date of payment (subject to the interest not exceeding the duty amount). Once the assessee pays the amount, there will be no need to issue SCN or pass an order. Provisions are also being made that in case of nonpayment of the defaulted amount within a reasonable time, the goods in respect of which the payments are in default would be liable to confiscation and the amount in default may be recovered as if these are arrears of revenue.

14. Monthly payment of duty

14.1 From 1.4.2003, the fortnightly duty payment scheme will be replaced by monthly payment scheme. Duty for a month will have to be paid by 5th of the next month. However, for the month of March, the duty has to be paid by 31st March, both for SSI and non-SSI units.

14.2 It is also being provided that date of payment of cheque in the nominated banks will be the date of payment of duty, provided the cheque is honoured.

15. Valuation

15.1 The introduction of ‘transaction value’ has brought out significant improvements in reduction of disputes and bringing about certainty in the matter of valuation. There are, however, certain areas where disputes are still continuing. Having regard to this, section 4 of the Central Excise Act has been amended by providing an explanation so as to clarify that the total amount received by a manufacturer will be deemed to be the price-cumduty and the assessable value should be determined accordingly subject to exclusion of sales tax or other taxes, if paid. Similar will be the position when additional considerations are received [clause 127 of the Bill]. The following illustrations will clarify the issue.

Illustration 1: An assessee A sells his excisable goods for Rs.120 per piece and does not charge any duty of excise in his invoice. Subsequently, it is found that such goods were not exempted from excise duty but were liable to pay duty at 20%. In this case, Rs.120 shall be treated as price-cum-duty and excise duty shall be calculated on the transaction value of Rs.120 with excise duty payable thereon being Rs.20.

Illustration 2 : Certain excisable goods was sold for Rs.120 and 20% is the rate of excise duty. In this case the transaction value for charging excise duty shall be calculated as follows:

Illustration 3: Suppose the assessee has paid duty at 20% when price-cum-duty was Rs.120/-. Subsequently, it is found out that the rate of duty was in fact 30%, and the assessee has not collected anything over and above Rs.120/-. In such a case, the value for the purpose of charging duty will be: Rs.120/1.3 = Rs.92.3.

15.2 Rule 7 of the Valuation Rules provides as to how the value is to be determined in the case of goods sold from a depot etc. This provision is now being incorporated in section 4 of the Central Excise Act itself whereby Sub-section 3 has been amended to provide that “place of removal” will include a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearances from the factory. Suitable amendments have been made to provide that the time of removal in the case of goods removed from the place of removal shall be deemed to be the time of clearance of such goods from the factory.

15.3 Rule 5 of the Valuation Rules provides for deduction of actual cost of transportation when the price at the place of removal is not known. This is subject to production of actual invoice. It is proposed to allow deduction of freight worked out on an average basis. It is clarified that the deduction of average freight or actual freight is only in respect of cost of transportation beyond the place of removal when the goods are sold for delivery at a place other than the place of removal. In case of a depot, the cost of transportation upto the point of depot or any other place from where the goods are sold will continue to be included.

16. Retrospective Amendments

16.1 It may be recalled that notification No.61/2002-CE dated 23.12.2002 was issued to provide that:

(i) the Cenvat credit of the duty paid on the inputs used in the manufacture of final products cleared after availing of the exemption under notification No.32/99-CE and 33/99-CE both dated 8.7.1999 [North East exemption notifications] shall be utilized only for payment of duty on the final products cleared after availing of the exemption under the said notifications; and

(ii) the refund allowable under these notifications shall not exceed the amount of duty paid less the amount of the Cenvat credit availed of, in respect of the duty paid on the inputs used in or in relation to the manufacture of goods cleared under the corresponding exemption notification.

16.2 Similarly, notification No.42/2002-CE (NT) dated 23.12.2002 was issued to disallow diversion of the credit taken on inputs used for manufacture of products exempted under the said North East notifications for payment of central excise duty on other products. Such diversion simply implied payment of a greater amount of duty through account-current on the products exempted under the said notifications thereby resulting in unintended benefit. The following illustration shows how the scheme was being misused:

Illustration: Suppose duty payable on the goods was Rs.100/- and the duty paid on inputs for the manufacture of said goods is Rs.20/-. What the notification 32/99-CE and 33/99-CE envisage is that the manufacturer will utilize the full credit in respect of inputs and pay only Rs.80/- in cash, which would be subsequently refunded to him. However, there are cases where a manufacturer did not utilize the input credit and paid the entire duty of Rs.100/- in cash. The credit of Rs.20/- was being kept by him in reserve to be utilized on some other goods not covered under the exemption notifications. There were also situations when the assessee was manufacturing two goods, one covered under the above notifications, and the other outside. What they were doing was to utilize the entire input tax credit for payment of duty on the product not covered under the exemption notification, and paying full duty on the exempted goods and getting back full refund.

16.3 The amendments made in December, 2002 sought to plug this loophole. These provisions are now being given retrospective effect w.e.f. 8.7.1999[clauses 142 to 145 of the Finance Bill]. Consequently, all assessments from 8.7.1999 onwards in respect of these two notifications will have to be revised to ensure that the entire credit of duty paid on the inputs used in the manufacture of the exempted final products is used only for payment of duty on final products cleared under these notifications and refund is restricted to total duty paid less the total credit in respect of the duty paid on inputs. Thus, in the above illustration, refund will be restricted to Rs.80/-, though the duty paid in cash was Rs.100/-. Similarly, if any credit taken in respect of inputs used in the manufacture of goods cleared under 32/99-CE and 33/99-CE, was used for payment of duty on other goods not entitled to the benefit under these notifications, such credit is not admissible and amount equal to the credit so utilized has to be demanded from the manufacturers. As the assessee will have to make the payment within 30 days of the enactment of Finance Bill, it is suggested that necessary action be taken to work out the amount to be recovered before this date. Similar amendment has also been made prospectively in the notifications for Kutch district of Gujarat and State of J&K. It may be ensured that refund of duty is made only in accordance with the above provisions.

16.4 Clause 146 (1) of the Finance Bill amends notification No.32/99-CE and 33/99-CE retrospectively so as to provide that the exemption under this notification will not be available to cigarettes and pan masala containing tobacco with effect from 8.7.1999 and in respect of all products of chapter 24 w.e.f. from 1.3.2001. Here also, action has to be initiated to recover the amount within 30 days of the enactment of the Finance Bill.

16.5 Notification no.32/99-CE has also been amended retrospectively to provide that w.e.f. 12.2.2002, benefit under this notification will not be available to goods manufactured and cleared by (i) Numaligarh Refineries Limited (ii) Bonagaigaon Refineries and Petrochemicals Limited (iii) Indian Oil Corporation, Guwahati and (iv) Assam Oil Division, Indian Oil Corporation, Digboi (clause 146(1) of the Finance Bill).
16.6 Under rule 57R(8) of the Central Excise Rules, there were some disputes as to whether the credit was admissible in the case of manufacturers who claim revenue expenditure in respect of amount of duty paid on the finished goods in the profit and loss account. It was argued that the manufacturer can be said to have claimed revenue expenditure in respect of the duty paid on the finished goods through modvat credit. Consequently, it was argued that the credit taken of the duty paid on the capital goods was not permissible.

16.7 As this was not the intention, rule 57R(8) and 57R(5) have been amended retrospectively with effect from 23.7.1996 so as to delete the reference to revenue expenditure. Credit would be admissible so long as the manufacturer does not claim depreciation under section 32 of the Income Tax Act, 1961 in respect of that part of the value of capital goods which represents the amount of specified duty on such capital goods. Consequently, on enactment of the Finance Bill, 2003, all pending cases may be decided accordingly in the light of amendment made [clause 141 (1) of the Finance Bill].

17. Pre-budget stocks

17.1 You are aware that the restrictions on clearances on budget day have been removed this year with the result that all clearances upto midnight of 28.2.2003/1.3.2003 are entitled to pay duty at the rates prevailing on this date. All the budgetary changes, unless otherwise stated, will come into effect from midnight of 28.2.2003/1.3.2003 and clearances effected after this period will attract the new rates of duty. As regards the dutiability of the stocks manufactured prior to 28.2.2003/1.3.2003, pre-budget stocks will be leviable to excise duty at the rates prevailing on the date of their removal. In other words, the goods cleared after 28.2.2003 would be liable to pay duty at the new rates even if they were exempted on or prior to 28.2.2003. However, goods which were not subject to the levy at all, for instance, the levy of NCCD on new items, same will have to be treated differently. In this connection, your attention is invited to the decision of the Supreme Court in the case of CCE Hyderabad vs. Vazir Sultan Tobacco Ltd 1996(83)ELT3(SC) which has laid down the guidelines as regards the duty liability of pre-budget stock. In other words, in respect of a completely new levy, the pre-budget stock will not attract the new levy as there was no liability when the goods were manufactured, irrespective of their date of removal.

(II). Customs

18. The highlights of the changes on the customs side are:

18.1 Peak rate of customs duty

The peak rate of customs duty has been reduced from 30% to 25%. No reduction is, however, effected on agricultural and dairy products.

18.2 Petroleum

Additional customs duty on motor spirit and high speed diesel oil has been increased from Re.1 per litre to Rs.1.50 per litre [clause 159 and 160 of the Bill].

18.3 Baggage : Customs duty on baggage has been reduced from 60% to 50%.

18.4 Transport: Except in CKD form, cars in all other forms, including completely built unit will attract customs duty at 60%.

19. Tea: An additional duty of customs on tea and tea waste @ Re. 1 per Kg. has been proposed for the purposes of the Union [clause 121(1) of the Bill].

20. Export Promotion Measures

21. National Calamity Contingent Fund

For replenishment of the above fund, a duty of Rs.50 per metric tonne has been imposed on imported crude oil. A duty of 1% also has been imposed on polyester filament yarn, two-wheelers and motor cars. The imposition on these items will be valid for one year (upto 29.2.2004). The goods covered under the NCCD earlier under 7th Schedule of Finance Act, 2001, has been amended by the Thirteenth Schedule [read with clause 126(1) and 161 of the Bill].

22. A number of legislative changes have been made in the Central Excise Act as also the Customs Act. Finance Bill may please be referred to for details. All these changes, unless otherwise specified, will come into force from the date of enactment of Finance Bill, 2003.

23. In the explanatory notes for the last year’s budget it was clarified that for computing the CVD, only the value of imported article as determined under section 14 of the Customs Act, 1962, including the landing charges, if any and the basic customs duty chargeable at the rates specified in the First Schedule to the Customs Tariff Act (read with any notification for the time being in force in respect of the basic customs duty) needs to be taken into account. Other duties such as anti-dumping duty, safeguard duty, etc. should not be taken into account. A view has been expressed that section 3A of the Customs Tariff Act does not permit such interpretation. To place the matter beyond doubt, it is proposed to amend section 3 and section 3A of the Customs Tariff Act so as to make it very clear that for computation of additional duty of customs, only the c.i.f. price, landing charges and basic customs duty will be included. Similarly for determining special additional duty of customs (SAD), only the c.i.f. price, landing charges, basic customs duty and the additional duty of customs will be included. Other duties such as anti-dumping duty, safeguard duty, etc. shall not be taken into account. This amendment will have effect from 1.3.2002.

24. As you would be aware, the 8 digit customs classification was introduced through an Ordinance on 1.2.2003. As a consequential change, some of the exemption notifications have been amended so as to incorporate the 8 digit headings.

25. Miscellaneous(Customs and Excise)

26. Revenue statements

26.1 Though this issue is not directly linked with the budget, but is being reiterated in view of the difficulties faced in the Board regarding timely receipt of information on revenue realization. Despite clear instructions, revenue figures are not being posted in CRRS site by some of the Commissionerates by the due dates. I would like to reiterate that from this month onwards, all Commissioners must ensure that the revenue figures are put on the CRRS site on due dates. It has also been noticed that on many occasions, the revenue figures are being changed off and on. This needs to be avoided.

26.2 I am enclosing a copy of monthly revenue statement which should be sent by the Chief Commissioners in respect of the commissionerates in their jurisdiction. This statement for a particular month must be sent so as to reach by 25th of the next month positively (Annexure I). This statement is in addition to other revenue statements being furnished.

26.3 In a number of cases, excise duty rates have been altered. It has been decided to collect data on the price behaviour and revenue implications. The information about the prices may kindly be supplied in the proforma at Annexure-II to this letter. You may kindly ensure that the information furnished is accurate since reliance will be placed on this data at the time of discussion of the Finance Bill in Parliament. The first report in this regard may be sent by 15th March, 2003 and subsequently at an interval of one month i.e. 15th of every month.

26.4 In the Explanatory Memorandum, we have asked for special reports in few cases. They may kindly be arranged to be sent on time after careful scrutiny.

27. I would take this opportunity to thank all of you, on my behalf and on behalf of the officers of the Tax Research Unit for the valuable suggestions you made in response to my earlier communication. These have provided valuable inputs. In fact, some of the proposals here are the direct outcome of such inputs.

28. It may kindly be ensured that in respect of units which would be required to pay excise duty w.e.f. 1.3.2003 for example, edible oil manufacturers, there is no hold up in clearances on the ground that procedural formalities have not been completed. You are requested to facilitate the registration of such units, if not already registered, and to explain the formalities which need to be completed but this should not be a ground for not allowing the clearances on payment of duty. If there is any difficulty, provisional assessment may be resorted to.

29. All rate changes in customs and excise duties are explained in detail in the Explanatory Notes. You would appreciate that number of changes have been carried out through amendments in notifications, rules and Acts. Though every care has been taken to reflect the intention of the Government clearly in all these documents, the chances of human error cannot be ruled out. I would, therefore, request you to kindly go through the explanatory notes, notifications and Finance Bill carefully and bring to my notice at the earliest any omission/error that might have crept in. If there is any doubt or difficulty on any point, you are requested to bring it immediately to my notice. You could also contact Shri Gautam Bhattacharya, Director, TRU (Tel No.23092634), Shri Alok Shukla, Deputy Secretary, TRU (Tel No.23092753) or Shri V. Sivasubramanian, Deputy Secretary, TRU (Tel No. 23092236). Copies of the FM’s speech, notifications, Finance Bill etc, are forwarded herewith. These will also be available on the department’s website soon after the conclusion of FM’s speech.
With regards, Yours sincerely,

(Gautam Ray) To All Commissioners of Customs
and Central Excise

Annexure-I

REVENUE COLLECTION FROM CUSTOMS AND EXCISE
Report upto the month of __________________

A: CUSTOMS

Financial Year:2003-04
( Rs. Crore)

B: EXCISE

(Rs. Crore)

Remarks: Drawbacks figures are exclusive of Drawbacks paid by customs houses
Note: Monthly Report may be sent by the Chief Commissioner in respect all Commissionerates under his/her jurisdiction latest by 20th of next month.

Annexure-II

PRICE DATA
Report for the period
Commodity
Chapter No.

Notes: