JULY 07, 2009

Union Budget 2009 - Central Excise - A mixed bag

S.C. Dabral, J Sagar Associates

FISCAL stimulus packages announced by the Central Government in December 2008 and February 2009 had prescribed dual rate structure of effective ad valorem duty (viz. 4% and 8%) for non-petroleum products. The present budget has continued the same structure. It further appears that in order to have 8% mean rate for central share in the proposed GST, effective rate of 4% prescribed hence-forth for certain products is increased to 8% with exception of food items; drugs and pharmaceutical products; paper, paper board and articles thereof; footwear of MRP not exceeding Rs. 750 per pair; pressure cooker; power driven pump for handling water; water filtration/ purification equipment; specified textile machinery; compact florescent lamp and vaccum gas filled bulb of MRP upto Rs. 20; medical equipments etc. on which 4% ad valorem rate continues. Goods on which rate has been increased from 4% to 8% are manmade textile, fiber and fabrics; ceramic tiles manufactured without using electricity for firing kiln; plywood, flush doors and article of wood; ink; zip fasteners and MP3/ MP4 players.

In petroleum sector advalorem + specific rate of effective excise duty on petrol and diesel intended for sale with brand name has been changed to specific rates. As a result fluctuation in value of petrol and diesel would not affect incidence of excise duty.

Care has also been taken to solve the problem being faced by packaged software manufacturer supplying such software to customers with right to use. Value attributable to transfer of right of software is exempted from value of software for calculating levy of excise duty on the same. However value attributable to transfer of right to use software would be charged to service tax under ‘information technology software service' for which the manufacturer has to be registered under the provisions of the Finance Act, 1994, also.

To avoid ambiguity and litigation an amendment has been made in the Cenvat Credit Rules, 2004, to specifically exclude ‘cement, angels, channels, CTD/ TMT bars and other items used for construction of factory shed, building or laying foundation or making of structures for support of capital goods' from the definition of inputs. This is likely to increase cost of manufactured goods or taxable service and is not an industry friendly change. On the contrary the government should have amended the definition of inputs to include every input that is used right from setting up of an industry to operations and delivery of goods or service to the consumer.

In line with reduction in excise duty rate the Cenvat Credit Rules have been amended to provide for reduction in the amount payable from 10% to 5% on exempted goods in the manufacture of which Cenvat credit has been availed on all inputs.

Recorded Smart Cards and tags' were exempted from excise duty wef July 19, 2007, which had broken Cenvat credit chain, leading to excise duty and service tax paid on inputs becoming sunk cost in the hands of the manufacturer. The industry has been protesting and requesting for withdrawal of exemption as local manufacture of Recorded Smart Cards were costlier as compared to imports which were fully exempt from basic and additional customs duty. Now exemption from excise duty on Recorded Smart Cards is made optional subject to non-availment of Cenvat credit. The long standing demand of industry has been met with the removal of anomaly.

It is good that in the current budget proposals the Government has not tinkered much with existing duty structure leading to continuity of existing tariffs and moving towards an average rate of 8% which is also the mean proposed rate for Central GST.