MARCH 4, 2010

Levy of duty on diapers, sanitary napkins – ‘All is not well'

By J K Naidu

THE Union Budget 2010 is just sinking in and expectedly responses and expert's views have been flying in thick and fast, since then. Yet again, TIOL has led from the front and done a wonderful job in getting the Budget news across to netizens ‘as it happens' juxtaposed with expert comments from indirect tax ‘big wigs' at lightning quick pace. While glancing through the Times of India newspaper dated 27.Feb.2010, the article “Dry baby at crybaby prices now” , struck a chord somewhere within me. The article conveyed the anguish of companies like Procter & Gamble India (P&G) which manufacture children diapers/sanitary napkins, consequent to the announcement of a 10 % levy of excise duty on the said products, till now, enjoying the benefit of exemption. A similar view was also expressed in the Budget column of TIOL.

The disappointment expressed by the industry concerned is probably well reasoned and taken as these are items connected to personal hygiene and from India's commitment to the general health perspective, it would have been better if the same had been kept out of the tax net. However, the Finance Ministry appears to have approached it differently, probably with a limited view of looking at it as another source of revenue by doing away with the exemption.

From 0% to 10%, this jump is really an Olympian effort!! All looks fine and hunky dory on the face of it. Nothing much to write about but for the concerns already discussed above. But as I perused the entries and a bit of research on this levy, it appeared that there could be a ‘slip' showing amidst this levy. This article makes an attempt to probably put words to this apprehension. Well, I am a tax man after all and as the age old adage goes, ‘In Rome, think like a Roman'.

Let's start with perusing the relevant Tariff, Notifications and analyse for yourself. Relevant portion of Chapter 48 of Central Excise Tariff Act (as it stood before the Budget 2010) is extracted below;

Paper and paperboard; articles of paper pulp of paper or of paperboard

The above position before the Budget shows that the products falling under Chapter heading 4818 4010 and 4818 4090 attracted NIL rate of duty. It is apparent that baby and clinical diapers, sanitary towels, napkins, tampons etc (as above) attracted NIL rate of duty before this Budget.

Relevant portion of Notification no. 10/2010-CE dt. 27.02.2010 that amends 4/2006-CE dt. 01.03.2006, is reproduced below;

(xxxi) after S.No. 96A and the entries relating thereto, the following shall be inserted, namely:

Logically, the next area to be looked into was whether the said products would attract duty of central excise under Section 4 of Central Excise Act, 1944 or under Section 4A ibid. Corresponding entry in notification no. 49/2008-CE (NT) dt. 24.12.2008, as amended, captures the following:

This Notification no. 49/2008-CE (NT) dt. 24.12.2008 read with the amending Notification no. 10/2010-CE dt. 27.02.2010, would indicate that Baby and clinical diapers and Sanitary napkins would attract duty of 10% on Section 4A price as the said goods appeared be covered under the category ‘other than goods falling under 4818 50 00'. But did the legislature anticipate duty imposition on the said product way back on 24.December 2008? What was the point in including the same under Sr No 55 when during the material time the said goods were anyway exempted from payment of central excise duty.

Taking a step or two back, lets look at the position vide Notification no. 02/2006-CE(N.T.), DT. 01/03/2006, relevant portion of which is extracted below;

Perusal of the same would clearly indicate that the legislature excluded the product falling under 481840 (i.e Baby and clinical diapers and Sanitary napkins) 4818 5000 (i.e Articles of apparel and clothing accessories) from the purview of MRP assessment. With regard to Chapter heading 481840, the reasons for doing so was presumably the fact that it attracted NIL rate of duty. The Notification no. 49/2008-CE (NT) dt. 24.12.2008, for reasons best known to Revenue, changed this position by removing the words “except 481840, 4818 50 00” from the column head “Chapter heading…” and added the words “other than goods falling under 4818 50 00” to the existing description of goods. Thus by this exclusion of the Chapter 4818 40, the products i.e Baby and clinical diapers and Sanitary napkins came under the purview of MRP assessment for the purpose of levy of central excise duty. The going was good for the industry concerned till the time the said products attracted NIL rate of duty. But this scenario has now changed with the introduction of 10% duty in the present Budget. Thus it could be inferred that Baby and clinical diapers and Sanitary napkins would now attract central duty of 10% on Section 4A price (MRP price). Before proceeding further, just a random thought. Why could the law makers simply not refer the present entry at Sr No 55 to read “ all goods other than goods falling under 4818 50 00”. The same should clearly have sufficed the requirement of imposing MRP based levy on the desired goods rather than the way Sr No 55 is presently drafted. But where is the catch? Is anything missing? Well here it is.

The legislature has failed to plug one gaping loophole available in the Third schedule to the Central Excise Act, 1944, the relevant portion of which is reproduced as follows;

Herein lies the catch. Perusal of this schedule shows that neither Chapter heading 481840 nor the products, namely, Baby and clinical diapers and Sanitary napkins find mention. Thus, these products do not fall within the mischief of the deemed manufacture category as defined under Section 2 (f) of the Central Excise Act, 1944. which, stipulates that in relation to the goods specified in Third Schedule involves packing or re-packing of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

Thus the intention of the legislation to impose duty on Baby and clinical diapers and Sanitary napkins would be easily negated by such Companies who could use the import-repacking route to tactfully negate this levy. In other words, the diapers/napkins could be imported in bulk at cheap rates say from China or any other countries for that matter keeping the Customs duty burden low and the same could be repacked and sold in India through job workers without attracting duty as the said activity is not covered under Section 2 (f) of the Central Excise Act, 1944.

Also I am not privy to information as to how many manufacturers in this industry actually have a start to end manufacturing set up which would attract duty of excise as presently envisaged by the Government. Hopefully the Government has done its home work well before imposing this levy!!! My concern as a tax man is that unless the Third Schedule to aligned to include baby diapers / sanitary napkins et al, there is every possibility of leakage of revenue that the Government envisaged from this amendment.

Before Parting: The industry should clearly look at this as signs that under the proposed Goods and Services Tax, these products will lose the exemption status and that would be a huge blow to the said Industry. I am sure that the corporate honchos would start lobbying very hard to get the same under the exemption route going forward under GST. A bit of further internet based research also brought out an interesting development recently. I understand that the exemption that the said goods enjoyed under Maharashtra VAT act also appears to have been withdrawn very recently. Though I am not an expert on this state levy, one thing appears to be sure – this issue is not going to die down that easily and the Industry will privy to some hectic hob-nobbing, atleast that's my guess. I am handicapped by the absence of statistics to probably demonstrate the impact that this levy could have overall.

That's probably some time to happen. As of now, will the Government wake up to the possibility of some ‘dry baby' (i.e the industry) using this loophole and plug it with suitable tweaking of Third Schedule so that it need not ‘Cry over Spilt milk' later.

(The views expressed are strictly personal)