MARCH 10, 2011

The Great Jamboree – 1% Duty Scheme vis-à-vis SSI exemption – clarifications needed

By A Netizen

THE letter D.O.F.No.334/ 3/2011-TRU dated 28.02.2011 of the Joint Secretary (TRU-I) in the matter of imposition of 1% ad valorem duty mentions thus -

“4. Withdrawal of exemptions/ concessions:

4.1 A number of exemptions from Central Excise duty (about 130 exemption entries) are being withdrawn. These include some cases where the rate of duty is Nil by tariff. A nominal duty of 1% ad valorem is being imposed on these items with the condition that no credit of the duty paid on input and input services is taken . For ease of reference, this rate is being prescribed through a common notification no. 1/2011-CE dated 1st March, 2011. The statutory/ tariff rate for those items that hitherto attracted a Nil rate (by tariff) has been fixed at 5% ad valorem. Bill entries contained in the Tenth Schedule to the Finance Bill, 2011 may be referred to for this purpose. For the remaining items in whose case the statutory/tariff rate is not Nil, a general effective rate of 5% is being prescribed (without any condition) through notification no. 2/2011-CE dated 1st March, 2011. This would enable those manufacturers who wish to avail of Cenvat credit to pay a concessional duty of 5%.

4.2 x x x

4.3 The following amendments have been made in the Cenvat Credit Rules, 2004 for the implementation of the 1% scheme:

(a) The definition of “exempted goods” has been amended to include goods in respect of which the benefit of notification no.1/2011-CE is availed. This would imply that the credit attributable to such goods would have to be reversed when common inputs and input services are used for both these goods and otherwise dutiable goods.

(b) Credit of duty paid on inputs or input services would not be available to a manufacturer of these goods. Credit of the duty paid on items that are being subjected to the levy of 1% would not be available to a manufacturer or service provider who buys them.

(c) It is also being prescribed in the Cenvat Credit Rules that the manufacturer of these goods cannot discharge the duty liability on them by utilizing Cenvat credit otherwise available in his books of accounts. For these provisions, amendments in the Cenvat Credit Rules, 2004 contained in Notification No. 3/2011-CE (NT) dated 1st March, 2011 may be referred to.

4.4 Many of the manufacturers of these goods may be fresh registrants under Central Excise law. It may kindly be ensured that they are provided the necessary facilitation and guidance in securing registration and complying with Central Excise formalities and that coercive measures are not used in the immediate aftermath of the Budget for the implementation of the levy.”

In effect, imposition of a low rate of 1% duty adv. on these excisable goods is not to assuage those manufacturers who have been “dragged” into the excise net after an era but is a “mirage” into which many manufacturers will fall for. Coupled with the umpteen ifs and buts incorporated into the Cenvat Credit Rules, 2004, both the manufacturer and the purchaser of these goods will have a hard time in deciding whether it is worthwhile to opt for this 1% duty payment or be ready to shell out the 5% duty where there are no strings attached. Obviously, if the 1% duty paid goods are treated as “exempted goods” and sucked into the vortex of Rule 6 of the CCR, 2004 and furthermore if the duty so paid of 1% is not allowed as Cenvat credit, it is highly unlikely that there will be any manufacturer opting for this “lollipop” exemption or for that matter any consignee purchasing such goods.

It is, therefore, most likely that these “fresh registrants” would opt to pay 5% duty rather than offer themselves as gullible victims to the Central Excise officers who are out to “facilitate and guide them” along the way.

Having said this, I wonder as to why the learned TRU officers could not take the trouble of explaining for the benefit of the Trade and the Departmental Officers alike as to -

++ whether the manufacturers who opt for this 1% or 5% duty payment scheme are entitled for SSI exemption;

++ if so, what would be the manner of computing the aggregate value of clearances;

++ how much is the exemption limit for the financial year ending March, 2011.

I happened to read, in the context of imposition of duty on ready made garments in this Union Budget 2011, an article, where the learned author concluded thus –

“The general SSI exemption which stands at Rs 1.5 crores in a financial year has been extended to the readymade garments / textile made ups. Without any restricted turnover prescribed for the fiscal 2010-2011, the garment industry as well as other goods which are in the net would be entitled for a turnover of 1.5 crores in the month of March 2011, which is highly surprising. Is it intentional or a slip?”

It is more than a week since this article made its appearance but the Central Board of Excise & Customs has failed to respond. Probably the TRU has wound up its Budget Cell altogether.

++ Be that as it may, I have tried to find an answer to the posers above and they are as under:-

++ The notification 8/2003-CE dated 01.03.2003, as amended, lists in the Annexure the excisable goods which are entitled for the SSI exemption viz. Nil rate of duty for the First clearances up to an aggregate value not exceeding one hundred and fifty lakh rupees made on or after the 1st day of April in any financial year. In the past, when duty was imposed for the first time or when exemption was withdrawn, the excisable goods were allowed SSI exemption for the first clearance value of a limit that was specified in the notification 8/2003-CE. [ Examples are notification 8/2006-CE, dated 01.03.2006 and 47/2008-CE dated 01.09.2008. ]

++ Absence of any such notification amending the current notification 8/2003-CE would indicate that the goods which have been brought into the excise net consequent upon withdrawal of exemption notifications or Tariff rates prescribing Nil rate being changed to 5% would be entitled for a total SSI exemption of 150 lakhs for the one month of March, 2011.

++ This is for the following reason –

Clause 3 of the notification 8/2003-CE stipulates –

“3. For the purposes of determining the first clearances upto an aggregate value not exceeding one hundred and fifty lakh rupees made on or after the 1st day of April in any financial year, mentioned against serial no.1 of the said Table, the following clearances shall not be taken into account, namely:-

(a) clearances, which are exempt from the whole of the excise duty leviable thereon (other than an exemption based on quantity or value of clearances) under any other notification or on which no excise duty is payable for any other reason;”

Having said that, the next question that would arise is whether the clearance of these goods that were exempted (by notification or by Tariff) during the preceding financial year viz. 2009 – 2010 would have to be reckoned for deciding the eligibility of the manufacturer for the benefit of SSI notification.

++ The following clauses of the notification 8/2003-CE are relevant –

“2. The exemption contained in this notification shall apply subject to the following conditions, namely: -

x x x

(vii) the 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 rupees four hundred lakhs in the preceding financial year.”

“3A. For the purposes of determining the aggregate value of clearances of all excisable goods for home consumption, mentioned in clause (vii) of paragraph 2 of this notification, the following clearances shall not be taken into account, namely:-“

++ In some of the Central Excise Commissionerates, a stand is being taken that for computing the four crore turnover of the preceding financial year, ONLY those clearances mentioned in clause 3A (a), (b), (c), (d) and (e) are to be excluded. Resultantly, the benefit of SSI exemption is being denied to some of these manufacturers.

++ What is being missed out by the departmental officers is that “these goods which have come into the bracket of 1% / 5% excise duty were either fully exempted by virtue of an exemption notification (not based on value of clearance) or were subjected to “Nil” rate of Tariff duty. Simply put, these manufacturers were not required to avail the benefit of the SSI exemption till 28.02.2011 and if this be so the clearances made in the preceding financial year 2009 – 2010 would not be required to be considered while deciding their eligibility for the last month of the financial year 2010-2011 i.e March, 2011.

++ The above inference is also supported by the second proviso to clause 1 which made its appearance in the SSI notification 8/2003-CE by amending notification 8/2006-CE dated 01.03.2006. It reads –

“Provided further that exemption contained in this notification shall not apply to goods which are chargeable to nil rate of duty or are exempt from the whole of the duty of excise leviable thereon.”

++ To conclude, these items on which duty of 1% adv. has been imposed by notification 1/2011-CE dated 01.03.2011 or for that matter the Tariff rate has been fixed at 5% adv. are entitled for an unfettered SSI exemption of 150 lakhs for the month of March, 2011.

++ It is requested that the TRU immediately issues a clarification before the end of the month for the reason that if at all duty is required to be paid by these manufacturers, the same is to be paid by 31 st March, 2011.

++ After all, no one is interested in being saddled with penalties and interest under the new dispensation of sections 11A, 11AA and 11AC which may see the light of the day on the 24 th of this month!