Budget Proposals – Conundrums for Textile Industry

By Santosh Hatwar

IN Budget 2011, the Finance Minister made some key proposals to change the excise duty structure of a vast majority of products in the textile sector. This has significantly impacted those engaged in manufacture of articles of apparel and clothing accessories, whether or not knitted or crocheted, all sorts falling under Chapter 61 or 62 and other made up textile articles or sets, falling under Chapter 63.

Notification No. 30/2004-CE dated 09.07.2004 was further amended by Notification No. 12/2011-CE dated 01.03.2011 whereby all goods falling under chapters 61, 62 and 63 (except 6309 00 00 and 6310) and not bearing a brand name or sold under a brand name, are exempted from the whole of excise duty. However, the benefit of this Notification shall not be applicable if the said manufacturers avail benefit of CENVAT credit on inputs.

Notification No. 29/2004-CE dated 09.07.2004 was further amended by Notification No. 11/2011-CE dated 01.03.2011 whereby all goods of cotton, not containing any other textile material and falling under chapters 61, 62 and 63 (except 6309 00 00 and 6310) and not bearing a brand name or sold under a brand name are charged to 5% excise duty with CENVAT benefit.

It is not understood as to why the Government has taken pains to levy excise duty only on goods of cotton not bearing a brand name or sold under a brand name and grant exemption to those non-branded goods containing other textile materials – of course, they can opt for Notification No. 30/2004-CE. Also, those manufacturing cotton goods can opt for Notification No. 30/2004-CE. But why impose levy only on cotton goods in the amended Notification No. 29/2004-CE? Hitherto, before this latest amendment, there were two categories of goods in Notification No. 29/2004-CE, firstly, cotton goods without any other textile material attracting 4% duty and secondly other goods falling outside this bracket attracting 10% duty. Now that distinction is removed and we find a mention of only cotton goods without any other textile article in amended Notification No. 29/2004-CE.

Further, in all other cases i.e. articles of chapters 61, 62 and 63 (except 6309 00 00 and 6310) bearing a brand name or sold under a brand name are liable to pay 10% excise duty with CENVAT benefit. It should be noted that it may be manufacturer's own brand names or brand name of other persons. And the term ‘brand name' is defined in chapter notes 11, 10 and 5 of chapters 61, 62 and 63 respectively.

However, to offset their burden to a certain extent, the manufacturers engaged in manufacturing the said goods bearing a brand name or selling under a brand name are provided with SSI benefit under Notification No. 8/2003-CE dated 01.03.2003 as amended.

In terms of paragraph 3.5 of letter dated 28.02.2011 (on excise), TRU clarified that SSI exemption is being extended to the goods attracting this levy of excise duty and that item (xxvi) of Annexure to Notification No. 8/2003-CE is amended to extend this benefit to articles of chapters 61, 62 and 63 as well. Further, in the said clarification TRU has made it abundantly clear to the field formations that this levy does not apply to retail tailoring establishments that stitch garments in a customized manner to the size and style specifications of individual customers, whether out of fabric purchased by the customer from the same establishment or fabric supplied by the customer.

However, it may be noted that in terms of paragraph 4 of the said notification, the SSI benefit will not be available to specified goods bearing a brand name or trade name, whether registered or not, of another person. Since levy is extended to manufacturers of all goods of chapters 61, 62 and 63 bearing a brand name (i.e. their own brands or brand names of others manufactured on job work basis) and goods sold under a brand name, it is to be seen as to how the officers in the field will see the manufacturers of branded goods through the prism of paragraph 4 of Notification No. 8/2003-CE as amended? It is better if the Board comes out with a suitable amendment to make an exception in paragraph 4 to manufactures of articles of chapters 61, 62 and 63 before litigation piles up on this front.

The problem does not end here. The real trouble for those who opt to pay excise duty on textile articles either under Notification No. 29/2004-CE or otherwise is applicability of Notification No. 20/2001-CE(NT) dated 30.04.2001 as amended. This notification is issued in terms of section 3(2) of Central Excise Act, 1944 whereby the Central Government is empowered to fix tariff values for notified goods. As on date, the Central Government has notified and fixed tariff values for two commodities – pan masala falling under chapters 2106 90 20 and 2403 (Notification No. 3/2006-CE(NT) dated 01.03.2006 as amended) and textile articles of chapters 61, 62 and 63.

As per Notification No. 20/2001-CE(NT), for articles of apparel and clothing accessories, whether or not knitted or crocheted, all sorts falling under Chapter 61 or 62 and other made up textile articles or sets, falling under Chapter 63, the Central Government has fixed tariff value at 60% of the retail sale price that is declared or required to be declared on the retail packages under the provisions of the Legal Metrology Act, 2009 or the rules made there under or under any other law for the time being in force.

While there is scope for swapping of valuation mechanism under section 4A and section 4 of Central Excise Act, 1944 for notified products of section 4A in certain circumstances, there is no such swapping allowed for products where tariff values are notified by the Central Government in terms of section 3(2). So invariably, the manufacturers have to pay excise duty on the tariff values notified by the Government.

But what will happen if there is no mention of RSP on the packages of textile articles? While Central Government has notified Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008 in terms of section 4A(4) to enable central excise officers to determine retail sale price of goods notified under section 4A, in instances where there is no declaration of RSP in spite of its mandatory requirement under Legal Metrology Act, 2009 and the Rules made there under, there is no mechanism to determine retail sale price if the manufacturers do not declare retail sale price.

However, it should be noted that non-declaration of retail sale price and other requisite particulars would result in violation of various provisions of Legal Metrology Act, 2009 and the Rules made there under and such violators are liable for penal action. But this is not going to resolve the problem in instances where there is no declaration of retail sale price. In view of this, to overcome the lacuna, the Government should either extend the RSP Rules to goods under section 3(2) of CEA, 1944 or notify new rules for determining RSP in instances where they are not declared. This would ensure that there is some uniform practice in determining retail sale price of such goods in various field formations.

As it is, the textile industry is not at all happy with the new duty structure and added to this, if there is threat of litigation due to confusion in SSI benefit and RSP based levy then it will be total chaos. Let us hope that the issues will be resolved sooner than later and save the textile industry from further litigation.