Taxation of Small Scale Industries

A small scale industry (SSI) is an industrial undertaking in which the investment in fixed assets in plant & machinery, whether held on ownership term or on lease or hire purchase, does not exceed Rs. 1Crore. However, this investment limit is varied by the Government from time to time. Entrepreneurs in small scale sector are normally not required to obtain a licence either from the Central Government or the State Government for setting up units in any part of the country. Registration of a small scale unit is also not compulsory. But, its registration with the State Directorate or Commissioner of Industries or DIC's makes the unit eligible for availing different types of Government assistance like financial assistance from the Department of Industries, medium and long term loans from State Financial Corporations and other commercial banks, machinery on hire-purchase basis from the National Small Industries Corporation, etc. Registration is also an essential requirement for getting benefits of special schemes for promotion of SSI viz. Credit guarantee Scheme, Capital subsidy, Reduced custom duty on selected items, ISO-9000 Certification reimbursement & several other benefits provided by the State Government. The Ministry of Micro, Small and Medium Enterprises acts as the nodal agency for growth and development of SSIs in the country. The ministry formulates and implements policies and programmes in order to promote small scale industries and enhance their competitiveness. It is assisted by various public sector enterprises like:

is the apex body for assisting the Government in formulating and overseeing the implementation of its policies and programmes/projects/schemes.
Small Industry Development Organisation (SIDO)

was established by the Government with a view to promoting, aiding and fostering the growth of SSI in the country, with focus on commercial aspects of their operation.
National Small Industries Corporation Ltd (NSIC)

The Ministry has established three National Entrepreneurship Development Institutes which are engaged in development of training modules, undertaking research and training and providing consultancy services for entrepreneurship development in the SSI sector. These are:y
National Institute of Small Industry Extension Training (NISIET)

at Hyderabad,

National Institute of Entrepreneurship and Small Business Development (NIESBUD)

at NOIDA

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Indian Institute of Entrepreneurship (IIE)

at Guwahati

The National Commission for Enterprises in the Unorganised Sector (NCEUS) has been constituted with the mandate to examine the problems of enterprises in the unorganised sector and suggest measures to overcome them.

Small Industries Development Bank of India (SIDBI)

acts as apex institution for financing

SSIs through various credit schemes. In a developing country like India, Small Scale Industries play a significant role in economic development of the country. They are a vital segment of Indian economy in terms of their contribution towards country's industrial production, exports, employment and creation of an entrepreneurial base. These industries by and large represent a stage in economic transition from traditional to modern technology. Small industry plays a very important role in widening the base of entrepreneurship. The development of small industries offers an easy and effective means of achieving broad based ownership of industry, the diffusion of enterprise and initiative in the industrial field. Given their importance, the Government policy framework right from the First plan has highlighted the need for the development of SSI sector keeping in view its strategic importance in the overall economic development of India. Accordingly, the policy support from the Government towards Small Scale Industries has tended to be conducive and favourable to the development of small entrepreneurial class. Government accords the highest preference to development of SSI by framing and implementing suitable policies and promotional schemes. The most important promotional policy of the Government for the SSI's is fiscal incentives in the form of tax concessions and exemptions of direct or indirect taxes leviable on production or profits. With effect from financial year 2005-06,SSIs can claim deductions in respect of profits and gains(under section 80IB of Income tax Act) at the following rates:

If SSI unit is owned by a company, the deduction available is 30% for first 10 years. If SSI unit is owned by a co-operative society, the deduction available is 25% for first 10 years.

If any other person owns SSI unit,the deduction to be claimed is 25% for first 10 years.

SSI unit can avail this tax exemption after fulfilling following conditions:


They should not be subsidiary of, or owned or controlled by other industrial undertakings. They should not be formed as a result of splitting up or reconstruction of any industrial undertaking/business. SSI units can manufacture any nature or type of goods, which they are permitted to do so. They should have commenced business between 1st April 1991 and 31st March 2002. They should employ atleast 10 workers in a manufacturing process carried out with aid of power or atleast 20 workers without aid of power.

This tax exemption from total income is allowed from the assessment year in which the unit begins to manufacture goods.

Small Scale Industries are subjected to excise duties under the Central Excise Tariff Act,1985(5 of 1986). The eligibility for excise concessions for SSIs has been based on annual turnover rather than SSI registration. SSI units having turnover less than Rs. 4 crores are only eligible for concessions. Government of India has provided various concessions to SSIs by granting full exemption from payment of central excise duty on a specified output and thereafter slab-wise concessions. Thus concessions in this regard are:

SSI units producing goods upto Rs. 100 lakhs are exempted from payment of excise duties.

SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate storeroom for storing finished products.

They are not required to maintain any statutory records such as daily stock accounts, etc. Their own records are adequate.

SSI exemption is available for goods for home consumption as well as goods exported to Nepal and Bhutan.

Choice of streams of concessions/exemptions:

SSI Scheme (without CENVAT) :- Units can avail full exemption upto turnover or value

of clearance of Rs. 100 lakhs and pay normal duty thereafter in the slab-rate ofRs. 100-300 lakhs. This option can be exercised automatically. Such SSI units can avail Cenvat credit on inputs only after reaching turnover of Rs. 100 lakhs. This scheme is applicable to all those units mentioned under SSI exemption notification no.8/2003-CE .This notification grants exemption in respect of basic excise duty and special excise duty. The manufacturer may opt for not availing exemption contained in this notification and instead pay normal rate of duty on the clearances. But once the option is exercised, it shall continue till the financial year ends.

SSI Scheme(with CENVAT) :- Units can avail Cenvat credit on inputs on all its turnover.Upto the value of clearance of Rs. 100 lakhs,units have to pay 60% of normal duty and thereafter for value of clearance of Rs.100-300 lakhs,they have to pay normal rate of duty .'Assessable value' is used to calculate limit of 100 and 300 lakhs which is equal to wholesale price at factory gate,exclusive of taxes .A manufacturer can opt this option any time determining his eligibility for concession and the concessional rate of duty.While exercising this option,the manufacturer should inform in writing to the Assistant Commissioner of Central Excise with a copy to its Superintendent giving following details:(a)name and address of manufacturer; (b)Location/locations of factory/factories; (c)description of inputs used in manufacture of specified goods and its description thereafter:(d)date from which option under SSI exemption notification (No.9/2003-CE) has been exercised; (e)Aggregate values of clearances of specified goods(excluding the value of clearances not covered under SSI exemption notification)till the date of exercising the option.

Value of clearances which are not eligible for SSI concessions, that is, not covered under SSI exemption notification are as follows:

Clearances of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods

Clearances of strips of plastics used within the factory of production for weaving of fabrics or for manufacture of sacks or bags made of polymers of ethylene or propylene

Clearances of goods manufactured by SSI unit with the brand name or trade name of another person(unless goods are manufactured in rural areas)

Clearances of goods manufactured by SSI unit for captive consumption

Clearances of goods exempted under any other notification.

Procedural concessions to SSI:

Quarterly Return:-SSI units availing concessions need not submit monthly ER-1 Return. They only have to submit quarterly ER-1 return by 20th of the following month.

SSI units have to pay duty by 15th of following month. They also have to pay duty in March by end of the month each year.

Export procedures for SSI :- SSI units not covered under excise provisions have to follow simplified export procedures such as they do not have to prepare ARE-1 Form, etc.

Excise inspectors, officers and audit parties can visit SSI unit only with specific permission taken from Assistant Commissioner and for a specific purpose. They have to enter relevant particulars in Visitors book maintained by registered person .Normally, audit of SSI unit has to be done once in two or five years(except for units who pay duty of Rs. 1 crore or above, who should be audited every year).

Small Scale Industry

16. The SSI sector makes a valuable contribution of about 40 per cent to our total manufacturing sector production, 35 per cent to exports and employs over 160 lakh workers. Our commitment to the SSI sector is total. The commonest complaint of SSI entrepreneurs and associations are the insufficiency of timely credit and the harassment of the "Inspector Raj". 17. On the credit problems of the SSI sector, I propose the following initiatives: At present, for SSI units having aggregate working capital requirements up to Rs.2 crore, the working capital limit is determined by the banks on the basis of a simple calculation of 20 per cent of their annual turnover. This facility is being doubled to Rs.4 crore. This will ease the flow of bank credit to SSI.

To moderate the cost of credit to SSI units, RBI will advise the banks to accord SSI units with a good track record, the benefit of lower spreads over the prime lending rate.Enhanced powers would be delegated to bank managers of specialised SSI branches to ensure that most credit proposals are decided at the branch level. At present, Small Industrial Development Bank of India (SIDBI) is a subsidiary of IDBI and IDBI is the major shareholder in State Finance Corporations (SFCs). To equip SIDBI to play its apex role in SSI credit provision more effectively, SIDBI will be delinked from IDBI and IDBI shareholding in SFCs will be transferred to SIDBI. SSI units are often handicapped by delays in the settlement of their dues from larger companies. To tackle this problem, I am asking RBI to strengthen the existing mechanisms available to SSI for discounting of bills. RBI will also modify its guidelines to commercial banks on credit appraisal to give greater weight to the amount of overdue outstandings that large units have in respect of SSI supplier. My colleague, the Minister of Industry is separately bringing amendments in the Interest on Delayed Payments to Small Scale and Ancillary Industry Undertaking Act,1993 to make the existing legislation more effective. 18. As for the pervasive problem of the "Inspector Raj", I shall be announcing far reaching changes in the administration of Central Excise which should help SSI units significantly. I urge all States to review their laws and regulations and make necessary changes to lighten the burden of the inspector raj problem of SSI units. 19. I shall also be announcing some tax concessions to the SSI sector later in my speech.

Small Scale Exemption Scheme 1.The contribution of Small Scale Sector in the industrial growth of the Indian economy and to the Gross Domestic Product is significant besides the potential for employment generation. The Small Scale Sector has for itself a special dispensation in the Central Excise law in order to make it competitive in the domestic and global market. Central Excise duty concessions have been extended to the units in the small-scale sector based on their turnover so as to facilitate them to graduate by availing these concessions in a graded manner.

ELIGIBILITY 2.Manufactuerers of specified commodities having clearances not exceeding Rs. 3 crores in the preceding Financial Year are eligible for this exemption. REGISTRATION OF SMALL SCALE COMPANIES 3. Every manufacturer of excisable goods is required (under Rule 174 of Central Excise Rule 1944) to get registered with the Central Excise Department before starting production. The SSI must file for registration when their turn over crosses Rs. 1 Crore only. The application for the registration should be submitted to the jurisdictional Range Superintendent of Central Excise. The Registration Certificate will be automatically granted. If it is not granted within 30 days of the receipt of the application it is deemed to have been granted. There is no fee for registration and a factory or a unit is to be registered once only. There is no need for renewal of the registration. The registration is applicable only for the premises where the manufacture is taking place. A separate registration is required for each premise. In case a new product is to be manufactured, the registration certification should be got endorsed for the additional items. Exemption from registration. 4. The requirement of registration has been exempted for the following persons.(Notification No. 22/98 CE(NT) dated 4.6.98 as amended)
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Manufacturers who are only manufacturing goods, which are exempted from payment of duty of Central Excise. For small scale industries who are manufacturing goods up to an aggregate value of less than Rs. 90 lacs. After crossing Rs. 90 lakhs turn over the SSI must file declaration. In case an SSI is manufacturing goods of more than 30 lacs he must file a declaration only once. (the form is enclosed).

WHO IS COVERED BY THE SSI SCHEME 5. At present, in terms of notification nos. 8/2000-CE and 9/2000-CE, both dated 1st March, 2000, and effective from 1st April, 2000, a general small scale excise duty exemption scheme has been made operational providing slab-rated concessions from excise duty in respect of clearances of specified excisable goods. Under these notifications, all goods specified in the First Schedule to the Central Excise Tariff Act, 1985 are eligible to avail the exemptions/concessions except for those goods which are chargeable to NIL rate of duty or which are exempt from whole of the duty and certain products as given in the Annexure to these notifications. With effect from 1st April, 2000, the hitherto commodity specific exemption schemes for SSI units manufacturing cosmetics, refrigerating and air conditioning equipment, tread rubber and for articles of plastics have also been merged with the general small scale exemptions, as provided under the aforesaid notifications.

6.I. The salient features of these exemption schemes, as contained in the aforesaid notifications are as under:Where the SSI unit does not avail CENVAT
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Notification No.8/2000-CE, dated 1st March, 2000 as amended. For first clearances effective from 1st April of a financial year up to an aggregate value of Rs. 1 Crore, duty is exempted in respect of those SSI units which do not intend to avail CENVAT up to a value of clearances of rupees one crore.

6. II.Where the SSI unit avails CENVAT Notification No.9/2000-CE, dated 1st March, 2000 as amended. The graded scheme of exemption in respect of those SSI units which intend to avail CENVAT is as under:Sr. No. Value of Clearances Rate of Duty 1 First clearances effective from 1st April of a financial year Up to an aggregate value of Rs.1 crore 60% of the normal rate of duty 2 Subsequent Clearances at the normal rate of duty 7. A. The following clearances are excluded from computation of value of clearances
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Clearances of the specified goods which are used as inputs for further manufacture of specified goods within the factory irrespective of the value of clearances. Clearances of excisable goods affixed with the brand name or trade name of another person who is not eligible for availing the exemption under the aforesaid notification. However, the clearances of goods affixed with the brand name or trade name of another person - other than those which are in the nature of components or parts of machinery or equipment for use as original equipment in the manufacture of the said machinery, goods bearing the brand name of KVIC, NSIC or a State Small Industries Corporation or State KVIB or those goods manufactured in a factory located in a rural area are not eligible for the exemption/concession from excise duty irrespective of the value of clearances. Clearances which are fully exempt from excise duty under any other notification (other than those giving exemption based on quantity or value of clearances).

B. The conditions for availing the aforesaid exemption/concession from excise duty are as under:-

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 three hundred lacs in the preceding financial year. The manufacturer does not avail of the credit of duty under the CENVAT scheme upto an aggregate value of clearances of rupees one hundred lacs.

C. The thresholds of excise duty concessions under the aforesaid small-scale schemes act as a ladder for enabling the small units to grow and graduate into bigger units.

D. Units availing SSI exemption are permitted to remove specified goods to a place outside the factory for getting any job work done on any specified goods without payment of duty (Notification number 83/94 and 84/94 Central Excise dated 11.4.94 as amended) 8. HOW TO AVAIL CENVAT/CAPITAL GOODS CREDIT The Cenvat scheme is a system whereby a manufacturer can avail of credit of the duties paid by a manufacturer of his raw materials, inputs, parts and components or his capital goods to pay his own Central Excise Duty. This is intended to ensure that no manufacturer is forced to pay duty on the duty portion of his product. Briefly, in order to avail the CENVAT credit, the goods manufactured or produced have to pay duty. All inputs if used in the manufacture of the final product are eligible for Cenvat {except high-speed diesel oil and motor spirit (petrol)}. All capital goods actually used in the manufacture of the final products are also eligible. All finished goods are eligible for the benefit of Cenvat except matches. However, availment of Cenvat on capital goods will be spread over two years, half in the first year. A manufacturer availing cenvat on capital goods must not avail depreciation under the income tax act on the duty part of the cost of the capital goods. 9. An SSI who is to take the benefit of Cenvat scheme must give a letter of C.Ex. and maintain the appropriate registers. Before availing cenvat, the SSI must physically receive the goods under a duty paying document or a proper invoice issued by a registered dealer. The SSI must maintain an registers giving details of receipt and disposed of inputs & capital goods and payment of duty by credit. Registers. Once he has availed cenvat on a duty paying document the documents must be defaced so that it can not be used again. These duty paying document already defaced and the record along with his own delivery documents must be shown to the Central Excise officers on demand. There is a provision for removing raw materials, inputs or capital goods on which cenvat credit has been taken out of the factory for further processing, repairs or

job work. Details of the cenvat scheme may be obtained from the local Central Excise officer. Please note that when duty is being paid vide cenvat credit, the credit accruing on goods received after the last day of the month in which duty is due to be paid, can not be utilized (CBECs circular 542/38/2000-Cx. Dated 25.8.2000) 10. QUARTERLY REPORT OF PRODUCTION AND CLEARANCE (RT-12) This report is to be filed once in a quarter, before the 10th day of the close of each quarter. The Jurisdictional Commissioner of Central Excise can permit filing up to 20 days from the close of each quarter. (Rule 173 G) A statement of invoice wise duty payment is also required to be filed, as per the Proforma placed below along with the quarterly return to facilitate cenvat verification. HOW TO PAY DUTY 11.Duty can be paid in a lump sum at the end of the month and before the 15th day of the next month. Duty is to be paid to the notified bank in the area under a TR-6 challan. (See format below) This challan should definitely contain number in seriatum for the Financial Year starting with Serial number 1 It should also have the head of accounts (in numbers), assessees ECC number, branch bank code, focal point code and any assessees number allotted by the Commissionerate. The SSI will be given the triplicate copy for his record and the quadruplicate copy which is to be given to the Range Suptd., with the RT-12 that the quarterly return. Duty can also be paid by debit entry in RG-23A or RG23 C for those SSIs who are availing of CENVAT credit. 12.Only after obtaining the receipted TR-6 challan from the bank should a credit entry be made in the PLA. In case of strike of the banks or closure due to unforeseen circumstances the Commissioner will issue a trade notice permitting the SSI to send the payment by cheque by registered post AD or special messenger with the TR-6 challans in quadruplicate duly filled in. These documents are to be sent to the Chief Accounts Officers of the Commissionerate with copy to the Range concerned. There must a clear declaration that the SSI has sufficient balance in their bank account. 13. In case payment is not made by the specified date interest is levible. The interest at present is 24% per annum on the outstanding amount, for the period starting with the first day after the due date until the date of actual payment of the outstanding amount. The accounting code for entry in the TR-6 challan is as follows: Basic excise duties Special excise duties Additional excise duties in lieu of sales tax Additional excise duties on textiles Cess on tea Cess on cotton 00380003 00380172 00380335 00380368 00380393 00380399

Cess on Bidi Cess on Sugar Cess on Paper Cess on Copra Cess on automobiles Other receipts COMPUTERISATION OF RECORDS

00380415 00380426 00380436 00380395 00380442 00380453

14. The Central Excise department has no objection to accepting computerised documents issued by the manufacturers instead of the prescribed forms or records. The new rule 226A permits the above. Records can be kept on any electronic media and the electronic records must be kept even if a hard copy is kept. The print out (hard copy) of records and documents must be taken out at the end of each month and kept in bound folders separately for each type of record, return, document etc. Persons maintaining their accounts on computer must ensure that proper back up record is maintained and preserved for a period of 5 years counted from the first day of the Financial Year following the financial year to which a record etc. pertain. In case the department requires the records they must produce the same before Central Excise, Audit parties of the department or C &AG officers. FORMAT OF INVOICE UNDER CENTRAL EXCISE 15. In case the SSI is making payment of duty only at the end of the month, a separate indication of "duty payable" must be made on the invoice or other clearance document to enable the buyer to avail cenvat. In most cases of sale to non-related persons, no declaration of value needs to be made separately. However, a declaration of marketing pattern is required under Rule 173 C of Central Excise Rules, 1944. Any changes in the marketing pattern must be informed to the department. Manufacturers are required to declare the value under Section 4 of the Central Excise Act in their documents by which the goods are sold or taken out of his factory. The information that is essential to be included in the invoice/clearance documents is as in annexure CLASSIFICATION DECLARATION 16. All assessees must give a classification declaration to the Range Supt. before commencing production. The format etc., will be obtained from the local central excise office. VISITS BY OFFICERS 17. No SSI factory should be visited by Central Excise Inspectors except with the specific permission of the Assistant Commissioner and for a specific purpose. The

officers who visit are required, on their visit to enter the relevant particulars in the visitors book being maintained by the SSI. WHO TO APPROACH IN CASE OF PROBLEMS FACED 18.In case of any problems faced, the SSI is advised to approach either the jurisdictional Range Supdt., or the Asstt. Commissioner of the Division or the Commissioner of Central Excise. Annexure as above FORM To, The Assistant Commissioner, Central Excise ---------------I/We.declare that to the best of my/ our knowledge and belief the information furnished in the Schedule below is true and complete. I/We undertake to apply for a Central Excise registration certificate in the proper form as soon as the value of the goods, mentioned in the said Schedule, cleared for home consumption in a financial year, reaches the full exemption limit. I/We undertake to apply for a Central Registration in the proper form as soon as the goods mentioned in the Schedule become chargeable to duty. I/We undertake to maintain such records and follow such procedure as may be prescribed by the Commissioner in relation to the exempted goods. I/We also undertake to intimate any change in the information furnished in the said Schedule.

THE SCHEDULE

1. Name(s) and address(es) of the proprietors/all partners/Directors of the company 2. 3. 4. 5. 6.

owning the factory. Name and address of the factory Name and addresses of other factories/manufacturers(producing such goods) in whom the manufacturer claiming the exemption has proprietary interest. Full description of the goods (heading-wise) manufactured by the factory. Value/quantity of the goods cleared during the preceding financial year. Value/quantity of the goods estimated to be cleared in the current financial year.

7. Heading No. or sub-heading No. of the Schedule to the Central Excise Tariff Act,
1985(5 of 1986) under which the goods are classifiable. 8. (a) Reference to the heading/sub-heading of the said Schedule or the notification issued under rule 8 of the Central Excise Rules, 1944 or Section 5A of the Central Excise Act, 1944 or Section 5A of the Central Excise Act, 1944( 1 of 1944), as the case maybe (under which the goods are exempted from the whole of the duty of excise leviable thereon). (b) Ground of exemption under the said heading/sub-heading or the said notification 9. Process of manufacture. (Signature of Applicant ) Note. Portion of the Form/Schedule that is not relevant to a particular manufacturer May be deleted. See paragraph STATEMENT SHOWING MONTHWISE DUTY PAYMENT FOR THE QUARTER ENDING.
Serial No. Invoice No. and date Name of the consignee ECC No. of consignee

(1)

(2)

(3)

(4)

Assessable value

Duty paid

Detail of Duty Debited i.e. entry no. & date in PLA. RG 23A Pt. II or RG 23C Pt. II

(5)

(6)

(7)

i. ii. iii. iv. v. vi. vii. vii.

Full postal address of Range and Division : Name, Address and Code Number/Registration Number of Factory/Warehouse : Name and Address of consignee : Description and Specification of goods : Number and Description of Packages : Total quantity of goods(net) : Total price of goods Details of deductions/additions made to arrive at Value under section 4 of the Act

viii. ix. x. xi. xii. xiii. xiv. xv. xvi.

Assessable Value/Tariff Value per unt Total assesssable alue/tariff value Tariff heading Number/Exemption Notification No. Total duty paid(Both in words and figures) Serial Number of debit entry in PLA/RG-23 Date and time of issue of invoice Date and time of removal of goods Mode of transport and motor vehicle Registration number Appropriate certificate as below

"Certified that that particulars given above are true and correct and the amount indicated represents the price actually charged and that there is no flow of additional consideration directly or indirectly from the buyer" OR "Certified that the particulars given above are true and correct and the amount indicated is provisional as additional consideration will be received from the buyer on account of.". NOTE: i. Value indicated against S.No. (ix) and (x) shall correspond to the assessable value determined in invoice or as indicated in the declaration filed or tariff value as the case may be. The rate of duty and the amount of duty given against S.No. (xii) and (xiii) should be indicated separately for each type of duties, such as basic duty, additional duty, cess etc.

ii.