Central excise duty

19.2 NATURE OF EXCISE DUTY

As per section 3 of Central Excise Act (CEA) excise duty is
levied if: -
1) There is a good.
2) Goods must be moveable
3) Goods are marketable
4) Goods are mentioned in the central excise tariff act
(CETA).
5) Gods are manufactured in India.
 TAXABLE EVENT
Taxable event means the stage when tax is levied/ applied. Manufacture or
production in India is the stage of levying tax. However, the government,
at the time, when the goods are removed from the factory, i.e., goods are
taken out from factory, collects tax.

Since, excise duty is levied at the time of removal of goods. Thus, it

becomes taxable at the time of their removal and therefore, the date of its
actual production is not relevant. The date of removal is relevant and the
rate of excise duty applicable on the date of removal shall be actual rate of
excise duty to be paid.
 RATES OF EXCISE DUTY

The basic rate of excise duty is 16% while in some cases there is
a special duty if 8% which makes the excise duty in those cases
at 24%. There is at present a cess for education called education
cess, which is 2% of the excise duty; therefore, the effective
excise duty comes out as 16.32% or 24.48%.
 CHARGABILITY OF EXCISE DUTY

Excise duty is levied on production of goods but the liability of excise duty
arise only on removal of goods from the place of storage, i.e., factory or
warehouse.
Excise duty is levied even if the duty was paid on the raw material used in
production.
Excise duty is levied on government undertakings also, e.g., Railways is liable
to duty on the goods manufactured by it.
Excise duty is an expense while calculating the profits in accounting.
Excise duty is levied if goods are marketable. Actual sale is not relevant.
Therefore, goods, which are given for free replacement during warranty
period, are also liable for excise duty.
 DEFINITIONS AND CONCEPTS

Central Excise Law is levied on manufacturer or production of goods. The

liability of paying the central excise is on the manufacturer. So let us
examine the concept and definitions of goods, manufacture and
manufacturer in detail.

FACTORY
According to section 2(e) Factory means any premises where any part of
the excisable goods other than salt are manufactured or any
manufacturing process is carried out.
 GOODS
Goods have not been defined in Central Excise Act. As per Article
366(12) of Constitution of India, Goods includes all material
commodities and articles.
Sale of Goods Act defines that “Goods” means every kind of movable
property other than actionable claims and money; and includes stocks
and shares, growing crops, grass and things attached to or forming
part of the land which are agreed to be severed before sale or under
the contract of sale.
Goods must be: i) Movable; and
ii) Marketable
Moveable means goods, which can be shifted from one place to
another place, e.g., motor car, mobile phone, computer etc.

The goods attached to earth are immovable goods, such as,

Dams, Roads, and Buildings etc.

Marketable means goods which are capable of being sold.

Moveable Goods are manufactured or produced but
immoveable goods are constructed
Goods produced for free distribution, as sample, gifts, or replacement during
warranty period is also liable of excise duty.

Excisable Goods are those goods, which are mentioned in the items of tariff in
CETA. Sec 2(d) defines “Excisable Goods as goods specified in the schedule
of CETA 1985 as being subject to a duty of excise and includes salt.”

ASSEMBLY – Assembly of various parts and components amount to

manufacture provided it result in movable goods which have distinctive
identity, use, character, name etc. e.g., assembly of computer is manufacture.
 VALUATION OF GOODS

Excise duty is payable on the basis of:

1. Specific duty based on measurement like weight,

volume, length etc.
2. Percentage of Tariff value.
3. Maximum Retail Price.
4. Compounded levy Scheme.
5. Percentage of Assessable Value (Ad-valour duty)
 Specific Excise Duty:
Specified excise duty is the duty on units like weight,
length, volume, etc.

Items Basis of Specific Excise Duty

Cigarettes length of cigarette
Matches per 100 boxes
Sugar per quintal
Marble slab and tiles square meter
Colour TV screen size in cm.
Cement per tonne
Excise Duty on Tariff Value: Tariff Value is the value fixed by
government from time to time. Government can fix different tariff
value for different classes. Tariff Value is fixed for Pan Masala,
Ready Made Garments.

Excise Duty on MRP: Government can specify the goods on which

excise
duty will be based on MRP.
Excise Duty on Assessable Value:

Assessable Value is the value of transaction i.e., the value

at which transaction takes place, in other words it is the
price actually paid or payable for the goods on sales. It is
also called
transaction value. It includes freight and transportation
charges, commissions to dealer etc.
Excise duty is paid on transaction value or assessable value
if:
1. Goods are sold at the time and place of removal.
2. Buyer and assessee (Manufacturer/seller) are not related.
3. Price is the only consideration for sale, i.e., money or
some valuable item is received on sale.
Assessable Value excludes amount of excise duty, sales
tax or other tax actually paid.
 DUTY PAYMENT PROVISIONS

Goods cleared from factory are cleared under an invoice. Duty is

payable on monthly basis by 5th of the next month in which duty
payment becomes due, i.e., the month in which goods are cleared from
the factory. Duty is paid through current account called PLA and /or
Central Value Added Tax Credit,
i.e., CENVAT Credit.

Goods can be cleared out of factory without payment of duty for

carrying out tests and omission per unit.
 Small Scale Industry (SSI)
SSI is required to pay the duty by 15th of the next
month. However, the duty for the month of March is paid by 31st March
itself not on 5th of next month i.e., 5th of April because government accounts
closes on 31st March.

If the due date is Sunday or holiday, the duty can be paid on next working day.
If duty is not paid then assessee is liable to pay the interest also on outstanding
amount. If duty and interest is not paid for 30 days after due date, then the
facility to pay duty on monthly basis will be withdrawn till the time interest
and duty is paid or 2 months, whichever later. Thus, the facility of monthly
payment of excise duty is withdrawn at least for 2 months. During this period
duty will be paid on removal basis.
 CENVAT System:
CENVAT is applicable on central excise duty. In Central
Excise the manufacturer has to pay tax on the value of goods manufactured
but taking the VAT system he can claim the tax credit i.e., CENVAT credit of
the tax paid on:
1. Input goods used in manufacture
2. Input services used in manufacture.
It should be noted that no CENVAT credit is available if:
1. Final production is exempt from excise duty.
2. The document showing proof of payment of duty on input is not
available.

It is worth to note that duty paid on input cannot be enchased / refunded it can
only be adjusted against duty on finished goods .
Input output relation: There need not be an input –output relation for
claiming CENVAT credit, e.g., duty paid on automobile components used in
automobile manufacturer can be adjusted against duty on textile production.

CENVAT credit on Capital Goods:

Any duty paid on machinery and plant, spare parts of machine, tools, dies etc.
used in manufacture can also be adjusted against duty payable on production.
However, up to 50% credit is available in current year and balance in
subsequent financial year.
Motorcar is not a capital asset and for the purpose of CENVAT Credit for all
manufacture. However it may be taken as capital good for service tax in case
of service provider uses motor car for service providing purpose e.g., Courier,
tour operator, rent-a-cab, cargo, outdoor caterer, pandal and shamiana
operator, and goods transport agency.
 Customs duty

Meaning of customs duty

Customs duty is a duty or tax, which is levied by Central Govt. on import of

goods into, and export of goods from, India. It is collected from the importer
or exporter of goods, but its incidence is actually borne by the consumer of the
goods and not by the importer or the exporter who pay it.
These duties are usually levied with ad valorem rates and their base is
determined by the domestic value ‘the imported goods calculated at the
official exchange rate. Similarly, export duties are imposed on export values
expressed in domestic currency.
Basic Customs Duty
All goods imported into India are chargeable to a duty under
Customs Act, 1962 .The rates of this duty, popularly known as basic
customs duty, are indicated in the First Schedule of the Customs
Tariff Act, 1975as amended from time to time under Finance Acts.
The duty may be fixed on ad –valorem basis or specific rate basis.

The duty may be a percentage of the value of the goods or at a

specific rate. The Central Government has the power to reduce or
exempt any good from these duties.
 Auxiliary Duty of Customs
This duty is levied under the Finance Act and is leviable all goods imported into the
country at the rate of 50 per cent of their value. However this statutory rate has
been reduced in the case of certain types of goods into different slab rates based on
the basic duty chargeable on them.

Additional (Countervailing) Duty of Customs

This countervailing duty is leviable as additional duty on goods imported into the
country and the rate structure of this duty is equal to the excise duty on like articles
produced in India. The base of this additional duty is c.i.f. value of imports plus the
duty levied earlier. If the rate of this duty is on ad-valorem basis, the value for this
purpose will be the total of the value of the imported article and the customs duty on
it (both basic and auxiliary).
Export Duties

Under Customs Act, 1962, goods exported from India are chargeable to export duty The
items on which export duty is chargeable and the rate at which the duty is levied are given
in the customs tariff act,1975 as amended from time to time under Finance Acts.
However, the Government has emergency powers to change the duty rates and levy fresh
export duty depending on the circumstances.

Cesses

Cesses are leviable on some specified articles of exports like coffee, coir, lac,
mica, tobacco (unmanufactured), marine products cashew kernels, black
pepper, cardamom, iron ore, oil cakes and meals, animal feed and turmeric.
These cesses are collected as parts of Customs Duties and are then passed
on to the agencies in charge of the administration of the concerned
commodities.
Education cess on customs duty

An education cess has been imposed on imported goods w.e.f. 9-7-2004. The
cess will be 2% of the aggregate duty of customs excluding safeguard duty,
countervailing duty, Anti Dumping Duty.
 Methods of Valuation for Customs
The Valuation Rules, 1988, based on WTO Valuation Agreement (earlier
GATT Valuation Code); consist of rules providing six methods of valuation.
The methods are:
(a) Transaction Value of Imported goods
(b) Transaction Value of Identical Goods (c) Transaction Value of Similar Goods
(d) Deductive Value, which is based on identical or similar imported goods, sold in India.
(e) Computed value, which is based on cost of manufacture of goods plus profits
(f) Residual method based on reasonable means and data available.

These are to be applied in sequential order, i.e. if method one cannot be

applied, then method two comes into force and when method two also cannot
be applied, method three should be used and so on. The only exception is that
the ‘computed value’ method may be used before ‘deductive value’ method, if
the importer requests and Assessing Officer permits.
 Transaction value of same goods:

This is the first and primary method as per rule 3 of Valuation Rules. As
per rule 4(1), ‘transaction value’ of imported goods shall be the price
actually paid or payable for the goods when sold for exported to India,
adjusted in accordance with provisions of rule 9.

[Rule 9 gives costs and services to be added to transaction value].

Transaction value of identical goods: Rule 5 of Customs Valuation Rules
provide that if valuation on the basis of ‘transaction value’ is not possible, the
‘Assessable value’ will be decided on basis of transaction value of identical
goods sold for export to India and imported at or about the same time, subject
to making necessary adjustments.
Identical goods’ are defined under Rule 2(1)(c) as those goods which fulfil all following
conditions i.e.
(a) the goods should be same in all respects, including physical characteristics, quality and
reputation; except for minor differences in appearance that do not affect value
of goods. (b) The goods should have been produced in the same country in
which the goods being valued were produced. (c) they should be produced by
same manufacturer who has manufactured goods under valuation - if price of
such goods are not available, price of goods produced by another manufacturer
in the same country.
Transaction value of similar goods: If first method of transaction value of
the goods or second method of transaction value of identical goods cannot be
used, rule 6 provide for valuation on basis of ‘Transaction value of similar
goods imported at or about the same time'.

Rule 2 (1) (e) define ‘similar goods’ as (a) alike in all respects, have like
characteristics and like components and perform same functions. These should
be commercially inter-changeable with goods being valued as regards quality,
reputation and trade mark. (b) the goods should have been produced in the
same country in which the goods being valued were produced. (c) they should be
produced by same manufacturer who has manufactured goods under
valuation - if price of such goods are not available, price of goods produced by
another manufacturer in the same country can be considered.
Deductive Value:

Rule 7 of Customs Valuation Rules provide for the next i.e.

fourth alternative method, which is called ‘deductive method'. This method
should be applied if transaction value of identical goods or similar goods is not
available; but these products are sold in India. The assumption made in this
method is that identical or similar imported goods are sold in India and its
selling price in India is available. The sale should be in the same condition as
they are imported.
Assessable Value is calculated by reducing postimportation
costs and expenses from this selling price. This is called ‘deductive value’
because assessable value has to be arrived at by method of deduction (deduction
means arrive at by inference i.e. by making suitable additions/subtractions from
a known price to arrive at required ‘Customs Value').
Computed Value for Customs:
If valuation is not possible by deductive
method, the same can be done by computing the value under rule 7A, which is
the fifth method. [This method has been added w.e.f. 24-4-95]. If the importer
requests and the Customs Officer approves, this method can be used before
the method of ‘deductive value'.
In this method, value is the sum of
(a) Cost of value of materials and fabrication or other processing employed in
producing the imported goods (b) an amount for profit and general expenses
equal to that usually reflected in sales of goods of the same class or kind,
which are made in the country of exportation for export to India. (c) The cost
or value of all other expenses under rule 9 (2) i.e. transport, insurance,
loading, unloading and
handling charges.
 Residual Method:

The sixth and the last method is called “residual method”.

It is also often termed as ‘fallback method’. This is similar to ‘best judgment
method’ of the Central Excise. This method is used in cases where ‘Assessable
Value’ cannot be determined by any of the preceding methods. While deciding
Assessable Value under this method, reasonable means consistent with general
provisions of these rules should be the basis and valuation should be on basis
of data available in India. This method can be considered if valuation is not
possible by any other method
In other words, selling price for export to India can alone form the basis.
(Thus, fixing ‘tariff value’ is really against this rule).
 Valuation for Assessment of Export Goods

Customs value of export goods is to be determined under section 14 (1) of

Customs Act. Customs Valuation Rules are applicable only for imported
goods. Thus, Assessable Value of export goods shall be “deemed to be the
price at which such or like goods are ordinarily sold, or offered for sale, for
delivery at the time and place of exportation in the course of international
trade, where the seller and the buyer have no interest in the business of each
other or one of them has no interest in the other, and the price is the sole
consideration for the sale or offer for sale”.