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Taxation and Excise Policy

Taxation and Excise Policy

Today, the MSME sector produces almost 8000 products. The number of units have gone up from 19 lakhs in 1991 to over 31 lakhs in 1999. During the 7 year period from 1991 when liberalization began till 1998, the MSME sector created almost 42 lakhs new jobs whereas the entire organised industry including government was able to create only 14.3 lakhs new jobs.

From time to time, various incentives in the shape of exemptions from payment of excise duties and licensing registration controls have been extended to small scale units producing excisable goods. This has been the long standing and consistent policy of the Government to encourage the small scale sector and to improve their competitive position vis-à-vis the large manufacturing units. Government of India has provided a major relief by granting full exemption from the Payment of central excise duty on a specified output and thereafter slab-wise conceMSMEons of certain specified items in 1978. A general Small Scale Exemption Scheme in respect of specified commodities was introduced in 1985. The same was replaced in 1986 and subsequently amended from time to time by a number of notifications in 1993. With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to cover clearances of goods as the duty-paying document.

In the Budget 1995-96, the limit of Rs.2 crore turnover for a small scale unit to be eligible to exemption was revised to Rs.3 crore. MSME units whose clearances dis not exceed Rs.30 lakhs in a financial year were exempted from payment of excise duty. MSMEs are also not required to maintain any statutory records such as daily stock account of production and clearances, raw material account, personal ledger account, RG-23A account, RG-23C account, stock register of goods sent for Processing of job-work, invoice records etc. Their own records are adequate for excise purposes. The exemption limit was raised to Rs.50 lakhs in the budget 1998-99 and further to Rs.100 lakhs in 2000. MSMEs have been allowed to pay duty on a monthly basis w.e.f 1-4-1999.

Eligibility as an MSME Unit

The pre-requisite for the eligibility for excise conceMSMEons was that MSME unit should be registered with the State Directorate of Industries or DC(MSME). At-the time of obtaining the exemptions and conceMSMEons, the MSME unit was required to produce such a certificate of registration from the respective Directorate of Industries or DC(MSME),

In the year 1986, MSME units not registered with the State Directorate of Industries were also given exemptions, but on different eligibility conditions. With effect from 1-4-1994, the requirement of obtaining registration certificate from the Directorate of Industries or DC(MSME) has been dispensed with as a condition for available or excise duty conceMSMEons. This implies that there would be no distinction between registered and unregistered units for MSME conceMSMEons. Further, the eligibility for excise conceMSMEons for MSMEs has been based on annual turnover rather than MSME registration which is based on the criterion of investment in plant and machinery. Only the units previously registered with DGTD and now with SIA are not considered eligible for MSME conceMSMEons.

There are two exemption schemes available for the MSME sector which have been amended by the Finance Act, 2000. The schemes are:

MSME Scheme (Without CENVAT)

This scheme as contained in Notification No.8/2003-CE dated 1.3.2003 is effective from 1.4.2000. The following rate of duty is applicable to such manufactures whose turnover does not exceed Rs. 3 crores in the previous financial year in respect of clearances of excisable goods for home consumption (including exports to Nepal or Bhutan) from one or more factories of the same manufacturer or from factory by one or more manufacturers:

Rate of duty in respect of Clearances of Excisable Goods

It may be noted that beyond clearances of Rs.100 lakhs, the manufacturer is liable to pay normal rate of duty and accordingly he can avail CENVAT credit at this stage. Similarly, CENVAT credit on capital goods can be availed and utilised after crossing the limit of Rs.100 lakhs.

The scheme has been extended to articles of plastic, cosmetic and toilet preparations, tread rubber, airconditioning and refrigeration and parts, which were earlier covered under a separate exemption. All such clearances of the specified goods which are used for captive consumption in production of the specified goods are subjected to ‘nill’ rate of duty and the Table itself. The notification grants exemption in respect of basic excise duty and special excise duty. The manufacturer may opt for not availing exemption contained in the notification and instead pay the normal rate of duty on the clearances. But once the option is exercised, it shall continue till the remaining part of the financial year.

MSME exemption notifications clearly use the words ‘first clearances on or after 1st April in any financial year’. In Remakrishna Engineering Works v. CCE, (1996) 83 ELT 346 (CEGAT), it has been held that all clearance from 1st April in chronological order have to be considered for purpose of calculation of exemption limit of Rs.100 lakhs. Thus, if some goods are cleared on payment of duty, those will also have to be considered for calulating the limit of 100 lakhs.

Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’ as per section 4 i.e., wholesale price at factory gate, exclusive of taxes, where price is the sole criteria. When goods are assessed on basis of MRP (Maimum Retail Price) the ‘Value’ will be as determined under section 4A.

MSME Scheme (with CENVAT)

This scheme as contained in Notification No.9/2003-CE dated 1.3.2003 is effective from 1.4.2003. The Notification provides the concessional rate of duty in respect of clearances of specified goods for home consumption (including exports to Nepal or Bhutan), and also states that all clearances of the specified goods which are used for captive consumption in production of the specified goods shall be subjectedd to ‘nil’ rate of duty. Such clearances shall not be counted for determining the aggregate value of clearance of the specified goods. The following Table shows the Rate of Duty.

Rate of duty in respect of Clearances of Specified goods

The exemption shall apply only subject to the following conditions:

1. A manufacturer who intends to avail the exemption under this notification shall exercise his option in writing for availing the exemption under this notification shall exercise his option in writing for availing the exemption under this notification before effecting the first clearances and such option shall be effective from the date of exercise of the option and shall not be withdrawn during the remaining part of the financial year.

2. While exercising the option under condition (i), the manufacturer shall inform in writing to the jurisdiction Deputy Commissioner or assistant Commissioner of Central Excise with a copy of the Superintendent of Central Excise giving the following particulars, namely:-

   1. name and address of the manufacturer;
   2. location/locations of factory/factories;
   3. description of specified goods produced;
   4. date from which option under this notification has been exercised;
   5. aggregate value of clearances of specified goods (excluding the value of clearances referred to in para 3 of this notification) till the date of exercising the option.

3. Where a manufacturer opts for availing the exemption under this notification in terms of condition (i) above, the clearances of specified goods already made during the financial year, prior to the exercise of such option, shall be taken into account for computing the aggregate value of clearances, as specified in the said table.

4. Where a manufacturer clears the specified goods from one or more factories, the exemption in this case shall apply to the aggregate value of clearances mentioned against each of the serial numbers in the said table, and not separately for each factory.

5. Where the specified goods are cleared by one or more manufacturers from a factory, the exemption shall apply to the aggregate value of clearances mentioned against each of the serial numbers in the said table and not separately for each manufacturer.

6. 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 manufacturer, does not exceed preceding financial year Rs.300 lakhs.

The exemption contained shall not apply to the specified goods bearing a brand name of trade name, whether registered or not, of another person, except in the following cases, namely:-

1. Where specified goods, being in the nature of components or parts of any machinery or equipment or appliances by following the procedure laid down in Chapter X of the Central Excise Rules, 1944, However, manufacturers, whose aggregate value of clearances for home consumption of such specified goods for use as original equipment does not exceed rupees fifty lakhs in the financial year 1999-2000, may submit a declaration regarding such use instead of following the procedure laid down in chapter X of the said rules;

2. Where the goods bear a brand name of trade name of -
   1. the Khadi and Village Industries Commission; or
   2. a State Khadi and Village Industry Board; or
   3. the National Small Industries Corporation; or
   4. a State Small Industries Development Corporation; or
   5. a State Small Industries Corporation;
3. Where the specified goods are manufactured in a factory located in a rural area.

Goods exempted from whole of the Duty of Excise/The Additional Duty of Excise

1. Specified goods produced without the aid of power. All capital goods, intermediate goods and inputs if captively consumed within the factory of their production or used in the manufacture of specified final products in the manufacturer or specified goods.

2. Specified goods if manufactured on job work basis/cleared for job work/manufactured as a job work and used in the manufacture of final products.

3. Genuine specified products of village industry/certain specified goods manufactured in the rural areas by Co-operatives/K.V.I.C., etc.

4. Goods meant for repairing, reconditioning and reengineering.
5. Goods sent abroad as exhibits for exhibition in International Trade Fairs or for demonstration or carrying out tests or trials.
6. Certain goods if cleared for display in any fair or exhibition in India.
7. Goods produced in a technical, educational and research institute during the course of technical training or an academic or vocational nature or carrying out experiments or research.
8. Goods supplied to specified research institutions.
9. Goods produced in Government Factories, Mines, Mints, prisons Defence Production etc.
10. Goods manufactured by specified units/Institutions for use by Governmnet Departments or Defence purposes.
11. Goods supplied for Defence or other specified purposes.
12. Specified goods manufactured in a State Government factory and intended for use in any of its department.
13. Duty in excess of 10% is exempted on goods for supply to Gas Authority of India Limited, Oil and Natural Gas Corporation Ltd., or the Oil India Limited.
14. Certain specified goods connected with solar and natural energy.
15. Improved Chulhas (including smokeless Chulhas) capable of burning wood, agro-waste, cow-dung, briquettes and coal.
16. Good required for Nuclear Fuel Complex.
17. Duty in excess of 5% ad valorem on pollution control equipment.
18. Goods manufactured by institution for handicapped persons.
19. Good produced or manufactured in a Free Trade Zone.
20. Specified goods used by units in Export Processing Zones/Free Trade Zones.
21. Goods brought to any gem and jewellery manufacturing units set up in Santa Cruz Electronics Export Processing Zone (SEEPZ).
22. Goods produced in 100% Export Oriented undertakings but not sold within India.

ConceMSMEons

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

MSME units are required to pay duty on monthly basis instead of paying at the time of every clearance. Duty liability is to be discharged by 15th of the following month. The duty can be paid either through PLA or RG23 register.

MSME exemption is available in respect of goods exported to Nepal & Bhutan. The MSME exemption is available for home consumption, i.e. for consumption within India. However, explanation to MSME exemption notifications make it clear that clearances for home consumption shall also include clearances for export to Bhutan & Nepal. Thus, exports to Nepal & Bhutan will qualify for MSME exemption.

As per the CBE&C circular No.406/39/98-CX dated 7.7.1998, since the exemption MSME units do not have to file any declaration, they will not be given any code number and it need not be mentioned in the invoice or challan. In Lokhandwala Construction Industries v. CCE, 1997 (92) ELT 703(CEGAT) & K.S. Mills v. CCE, 1998 (98) ELT 619 (CEGAT), it has been held that the declaration to be given by MSME is only for purpose of exemption from registration. The duty exemption to MSME is available whether or not such declaration is given. Thus, MSME exemption is available even if such declaration is not submitted.

Normally, excise officers are not expected to visit MSME units paying less than Rs.10 lakhs duty annually. According to Mumbai II Commissionerate Trade Notice No.15/93 dated 31-3-1993, excise inspectors as well as preventive and internal audit parties can visit MSME units only with specific permission of assistant Commissioner for specific purpose. Officers are required to enter relevant particulars in the visitors’ book maintained as assessee.