RULE 6(3) OF CENVAT CREDIT RULES – A BOON OR BANE TO EXEMPT GOODS MANUFACTURERS
K.Prakash Babu, Advocate/Consultant
Akasam consulting pvt. Ltd, Hyderabad
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A manufacturer or an excise gentleman can just travel down the memory lane and feel the difference of thrill in manufacturing the exempted goods alongwith the dutiable goods ‘then’ and now. This ‘then’ takes you back to 2004. Prior to this period the manufacturers who were producing dutiable and exempted goods were supposed to maintain separate accounts for the inputs used in dutiable goods and exempted goods. Those who fail to maintain such separate books, have to pay an amount of 8% of value on the sale value of the exempted goods under rule 57AD and then under Rule 57CC of MODVAT rules under CERs.
On 01-04-2000, these MODVAT rules have been rechristened as CENVAT rules and it is limited to manufacturers only.
In the year 2002, the Govt. of India had revamped these Cenvat Credit Rules and introduced the benefit of value added tax system to Service Tax arena also. They notified two sets of value added credit rules separately, one meant for Manufacturers called as Cenvat Credit Rules’2002 and the other meant for services sector called as Service Tax Credit Rules, 2002.
The Cenvat Credit rules, 2002 contained the same provisions which were earlier available under Rule 57AD and 57CC under Modvat Rules i.e, to pay an amount of 8% of value of the total price exclusive of sales tax and other taxes, if any. Apparently, the rationale behind the fixation of 8% as the amount to be paid by the manufacturer of exempted and dutiable goods is that, normally the value inputs used in any final product would account for around 50% of total sale price. Hence, a manufacturer who has availed cenvat credit paid at the rate of 16% on input materials used in the finished products which would be equal to 8% of the total price at which the same are sold to his customer. Thus, with this logic, the GOI ensured that no undue benefit accrues to the manufacturer of exempted and dutiable goods. And manufacturers were also not unhappy to follow this as it amounted to reversal of duty availed on the input materials involved in the production of finished products.
With effect from 10-09-2004, the amount to be paid by an exempted and dutiable goods manufacturer shall be equal to the 10% of total price of the exempted goods at which they are sold.
The basic excise duty rate was almost stable at 16% from the year 2000 onwards till 28-02-2008. The rate was reduced to 14% with effect from 01-03-2008. But due to international recession and its effects on Indian industry and economy the Government of India reduced the rates further to 10% with effect from 07-12-2008 and again to 8% from 24-02-2009. The rate of service tax was also brought down to 10% from 24.02.2009.
Now let us see the play of rule 6(3) of Cenvat Credit Rules. 2004. i.e., with effect From 10-09-2004 onwards, the manufacturers were put to extra hardship of foregoing 2% more for being unable to maintain separate accounts of inputs used in the manufacture of exempted and dutiable goods. Some how they compromised with the prevailing circumstances and implemented the provisions. But from 01-03-2008 onwards the rate of duty has slid down but without any change to the amount to be paid for not maintaining separate accounts for inputs used in the manufacture of exempted and dutiable goods.
Today the percentage of amount to be paid in lieu of excise duty is more than the basic excise duty i.e., basic excise duty is 8% and the amount to be paid under subject rule 6(3) is 10%. Under these circumstances, no manufacturer would be willing to avail the exemption notification and forego 2% value more than the excise duty. Further this amount paid under Rule 6(3) would not allow the buyer to avail cenvat credit. Hence, this is totally a loss to the manufacturer. Hence, he would prefer to pay duty at the prevailing rate i.e, 8% and enable his buyer to avail cenvat credit of the basic excise duty paid, if rules permit. Regrettably, this elbow-room is effectively denied to the manufacturer with the insertion of explanation 1A to Sec.5A of Central Excise Act, 1944.
Ministry of Finance, Department of Revenue should address this anomaly urgently because, by all appearances the revenue authorities are oblivious to the burden placed on the manufacturer.
Now, many trade associations and other renowned accounting experts/institutes are sending proposals to the Ministry of Finance, GOI, for doing and undoing certain rules/provisions in the interest of trade at large. But what I observed is that this point has been forgotten by many renowned institutes who have sent proposals.
Would the Hon’ble Finance Minister look into this aspect and set right this anomaly by lowering the percentage of amount to be paid to equal to half of the prevailing rate of basic excise duty in the budget to be presented next month and make the electorate feel that the government is really concerned about the welfare of its subjects.
Note : 1.The view expressed are purely personal.
2. I am associated with M/S. akasam consulting pvt. Ltd, Hyderabad and I can be reached on my e-mail id:firstname.lastname@example.org and mobile no 9490167486.