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Excise Duty

Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for
home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as
the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its
incidence on to the customers.

The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule
to the Central Excise Tariff Act, 1985 , as being subject to a duty of excise and includes salt.

The term "manufacture" includes any process,

1. Incidental or ancillary to the completion of a manufactured product and

2. Which is specified in relation to any goods in the Section or Chapter Notes of the First Schedule to
the Central Excise Tariff Act, 1985 as amounting to manufacture or

3. Which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such
goods in a unit container or labelling or re-labelling of containers including the declaration or alteration
of retail sale price on it or adoption of any other treatment on the goods to render the product
marketable to the consumer.

As incidence of excise duty arises on production or manufacture of goods, the law does not require the sale of
goods from place of manufacture, as a mandatory requirement. Normally, duty is payable on 'removal' of goods.
The Central Excise Rules provide that every person who produces or manufactures any 'excisable goods', or
who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in rules
or under any other law. No excisable goods, on which any duty is payable, shall be 'removed' without payment
of duty from any place, where they are produced or manufactured, or from a warehouse, unless otherwise
provided. The word 'removal' cannot be necessarily equated with sale.

The removal may be for:-

1. Sale

2. Transfer to depot etc.

3. Captive consumption
4. Transfer to another unit

5. Free distribution

Thus, it can be seen that duty becomes payable irrespective of whether the removal is for sale or for some other
purpose.

Excise Duty:
Rules for Levy of Central Excise

In India, excise duty is levied in accordance with the provisions of Central Excise Act, 1944. It is the basic Act
which lays down the law relating to levy and collection of Central Excise duty. The Act empowers the Central
Government to make rules in pursuance of the Act. Accordingly, the following set of rules has been framed:-

The Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002)

The Central Excise (Settlement of Cases) Rules, 2001

The Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of
Excisable Goods) Rules, 2001

Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

Consumer Welfare Fund Rules, 1992

The Central Excise (Advance Rulings) rules, 2002

Central Excise (Compounding of Offences) Rules, 2005

The Central Excise law is administered by the Central Board of Excise and Customs (CBEC). Central Board
of Excise and Customs is a part of the Department of Revenue under the Ministry of Finance, Government of
India. It deals with the tasks of formulation of policy concerning levy and collection of Customs and Central
Excise duties, prevention of smuggling and administration of matters relating to Customs, Central Excise and
Narcotics to the extent under CBEC's purview. The Board is the administrative authority for its subordinate
organizations, including Custom Houses, Central Excise Commissionerates and the Central Revenues Control
Laboratory.

Excise Duty:
Rules for Levy of Central Excise

In India, excise duty is levied in accordance with the provisions of Central Excise Act, 1944. It is the basic Act
which lays down the law relating to levy and collection of Central Excise duty. The Act empowers the Central
Government to make rules in pursuance of the Act. Accordingly, the following set of rules has been framed:-

The Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002)

The Central Excise (Settlement of Cases) Rules, 2001

The Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of
Excisable Goods) Rules, 2001

Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

Consumer Welfare Fund Rules, 1992

The Central Excise (Advance Rulings) rules, 2002

Central Excise (Compounding of Offences) Rules, 2005

The Central Excise law is administered by the Central Board of Excise and Customs (CBEC). Central Board
of Excise and Customs is a part of the Department of Revenue under the Ministry of Finance, Government of
India. It deals with the tasks of formulation of policy concerning levy and collection of Customs and Central
Excise duties, prevention of smuggling and administration of matters relating to Customs, Central Excise and
Narcotics to the extent under CBEC's purview. The Board is the administrative authority for its subordinate
organizations, including Custom Houses, Central Excise Commissionerates and the Central Revenues Control
Laboratory.

Different kinds of Excise Duties

Basic Excise Duty : This is the duty leviable under First Schedule to the Central Excise Tariff Act,
1985 at the rates mentioned in the said Schedule.

Special Excise Duty : This is the duty leviable under Second Schedule to the Central Excise Tariff
Act, 1985 at the rates mentioned in the said Schedule. At present this is leviable on very few items.

Additional Duties of Excise (Textiles and textile Articles) : his duty is leviable under section 3 of
the Additional Duties of Excise (Textiles and Textile Articles ) Act, 1978. This is leviable at the rate
of fifteen percent of Basic Excise Duty payable on specified textile articles.

Additional Duties of Excise (Goods of Special Importance) : duty is leviable under the Additional
Duties of Excise (Goods of Special Importance) Act, 1957 on the specified goods mentioned in its
First Schedule.

National Calamity Contingent Duty - Normally known as NCCD. This duty is levied as per section
136 of the Finance Act, 2001, as a surcharge on specified goods.

Excise Duties and Cesses Leviable Under Miscellaneous Act - On certain specified goods, in
addition to the aforesaid duties, prescribed rate of excise duty and cess is also leviable.

Education Cess on excisable goods is levied in addition to any other duties of excise chargeable on
such goods, under the Central Excise Act, 1944 or any other law for the time being in force.
Valuation of Goods

Generally, the Central excise duty in respect of different goods is on ad-valorem basis (i.e. the duty is fixed as a
percentage of assessable value of a good). It thus becomes important to find out as to how the value of a good is
to be assessed. The valuation of the goods as per Central Excise Act 1944, can be determined on the following
three basis:-

Tariff Value:- the Central Government may fix tariff values of any article by way of notification. The
duty is payable on the tariff value so fixed.

Transaction Value: This is the most common way to determination of assessable value. In most of the
products, the value for the purpose of charging duty, shall be taken as the price actually paid or payable
for the goods, when sold to buyer. This means the amount, which has been transacted between the
seller and the buyer in normal course of business is the assessable value.

For applicability of transaction value in a given case, for assessment purposes, certain essential
requirements should be satisfied. If any one of the said requirement is not satisfied, then the transaction
value shall not be the assessable value and value in such case has to be arrived at under the valuation
rules notified for the purpose. The essential ingredients of a Transaction value are:-

The goods are sold by an assessee for delivery at the time of place of removal. The term
"place of removal" has been defined basically to mean a factory or a warehouse

The assessee and the buyer of the goods are not related and

The price is the sole consideration for the sale.

Maximum Retail Sale Price:- The value is based on maximum retail sale price in terms of the Central
Excise Act, 1944. This is applicable to notified commodities. The notification issued in this regard
indicates the extent of abatement to be allowed for arriving at the assessable value for determination of
amount of duty. Central Government can specify goods in respect of which, the value shall be deemed
to be the retail sale price declared on the goods less the abatement. This provisions is applicable to
those goods in relation to which, the requirement of declaration of retail sale price on the package is
there under the provisions of Standards of Weights and Measures Act, 1976 or rules made there
under.

Procedures

The Central Excise Department follows two procedures in order to enforce the central excise law and collect the
Excise duty :-

Self removal procedure:- under this system, the assessee himself determines the duty liability on the
goods and clears the goods. It involves, self assessment by the manufacturer himself of the excise duty
payable by him. He removes goods without prior permission or physical supervision of the excise
officers. The assessee is required to follow the prescribed procedure. It is applicable to all goods
(except cigarettes) produced or manufactured within the country.

Physical control: - here assessment is followed by clearance. It takes place under the supervision of
Central Excise officers. Central Excise Officers check that goods are cleared only after payment of
duty. Once the excise duty has been paid, goods must move from that place. Duty paid goods cannot
remain in the factory unless specifically permitted. It is applicable to cigarettes only.

MODVAT and CENVAT

Taxation of inputs, like raw materials, components and other intermediaries had a number of limitations. In
production process, raw material passes through various processes stages till a final product emerges. Thus,
output of the first manufacturer becomes input for second manufacturer and so on. When the inputs are used in
the manufacture of product `A', the cost of the final product increases not only on account of the cost of the
inputs, but also on account of the duty paid on such inputs. As the duty on the final product is on ad valorem
basis and the final cost of product `A' includes the cost of inputs, inclusive of the duty paid, duty charged on
product `A' meant doubly taxing raw materials. In other words, the tax burden goes on increasing as raw
material and final product passes from one stage to other because, each subsequent purchaser has to pay tax
again and again on the material which has already suffered tax. This is called cascading effect or double
taxation.
This very often distorted the production structure and did not allow the correct assessment of the tax incidence.
Therefore, the Government tried to remove these defects of the Central Excise System by progressively
relieving inputs from excise and countervailing duties. An ideal system to realize this objective would have been
to adopt value added taxation (VAT). However, on account of some practical difficulties it was not possible to
fully adopt the value added taxation.
Hence, Government evolved a new scheme, `MODVAT' (Modified Value Added Tax). MODVAT Scheme which
essentially follows VAT Scheme of taxation. i.e. if a manufacturer A purchases certain components(raw
materials) from another manufacturer B for use in its product. B would have paid excise duty on components
manufactured by it and would have recovered that excise duty in its sales price from A. Now, A has to pay
excise duty on product manufactured by it as well as bear the excise duty paid by the supplier of raw material B.
Under the MODVAT scheme, a manufacturer can take credit of excise duty paid on raw materials and
components used by him in his manufacture. It amounts to excise duty only on additions in value by each
manufacturer at each stage.
The modvat scheme is regulated by Rules 57A to 57U of the Central Excise Rules and the notifications issued
there under (The Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002).
Modvat Scheme ensures the revenue of the same order and at same time the price of the final product could be
lower. Apart from reducing the costs through elimination of cascade effect, and bringing in greater
rationalization in tax structure and also bringing in certainty in the amount of tax leviable on the final product,
this scheme will help the consumer to understand precisely the impact of taxation on the cost of any product and
will, therefore, enable consumer resistance to unethical attempts on the part of manufacturers to raise prices of
final products, attributing the same to higher taxes.
Subsequently, MODVAT scheme was restructured into CENVAT( Central Value Added Tax) scheme. A new set
of rules 57AA to 57AK , under The Cenvat Credit Rules, 2004, were framed and whatever restrictions
restrictions were there in MODVAT Scheme were put to an end and comparatively, a free hand was given to the
assesses.
Under the Cenvat Scheme, a manufacturer of final product or provider of taxable service shall be allowed to
take credit of duty of excise as well as of service tax paid on any input received in the factory or any input
service received by manufacturer of final product.
The term "Input" means: -

1. All goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol,
used in or in relation to the manufacture of final products whether directly or indirectly and whether
contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants,
accessories of the final products cleared along with the final product, goods used as paint, or as packing
material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of
final products or for any other purpose, within the factory of production

2. All goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and
motor vehicles, used for providing any output service;

Explanation 1 : The light diesel oil, high-speed diesel oil or motor spirit, commonly known as petrol, shall not
be treated as an input for any purpose whatsoever.

Explanation 2 : Inputs include goods used in the manufacture of capital goods which are further used in the
factory of the manufacturer;"

The term "Input service" means any service: -

1. Used by a provider of taxable service for providing an output service; or


2. Used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final
products and clearance of final products from the place of removal,

And includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises
of provider of output service or an office relating to such factory or premises, advertisement or sales promotion,
market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as
accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking,
credit rating, share registry and security, inward transportation of inputs or capital goods and outward
transportation upto the place of removal;"
Manufacturer and service providers can avail Cenvat credit of capital goods used by them. The plant and
machinery and allied items are purchased by a manufacturer. Such goods known as capital goods may be duty
paid. The capital goods shall be used in manufacture of final products or for providing output service. The
CENVAT credit in respect of duty paid on capital goods shall be taken only for an amount not exceeding fifty
percent of the duty paid in the same financial year and the credit of balance amount can be take in any financial
year subsequent to the financial year in which the capital goods were received.
Duty Paying Documents against which CENVAT credit can be availed are:-

Invoice issued by

A manufacture of inputs or capital goods.

An importer

An importer from his depot or premises of consignment agent,

Provided the depot/ premises is registered with central excise

A first/second stage dealer.

A supplementary invoice

A bill of entry.

A certificate issued by appraiser of customs


An invoice/bill/challan issued by providers of input service.

A challan evidencing payment of service tax.

Credit of duty is allowed only if all the conditions given below are met:-

The basic criteria for availment of credit of duty paid on inputs or capital goods is that the goods shall
be used in manufacture of final products.

The goods shall be accompanied with proper prescribed documents.

The final products shall not be exempt from whole of duty or chargeable to nil rate of duty.