Busy
Excise Duty
Implementation in BUSY
Overview of Excise Duty
Excise duty is an indirect tax levied on goods produced or manufactured within a country. In other words, it is a duty on goods that are manufactured locally for domestic consumption. It is charged whenever the goods are moved from their principal place such as factory or godown even if the movement of goods is for stock transfer. Being an indirect tax, it is collected by the manufacturer and deposited with the government. The manufacturer passes on the burden of the duty to the consumer in the form of increased cost price.
Excise duty comes under the purview of Central Government and thus, the Central Government is responsible for levy and collection of excise duty. Excise duty is popularly known as Central Excise.
Central Excise Duty is the single biggest source of revenue for the Central Government.
To manufacture excisable goods it is necessary for the manufacturer to register with the Central Excise authority.
Basis for Levy and Collection of Excise Duty
When a new commodity is manufactured excise duty is levied but the duty is collected only on the removal of the goods. In other words, when the manufactured goods are removed for the purpose of sale or consumption excise duty is levied.
Let us understand with the help of a case scenario.
Ahead Cars is a car parts manufacturing concern based in Delhi.
Ø On April 15, 2005 it manufactured 1,500 car parts comprising of car seats and engine parts.
Ø On April 25, 2005 it sold all the 1,500 manufactured car parts to a dealer based in Delhi.
In this case, excise duty will be levied on the manufactured goods on April 25 since the goods were removed (sold) on this date. Thus, as soon as the goods are produced or manufactured they are liable for excise duty but the excise duty is collected only at the time of removal of the goods.
Although the final burden of excise duty falls on the consumer in the form of price hike but the liability to collect and deposit excise duty with the Central government is on the producer or manufacturer.
There are different types of excise duties that are levied depending on the goods under consideration. Let us discuss the types of excise duties in detail.
Types of Excise Duty
There are three types of Excise duties levied in India. These are:
Ø Basic Excise Duty
Ø Additional Excise Duty
Ø Special Excise Duty
Basic Excise Duty
Basic Excise Duty (BED) is charged as per Section 3 of Central Excises and Salt Act 1944 on all excisable goods other than salt, which are produced or manufactured in India at the rates set forth in the Schedule to the Central Excises Tariff Act, 1985.
Additional Excise Duty
Additional Excise Duty (AED) is charged as per Section 3 of the Additional Duties of Excise Act 1957 on the goods described in the Schedule to this Act. AED is charged in lieu of Sales tax and it is shared between Central and State Governments.
Special Excise Duty
Special Excise Duty (SED) is levied on all excisable goods that are subject to BED under the Central Excises and Salt Act 1944. Each year the relevant provisions of the Finance Act specify whether SED will be levied and collected during the relevant financial year.
We have discussed the broad outline of the excise duty system. Let us now discuss the working of the excise duty system.
Working of the Excise Duty System
Under the excise duty system, the manufacturer produces, sells the goods, and collects the appropriate excise duty. Further, the manufacturer deposits the excise duty collected with the Central Government.
The Central government needs to exercise control over excise duty collection to keep a check on the payment of excise duty. For this purpose the manufacturer need to maintain certain registers depending on the type of excise reporting that the manufacturer comes under.
Types of Excise Reporting
Excise reporting refers to how a manufacturer reports the collection of excise duty. In other words, the type of registers that the manufacturer maintains comprises excise reporting.
There are two types of Excise Reporting:
1. Manufacturing Excise Reporting
2. Trading Excise Reporting
The basic differentiator between the two types of excise reporting is the nature of the transactions carried out by the manufacturer/dealer.
Let us understand with the help of diagrammatic representation.
Ahead Cars à(Manufacturer) / Fast Wheels à (Dealer) / Today Cars à
(Manufacturer) / Go Cars
(Dealer)
In this case scenario, Ahead Cars and Today Cars are manufacturing concerns that produce car parts. These concerns pay excise duty on purchase of raw material and collect excise duty on the sale of the goods. Thus, they will maintain manufacturing excise reporting.
On the other hand, Fast Wheels is a trading concern (dealer) that purchases excisable goods and pays excise duty but when it sells the goods it cannot collect excise duty. The trading concern (dealer) cannot collect excise duty on sales because the trading concern simply passes on the goods to a further manufacturer or dealer. It has not produced a new product and thus cannot charge excise duty. In such a case, Fast Wheels will come under trading excise reporting. Similarly, Go Cars is a trading concern (dealer) that will come under trading excise reporting.
Note: The terms trading concern and dealer have the same meaning. Both the terms mean a middle business entity in the chain of transactions. These terms have been used interchangeably in the document. Similarly, the terms manufacturing concern and manufacturer have the same meaning and have been used interchangeably in the document.
To summarize we can say that if a manufacturer collects excise duty on sale of goods then manufacturing excise reporting is applicable. On the other hand, if a manufacturer/dealer does not collect excise duty on the sale of goods then trading excise reporting is applicable.
Typically speaking, manufacturers come under manufacturing excise reporting while the dealers come under trading excise reporting. Thus, we can conclude that the type of excise reporting applicable depends on whether excise duty is collected on the sale of goods.
Let us now discuss the working of the two types of excise reporting in detail.
1. Manufacturing Excise Reporting
For manufacturing excise reporting there are primarily eight registers that are required. These are:
1.1 Personal Ledger Account
1.2 Excise Duty Register
1.3 RG 23A II
1.4 RG 23C II
1.5 RG-23A1
1.6 RG-1
1.7 Form ER-1
1.8 CENVAT Return
Let us discuss these registers in detail.
1.1 Personal Ledger Account
Details regarding the deposit and the adjustment of the excise duty are recorded in a register called Personal Ledger Account, popularly known as PLA. PLA is the record of the amount deposited by the manufacturer with the excise authorities for payment of excise duty. PLA is to be maintained in the prescribed form for each excisable good. Each debit and credit entry must be made on a separate line and assigned a running serial number for each financial year.
There are two methods of maintaining the PLA account. One is where advance payment is made into PLA account and second is where payment is made into PLA account as and when the excisable goods are sold. We will discuss both the methods in detail.
Let us start with the first method. Unlike Sales Tax in which the tax is first collected and then deposited, excise duty is first deposited and then collected i.e. an advance payment of excise duty is deposited in banks irrespective of whether any sale or consumption of goods has taken place. Excise duty can be charged on sales only after an advance payment has been deposited in the bank.
When the assessee (manufacturer) deposits any amount with the Central Excise authorities for payment towards excise duty, he makes a debit entry in the PLA. At the time of sale or consumption of excisable goods, the assessee pays the duty determined by him by making a credit entry in the PLA. The balance in the PLA at a given point of time is the amount available for future payment of excise duty. If any goods are sold or consumed without a credit entry or without adequate debit balance in the PLA, they will be treated as goods sold or removed without payment of duty. Excise Duty can be charged on sale or consumption only when PLA register has a debit balance.
This is the first method. Earlier it was mandatory to make an advance payment into PLA but now it is not mandatory.
In the second method, payment into the PLA account is made as and when excisable goods are sold. Thus, the only difference between the two methods is that no advance payment in PLA account is required in the second method. Everything else remains the same in both the methods.
Let us understand with the help of an example.
On April 1, 2005, PLA has a balance of Rs. 100,000. On April 4, goods are sold and excise duty amounting to Rs. 50,000 is collected. The excise duty collected is adjusted against the PLA balance of Rs. 1,00,000.
Given here in the table format is the balance in PLA account and the corresponding adjusted excise duties on sales.
Date / Type of transaction / Excise duty on sales to be adjusted / Balance in the PLA after the adjustment1-4-05 / None / 0 / 1,00,000
4-4-05 / Duty Adjusted / 50,000 / 50,000
1.2 Excise Duty Register
In Excise Duty register, details of sale transactions on which excise duty has been collected are entered. For example, Ahead Cars produces and sells car parts to another dealer. It collects excise duty on the sale made. Such a transaction will be entered in the Excise Duty register.
Before we move onto the next register under manufacturing excise reporting, let us discuss a case scenario. We will continue with the case scenario for Today Cars.
Today Cars, a manufacturing concern, purchases raw material from Ahead Cars, another manufacturing concern and pays excise duty on the purchase. Further Today Cars processes the raw material into a finished product and sells it. On this sale excise duty is levied. This process subjects the raw material to double excise duty, since excise duty is levied twice, once on purchase and once on sale. This results in double taxation, leading to the cascading effect on the price of the final product.
To avoid double taxation, the government has allowed the set-off of excise duty collected on the finished product against excise duty paid on purchase of raw material. In this case, the manufacturer, Today Cars, can claim input excise duty paid on the purchase and set off the output excise duty collected. This system of setting off the output excise duty is similar to that in VAT and thus this system is called MODVAT, an abbreviated form for Modified VAT.
To set-off the output excise duty against input excise duty, the details of the appropriate purchase transactions have to be recorded in a register, RG 23A II. Let us discuss this register in detail.
1.3 RG 23A II
For purpose of claiming input excise duty credit on raw material a register, RG 23A II, is maintained. In this register details of the purchase transaction for raw materials only are entered. These purchase transactions are those on which excise duty has been paid.
Let us understand with the help of a case scenario. We will continue with the case scenario of Today Cars.
Ø On May 15, 2005 Today Cars purchased raw material worth Rs. 50,000 from Ahead Cars, a manufacturing concern and paid excise duty amounting to Rs. 5,000.
Ø Today Cars processed the raw material and manufactured 100 car parts. On 30 May, it sold the car parts @ Rs. 600 to Go Cars, a trading concern (dealer) and paid excise duty amounting to Rs. 6,000.
Note: For this example, we assume that the Ahead Cars, the manufacturer has not paid any excise duty on the purchases. This is done to simplify the example.
Let us have a look at the cost price and selling price given here in the form of a table for the business entities in the chain.
Elements/Business Entity / Ahead Cars à (Manufacturer) / Today Cars à(Manufacturer)
Cost Price (manufacturing cost/Procurement cost) / 50,000 / 50,000 (do not include excise duty paid on purchase in the cost)
Value Added / N.A. / 10,000
Selling Price / 50,000 / 50,000 + 10,000 = 60,000
Excise Duty (10%) / 5,000 / 6,000
Total (MR.P.) / 50,000 + 5,000 = 55,000 / 60,000 + 6,000 = 66,000
Excise Duty paid on purchase / N.A / 5,000
Excise Duty collected (payable) on sales / 5,000 / 6,000
Net Excise Duty payable (Excise Duty Collected – Excise Duty Paid) / N.A. / 6,000 - 5,000 = 1,000
In this case scenario, for Today Cars the input excise duty paid is Rs 5,000 while the output excise duty is Rs. 6,000. Since the manufacturing concern paid excise duty on the purchase of raw material it can set off the output excise duty against input excise duty paid. Thus the net excise duty payable is Rs. 1,000 (6,000 – 5,000).
Note: Do not include the excise duty paid on purchase in the cost for Today Cars. If the excise duty is included then it will lead to double taxation.
The Central government allows the facility of set-off against the input excise duty paid. Let us assume that the manufacturer has paid excise duty in advance and at the time of purchase and sale he makes the appropriate adjustments.