MARCH 20,2012

By D.B.Bhaskara Sharma, Superintendent of Central Excise

INDIA, being the world's largest consumer of gold and gold articles, currently import around 1000 tons in a year, with estimated increase over 10% every year. Whatever may be cultural or social reasons behind this, the fact is that it is causing strain on foreign exchange as expressed by Hon'ble Finance Minister in his budget speech. Perhaps to curb this unproductive spending on foreign exchange, and to curb flow of cash transactions in gold trade, an attempt has been made in this year's budget by hitting gold trade on three fronts- Income Tax, Customs, and Central Excise.

On the income tax front, the Budget 2012 proposes to levy a one per cent tax collection at source on cash sales of bullion and jewellery in excess of Rs 2 lakh. The new tax on cash purchase of bullion or jewelry above Rs 2 lakh has been introduced to curb black money transaction and in order to reduce the quantum of cash transaction in bullion and jewellery sector and for curbing the flow of unaccounted money in the trade. It also requires recording of all such transaction by mentioning PAN Number. On the Customs front, the import duty on gold has been raised to 4% from the current level of 2%.

However, the biggest impact is the levy excise duty of 1% on unbranded jewellery also from 17.03.2012. The traders have already shown their displeasure against these new levies, by calling for a three day strike. Unbranded jewellery accounts for 90% of jewellery market (estimated to be Rs.66,000Cr.) Involving over three lakh traders across the country. The perception of jewellery traders across the country about this levy is that it is an attempt to bring back the days of Gold Control regime that was ended in the year 1990. This write up attempts to bring out salient features of this new excise levy on unbranded articles of jewellery imposed in this year budget.

The levy of excise duty on articles on jewellery is not new as Government had introduced excise duty on branded jewellery way back in 2005; however, the levy was restricted only on jewellery traders selling branded jewellery. The market share of unbranded jewellery is much higher compared to that of branded jewellery, involving many local/regional players; therefore this new levy will have wider impact on the market.

This levy of 1% excise duty has been brought by imposing duty of 1% on articles of jewellery (both unbranded/branded). The relevant part of the notification issued in this regard – Notification No. 12/2012 - CE dt. 17.03.2012 - read as follows:

(Condition No. 25 : If no credit under rule 3 or rule 13 of the CENVAT Credit Rules, 2004, has been taken in respect of the inputs or input services used in the manufacture of these goods.)

(prior to amendment this entry was reading as : Article of jewellery on which brand name or trade name is indelibly affixed or embossed on the articles of jewellery itself).

Articles of jewellery as per Central Excise Tariff Act means:

The Section Note given in Chapter 71 defines ‘Articles of jewellery' as follows:

For the purposes of heading 7113, the expression "articles of jewellery” means:

(a) any small objects of personal adornment (for example, rings, bracelets, necklaces, brooches, ear-rings, watch chains, fobs, pendants, tie- pins, cuff-links, dress-studs, religious or other medals and insignia); and

(b) articles of personal use of a kind normally carried in the pocket, in the handbag or on the person (for example, cigar or cigarette cases, snuff boxes, cachou or pill boxes, powder boxes, chain purses or prayer beads).

These articles may be combined or set, for example, with natural or cultured pearls, precious or semi-precious stones, synthetic or reconstructed precious or semi-precious stones, tortoise shell, mother-of-pearl, ivory, natural or reconstituted amber, jet or coral.

The relevant Chapter Heading 7113 of First Schedule of Central Excise Tariff Act read as follows:

Who is liable to pay and the value for payment of 1% Central Excise duty:

The person (the trader) who gets articles of jewellery manufactured on job work basis, is the manufacturer and he is person liable for payment of central Excise duty on articles of jewellery sold by him. The Central Excise duty @ 1% is to be paid on Tariff value. The government has fixed 30% ‘Transaction value' as Tariff value for the purpose of payment of Central Excise duty on Articles of jewellery. Transaction value, is the value as per Section 4 of Central Excise Act, 1944 and to tell in simple terms it is the price at which the Articles of jewellery are sold at the point of sale to an unrelated buyer by the trade, excluding VAT and other statutory levies, if any. An individual goldsmith, who manufactures articles of jewellery on job work basis, is not affected with this levy as they will not be treated as manufacturer. It is the retailers/traders, who gets the goods manufactured from gold smiths on job work basis who are the manufacturers and liable to pay duty.

The Government vide TRU letter dt. 16.03.2012 clarifies thus:

Precious metals and jewellery:

8.1 The scheme of levy of excise duty on precious metal jewellery has been revamped. Hitherto excise duty of 1% ad valorem was applicable to precious metal jewellery manufactured or sold under a brand name. The levy would now apply to both branded and unbranded goods (except silver jewellery) although at the same rate of duty of 1%. The important features of the scheme are as under:

i. Duty would be chargeable on tariff value which is being prescribed under section 3 of the Central Excise Act.

ii. Tariff value would be equal to 30% of the “transaction value” declared on the invoice and transaction value shall have the same meaning as assigned to it under section 4 of the Central Excise Act.

iii. The benefit of SSI exemption would be available to manufacturers of precious metal jewellery and the aggregate value of clearances (both for the purpose of eligibility and exemption) would be computed on the basis of tariff value. Suitable provisions are being incorporated in notification no.8/2003-CE dated 1st March, 2003 so that for the purpose of determining eligibility of a manufacturer/ factory for SSI exemption for the year 2012-13, the computation of aggregate value of clearances of Rs. 4 crore for the year 2011-12 is made on the basis of the tariff value i.e. taking 30% of the transaction value and not full transaction value. It may be noted that the exemption limit for the remaining part of 2011-12 i.e. between 17th March, 2012 and 31st March, 2012 is not being curtailed for manufacturers of unbranded jewellery who would come into the tax net afresh. In other words, eligible manufacturers/factories would be entitled to exemption for the full threshold limit of Rs. 1.50 crore for this period. For manufacturers who are already availing of the SSI exemption during 2011-12 also the computation of the exemption limit would have to be made on the basis of tariff value of clearances effected during the period from 17th March, 2012 to 31st March, 2012 by virtue of Explanation (C)(ii) of notification no.8/2003-CE dated 1.3.2003.

Illustration- If a manufacturer X clears goods of value 1.4 crore till 16th March 2012, and from 17th March to 31st March 2012 manufacturer X clears goods of transaction value 30 lacs, the total value of clearances for SSI exemption in financial year 2011-12 shall be calculated as follows:-

Value of clearances from 1st April 2011 to 16th March 2012= Rs. 1.4 crore

Value of clearances from 17th March to 31st March 2012= Rs. 9 lacs(30% of transaction value 30 lacs)

Total value of clearances financial year 2011-12= Rs. 1.49 crore

iv. Rule 12AA of the Central Excise Rules has been amended to provide that every person who gets articles of jewellery of heading no.7113 produced or manufactured on job-work shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with the procedural requirements, as if he is the manufacturer. In other words, those artisans or goldsmiths who only manufacture jewellery for others on job-work need not obtain registration. The option to the job-worker to register, if he so desires, has been deleted.

It may kindly be ensured that the implementation of this scheme happens in a smooth, trade-friendly manner and no harassment is caused to assessees.

8.2 Unbranded jewellery is currently exempt. Full exemption from excise duty is being provided to branded silver jewellery. It may also be noted that in respect of articles of precious metals, the levy would continue to apply only to those articles that are manufactured or sold under a brand name. Full exemption from excise duty has been provided to gold coins of purity 99.5% and above and silver coins of purity 99.9% and above when manufactured from gold or silver on which the appropriate duty of customs or excise has been paid.

8.3 Excise duty on refined gold manufactured starting from the stage of ore, concentrate or dore bars has been increased from 1.5% to 3%. The same rate has been prescribed for refined gold produced from the smelting of copper. Refined silver obtained from the smelting of copper shall henceforth attract excise duty of 4%.

Where to collect and when to pay:

Central Excise duty being an indirect tax, it will be collected from the ultimate buyer at the point of sale. As the articles of jewellery are normally sold (to un related person) at the retail show rooms, every retails show room/trader, in case it sells articles of jewellery manufactured on job work, is required to get registered, raise invoice and collect the Central Excise duty from the customer. The tax thus collected has to be deposited with the government by 5 th of the month following.

Small manufacturers are out of this levy :

Manufacturers whose aggregate value crosses Rs.1.50 Cr in a financial year are alone liable to pay duty on subsequent value of clearances. The manufacturers are also eligible for SSI exemption during the current Financial year, as clarified by CBEC in the TRU letter dt. 16.03.2012, mentioned above. A doubt may arise that, if the same trader gets his articles of jewellery gets manufactured from different job workers will he get Rs.1.50 Cr exemption for each of such job worker and also whether he gets the exemption individual showroom/shop wise. The answer is NO. Because as per Notification No.8/2003-CE dt.1.03.2003 (which provides for SSI exemption) clearly states that where a manufacturer clears the specified goods from one or more factories, the exemption in his 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 (ie job worker from where the goods manufactured).

The impact of this levy on the ultimate customer:

If the value of articles of Jewellery purchased is Rs.10,000/- (excluding VAT) at the point of sale, then the value for Central Excise purpose is Rs.3000/- (being 30% of Rs.10000/-) and duty payable on this value is just Rs.30/-(1% of Rs.3000/-). The benefit for the customer is that every purchased article of jewellery would be on a valid central Excise invoice, which can be used against any cheating with regard to quality/quantity by the trader. Hence, there is not much truth that prices of jewellery would increase steeply because of this levy.

One more measure to curb black money:

If we look at this levy in the back drop of other measure taken in the budget to curb generation of black money in the system - ie levy of tax on real estate transactions exceeding a certain value and also levy of tax on the purchase of jewellery exceeding Rs.2 Lakhs- this levy should be seen as one more such measure to exercise control over the gold trade, ie making them to record every transaction (by issuing invoice) to control flow of unaccounted money, rather than to generate an additional revenue. The general trade practice is that all transactions in gold (in retail trade) is done on cash basis and seldom there would be any perfect recording of all transactions; this levy is aimed to discourage traders from making unaccounted transactions, which the government has noticed as helping in generation and circulation of black money in the system. Therefore, it is the primary responsibility of the field formations of the department to alley any fears in the minds of traders about this levy, by not showing any over enthusiasm or causing harassment to the trade. If that happens, it would certainly derail the vital objective behind imposing this new levy- ie to curb flow of black money.

(The views expressed are personal)