JULY 15, 2014

By K Prathiba and Shivam Mehta

THE first Budget of the new Government was presented by the Finance Minister amidst much expectations. The Finance Bill, 2014 was to set the road map of the new Government and its ability to fulfill its mandate based on which it was elected. Having taken up the task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year and at the same time admitting that fiscal consolidation cannot be compromised while providing for the essential items, the Finance Minister has sought to bring about various fiscal reforms.

Making the importance of the manufacturing sector clear, the Finance Minister has brought various amendments in Central Excise law. It was a bag of surprises but it did not fail to deliver some disappointments either. The Finance Minister seems to have played safe with the first Budget by not taking many bold steps, which may serve a spoiler for the industry but at the same time, tried to plug major misses of the past. Let us trace the broad changes brought about by the Budget 2014.

How harmful are aerated waters to health?

To begin with, Budget 2014 has imposed an additional duty of excise in the name of health at the rate of 5% ad valorem on aerated waters, containing sugar. At the time of introduction of the said additional duty in 2005, the Finance Minister in his speech had said that-

"The levy of an education cess has been widely applauded. The health sector demands similar treatment. What better way is there to fund health care than tax those goods which are health hazards? I, therefore, propose to raise some additional resources and allocate the proceeds to finance the National Rural Health Mission. Accordingly, I propose to increase the specific rate on cigarettes by about 10 per cent and impose a surcharge of 10 per cent on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala."

Putting aerated waters at par with pan masala and chewing tobacco, the health of aerated water industry has undoubtedly been disturbed. More particularly, such duty has to be paid in cash and the same cannot be paid by utilization of credit of duty of excise owing to the specific bar in the Cenvat Credit Rules.

To add to this additional levy, the same can be collected under the Provisional Collection of Taxes Act, 1931 and has come into force with immediate effect. A doubt may be raised in respect of the goods manufactured but not cleared prior to 11-7-2014. This doubt has been answered by the Supreme Court way back in 1996 - 2002-TIOL-215-SC-CX – Vazir Sultan Tobacco Co. Ltd. by stating that new levy cannot be imposed on the goods manufactured prior to the date of introduction of levy.

Further, a doubt also arises as to whether fruit based and lemon based drinks will also come under this new levy and thus, the classification of said product assumes significance under such circumstances.

Non conventional energy sources- need of the hour

To encourage the use of solar energy as an alternative source of energy, Budget 2014 has brought multiple measures-upstream and downstream which includes extending excise duty exemptions to inputs and machineries for use in solar energy products and projects.

Retrospective amendments can be positive too

Budget 2014 has also brought certain positive retrospective amendments. Excise duty on polyester staple fibre and polyester filament yarn manufactured have been exempted retrospectively with effect from 29-6-2010 to 7-5-2012, which is the period when intermittently excise duty was imposed by way of an amendment in the tariff rate.

Further, though non-domestic exempted category customers of liquefied propane and butane mixture, liquefied propane, liquefied butane and LPG were considered to be at par with domestic customers with effect from 8-2-2013, there was disparity related to availability of exemption only to supplies to domestic customers. To plug this, exemption has been provided with effect from 8-2-2013 retrospectively.

Has FIAT decision been overruled?

The Finance Minister has also attempted to address the woes of the manufacturing sector in the aftermath of the Supreme Court decision in the case of FIAT India Ltd. in 2012 wherein the transaction value was rejected owing to market penetration being considered as an additional consideration. With an aim to deter the application of the decision to every case, a new proviso to Rule 6 of the Central Excise Valuation Rules has been inserted to say that transaction value will be the assessable value if there is no additional consideration flowing directly or indirectly from the buyer to assessee, even if the goods are sold at a price less than manufacturing cost and profit. However, this attempt might just be a miss as the provision can still leave a doubt in the minds of the assessees as to why the question of market penetration will not be considered to be an additional consideration by the department.

Cenvat Credit Rules - Is it really a step towards GST?

To give credit to the Finance Minister, when the Court refused to read the definition of ‘place of removal' under Section 4 of the Central Excise Act, 1944 for the purpose of goods valued under Section 4A leading to undue denial of credit on outward transportation services in respect of the latter, the same definition has been now imported into the Credit Rules, vide Budget 2014.

In the same breath, the restriction of availment of credit within 6 months of issuance of invoice has taken the industry back to 1995 when identical provisions were introduced for the first time. These were however, deleted in the year 2000 to allow industries to avail credit at any time for which they were eligible. Re-introduction of such restriction may lead to considerable difficulties to the extent of even putting road block for units being set up. As regards applicability of such restriction in respect of inputs/input services received prior to introduction of this provision, in light of the Supreme Court's decision that such provision does not curtail a right of the assessee but merely prescribes a timeframe for exercising the right, it can be said that credit shall be availed on documents within the specified period irrespective of whether the inputs or input services were received prior to or after introduction of the provision. The Finance Minister also has taken away the major attraction for assessees to opt for LTU i.e., the facility of transfer of credit by LTU from one unit to another.

Limitations of the above nature, pose a serious doubt as to whether we are moving towards GST or farther away from it.

Dispute resolution mechanisms - Reasons to cheer or fret?

With an aim to reduce litigation, Budget 2014 also seeks to liberalize the provisions for applying to the now ‘Customs, Central Excise and Service Tax Settlement Commission' even if the excise duty liability has been shown in the excise returns. Also, even resident private limited companies can avoid litigation by seeking an advance ruling prior to entering into a new venture. Such facility was earlier restricted to public limited companies only.

The Finance Minister did not leave it there but went ahead to give the department also something. A burden has been cast on the assessee to make payment (pre-deposit) of specified percentage of the demand and penalty before the appeal is heard. However, questions such as whether Cenvat credit can be utilized for such payment since the provision uses the terms ‘amount deposited', applicability of the provisions to cases of reversal of credit on removal of capital goods, etc., remain unanswered. Though such provisions have to be applied appellant wise and case wise, the discretion of the Tribunal to apply the provision shall continue.

To conclude, Budget 2014 has managed to touch various areas with some significant changes that may or may not appeal to the industry. Whether his objective of achieving fiscal prudence that will lead to fiscal consolidation and discipline will be achieved or not, only future will tell. Though, with a lot of questions unanswered, Budget 2014 has surely tried to address many.

[The authors are respectively Principal Associate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed in this article are personal.]