DECEMBER 10, 2008

By Dinesh Kumar Agrawal, Ex-IRS

ONE of the Pink Dailies recently reported that the Govt may bring under compounded levy some of the sectors like iron & steel, paper, tiles and copper. It also reported that the proposal is actively being perused by the finance ministry in the backdrop of dipping excise duty collection in recent months.

The Central Excise Act lays down the law relating to central excise duties on goods manufactured or produced in India. In terms of Section 3 of the Act, excise duty is levied on all excisable goods manufactured or produced in India at the specific or ad valorem rate prescribed in the Central Excise Tariff. In terms of Section 3A of the Act, the Central Government is empowered to levy excise duty on notified goods, generally prone to duty evasion, on annual capacity of production of the factory.

Presently manufacturers of "Pan Masala" and "Guthka" are paying excise duty based on deemed annual capacity. It has been reported that duty collection for aforesaid two products have grown five times and therefore considered to be a huge success for the revenue. In view of the outstanding collection of revenue in this sector, government want to replicate the same in other sectors also, and what can be better time to extend the same in other sectors when the revenue is steadily falling. I am wondering whether a fall in revenue is due to duty evasion by unscrupulous manufacturers or recession triggered by global economic tsunami. There are enough indicators to establish that Indian economy is also facing slowdown in all sectors including manufacturing sectors like iron & steel, paper, tiles and copper. Not only the demand is hit, prices have also seen a free fall from dazzling heights in recent days. It is but natural that excise duty collection will also take a hit as duty collection depends not only on quantum of clearance but also on value as duty rates for these sectors are ad valorem i.e. levied at a percentage of transaction value.

Provisions of Section 3A of the Act appears to be against the fundamental rights to carry on any business as envisaged in the Article 19(1)(g) of the Constitution of India (the "Constitution"). Levy of excise duty on the deemed annual capacity also appears to be against entry 84 of the Union List of the Seventh schedule of the Constitution. As per entry 84 of the Union List, the Central Government is empowered to collect duties of excise on tobacco and other goods manufactured or produced in India. Provisions of Section 3A of the Act levies excise duty on deemed annual production capacity of the factory irrespective of whether so much goods has actually been manufactured or produced in India. If the actual production falls below the deemed annual production capacity of the factory, it will amount to levy of excise duty also on those goods which are not manufactured or produced in India, thus clearly going beyond the scope as envisaged in the said entry. One may argue that Section 3A merely prescribes the procedure for collection of excise duty, but a close scrutiny of the provisions of Section 3 and 3A will negate such view because Section 3 levies a duty on goods produced or manufactured in India whereas Section 3A levies duty on notified goods on unit of production.

Levy of duty on deemed annual production capacity of the factory also harms the fundamental rights to carry on any business of the citizen as meaningful enjoyment of this right presupposes level playing field where every citizen has equal opportunity. All manufacturers cannot be equally efficient. One manufacturer may run his factory at 150% of the installed capacity whereas other may run at 100% and still someone else may somehow manage to run his factory at only 50% of the installed capacity. It is anyone's guess that manner for determination of annual production capacity of a factory will be based on rated production capacity of the machine by the manufacturer of that machine. Such rated production capacity of the machine will not depend on the efficiency of factory manager or entrepreneur. A startup entrepreneur and an experienced/established entrepreneur both will be required to pay same amount of duty if both are using identical/similar machine for production. There are no prizes to guess that production efficiency of startup entrepreneur will be less than that of experienced entrepreneur. Further, startup entrepreneur will have to create a demand for his product whereas established entrepreneur will have enough demand. Still, startup entrepreneur will have to pay equal duty thus putting him in a disadvantageous position vis-à-vis experienced/established entrepreneur. Such disadvantages for the startup entrepreneur created by the central law are certainly against the fundamental rights to carry on the business.

Levy of duty on deemed annual production capacity of the factory also run against the economy. Production is based on demand. If there is less demand, there has to be reduction in the production. Accordingly the manufacturer has to plan his production schedule. He may reduce number of shifts or number of days for production. In terms of the provisions of section 3A of the Act, the manufacturer is liable to pay excise duty on the deemed annual production capacity as determined by the jurisdictional Assistant/Deputy Commissioner of excise which is supposed to be an annual exercise. Proportionate abatement in annual capacity for duty liability is provided where the factory did not produce notified goods during any continuous period of 15 (fifteen) days or more subject to fulfillment of other prescribed conditions. There is no abatement for closure of factory for one or two days in a week. Let's take an example of a manufacturer who has decided to run his factory only for three days in a week due to fall in demand. He has to pay full excise duty without any abatement. To save duty, he will close the factory for 15 days in a stretch instead of running the factory for three days in a week. This may possibly lead to retrenchment of staff.

Pan Masala and Guthka are consumer goods and therefore question of transfer and utilization of CENVAT credit does not arise. However, iron & steel, paper, tiles and copper are inputs for other manufacturers and service providers who would claim CENVAT credit to offset their excise duty/output service tax. When the duty liability is de-linked with actual clearance, there will always be excess or shortfall in actual production vis-à-vis deemed capacity. There will be innumerable problems in issuing excise invoice for claiming CENVAT credit by the buyers. Certainly, the department will not allow more CENVAT credit against the goods on which lower excise duty has been paid due to the actual production being higher than the assessed deemed annual capacity. On the other hand, in case of short production, the manufacturer would like to issue supplementary issue which the department will resist. Further, finding out cum-duty sales price will become difficult as duty components per unit of sale can be determined only at the end of month whereas transaction will be completed much before.

Alas, when we are already facing laying off of more than 10 Lakhs employees in India and Prime Minister is requesting industry not to lay off staff and giving lollypops of tax incentive, babus sitting in the finance ministry are creating situations where iron & steel, paper, tiles and copper industry will be forced to layoff more staff. Babus are saying that these sectors are prone to duty evasion. They are absolutely right, but one should ask who is failing to act against the duty evaders? It is the corrupt, lethargic, inefficient and bureaucratic department who should be taken to task instead of taking an easier shortcut to makeup the shortfall in revenue. Further, one has to graciously accept the cyclic behavior of these sectors before hurling allegations of duty evasion. Notification No. 38/2008-CE (NT) dated 29 September 2008 requires every assessee to declare an Annual Installed Capacity Statement declaring the annual production capacity of the factory. Today, it is iron & steel, paper, tiles and copper industry, tomorrow, it can be many more or all, as the Government may claim that declared production is below the Annual Installed Capacity and therefore all industry should be assessed under Section 3A of the Act.

A great nation needs a visionary leader. Myopic view should be resisted at all cost to safe the industry and economy from the harms of levy of duty based on deemed annual production capacity of the factory.

(The author is associated with a leading Law Firm)