Preparedness of Central Excise duty IF imposed on Textiles - July 2014

[Madhukar N Hiregange]

Central Excise on Garment Industry in Budget 2014?

History

The levy of central excise as per the stated policy of broadening the base of tax payers and reducing exemption was applied to the textile industry in 2001 with branded products being bought into the levy. In 2003 the entire industry was covered, but for some minor exemption. The nature of the garment Industry with manufacturers and the brand name owners/ exporters being different posed some challenges and therefore even the brand name owners were enabled to register and pay the duty whereby the actual manufacturer, the job worker was not required to comply.  However due to political promises, the levy was withdrawn by Not. 30/2004 wherein an option was provided that those who did not wish to claim the cenvat need not pay the central excise duty. Other than exporters who had some DEPB benefits, 100 percent of domestic garment manufacturers exited from payment of duty. In 2011 the FM Pranab Mukherjee bought branded goods into the levy. However in 2012 it was again withdrawn for the same reason as earlier by the FM P. Chidambaram.  The exemption maybe costing the GOI about 10 - 15K crores per year is guesstimated.

Budget – 2014

The present FM has very few possibilities for garnering additional revenue as he may not be able to increase the duty rate and therefore would be looking at withdrawing few exemptions. GST which seems to be the focus area would also require that almost ALL products are taxable except essential items for the families under the poverty line. The possibilities are:

1. All textile & products under Chapter 61, 62 & 63 would be made liable at either the normal rate [ presently 12.36 percent ] or a rate which is little lesser to encourage voluntary compliance.
2. Only branded products would be covered at the normal rate.
3. Only products above a certain cost would be made liable at the normal rate.

Impact if made liable

1. The GOI would start getting a sizable revenue.
2. The states would also get additional revenue as VAT is including CED as also due to forced disclosure due to imposition of CED.
3. The cost of apparels in general  would increase by the net amount tax less credit available. If same rate then about 6-9 percent depending on content of material.
4. Exporters would be insulated partially. However unless drawback rates are also increased a few percent age of CED would be additional cost.
5. The movement of goods may have to get properly documented, which presently is quite haphazard in the industry.
6. Large manufacturers may sub contract their work to smaller units with less than Rs. 150 lakhs value of clearances.
7. The dealers would find that they need to increase the sale price.  Maybe also parallel economy maybe preferred unless the law is administered adequately and without corruption/ compromises.

Some Important Aspects/ Care for Manufacturers

1. The levy would come by way of withdrawal of exemptions, therefore the central excise duty would be leviable from midnight of the budget. ALL REMOVAL [ not sales] from the manufacturers premises or if job worker is manufacturing completely from the job workers factory would have to suffer the duty.
2. However goods manufactured and REMOVED prior to the budget would not be liable. As a measure of caution for 1-3 months the documents accompanying these goods may have a stamp that these are goods manufactured prior to the budget.
3. The cenvat credit on the raw material in stock, the cenvat credit contained in inputs contained in the WIP/ Finished Goods in stock would also be eligible for credit. Therefore a stock taking may have to be done on the night of the budget.
4. The procurement of capital goods, inputs etc may also be done by payment of duty as credit is ONLY available based on valid duty paying documents.
5. The SSI exemption CANNOT BE CLAIMED BY ALL. Any manufacturer having more than 400 lakhs of clearances of EVEN exempted goods in the previous year [ 13-14] would become liable to pay from day one.
6. Smaller manufacturer with less than 400 lakhs would be eligible for the exemption upto 150 lakhs from date of budget onwards. After crossing 400 lakhs they would become liable for duty payment next year 2015 April from re.1.

There could be more issues/ impact which would only require to be examined if the Industry is subjected to the duty. However the purpose of this article is to strengthen the industry which could keep itself ready for such eventuality prior to the budget and avoid heartburns if the levy is imposed.  For feedback pl  contact. - madhukar at the rate of hiregange.com