CA. Pradeep Jain, CA. Preeti Parihar, Ankit Palgauta
Introduction:- Compounded levy scheme was introduced in the Central Excise Law with the duty of Rs. 10000/- per machine per month in the year 1994. The scheme was simple with reasonable amount of duty, as such a no. of manufacturers of stainless steel patta-patti switched to it. Later on this duty was increased to Rs. 15000/- and then to Rs. 30000/-. Now, this duty has been increased to Rs. 40000/- vide notification no. 5/2013-CE dated 1.3.2013. The increase in duty amount in the compound levy indicates that this step of government is going to decrease the popularity of this scheme in the stainless steel industry. This piece of writing is about the implications of this amendment on the stainless steel industry.
Product chain in stainless steel (SS) industry:-
The end product of SS industry is utensils which are manufactured by following process:-
- The initial input is the SS scrap which is converted into flats.
- Flats are subjected to process of hot rolling and the resultant product is hot rolled patta patti.
- Hot rolled patta patti are processed in cold rolling mills, the resultant product being cold rolled patta patti.
- The cold rolled patta patti are converted into circles.
- The circles are used in the manufacture of the utensils.
The compounded levy is levied on the intermediate process of cold rolling.
Situation prior to budget, 2011:-
There was no excise duty on the utensils by virtue of Notification no. 10/2006-CE dated 1.3.2006. The circles used in the manufacture of utensils was also exempted vide Notification no. 3/2005-CE dated 24-2-2005. Thus, the buyers of cold rolled patta pattis were not concerned whether the excise duty is charged on their invoice or not as in any case the excise duty was forming the part of their cost. This was the prime reason for which most of the manufacturers of the patta patti had opted for compounded levy. Besides this, the compound levy was simple involving less procedural formalities with reasonable amount of duty.
Situation after budget, 2011:-
Budget, 2011 has brought the excise duty on the utensils @ 1% under Notification no. 1/2011-CE dated 1.3.2011 on the condition that no credit is availed. Also an option was given in this budget to pay the excise duty on utensils @ 5% under Notification no. 2/2011-CE dated 1.3.2011 alongwith the facility of Cenvat credit. Since 1% duty was not a big deal, most of the manufacturers have opted for it rather than going for 5% duty with Cenvat. Thus, even after budget, 2011; though duty was imposed on utensils, the manufacturers did not require the Cenvat credit, as such, there was no impact on the manufacturers of cold rolled patta patti.
Situation after budget, 2012:-
The duty of 1% was increased to 2% on the utensils in budget, 2012. Simultaneously, the duty of 5% with Cenvat was also increased to 6% in this budget. As a result of this increase, big players of this industry where start to finish process i.e. cold rolling as well as utensils was carried out either in the same factory or within the same group companies; had already switched to Cenvat scheme. If the same cold rolling as well as utensils were manufactured in same premises then there was no problem in switching to Cenvat scheme. But if the manufacture of cold rolled as well as utensils were undertaken in separate premises or separate entities then they were following the job work procedure. However, the other manufacturers working alone were stuck to the compounded levy and those manufacturing the utensils were still paying the duty @ 2% on utensils without availing the Cenvat. However, recently announced budget of year 2013 may result into scrapping of the compounded levy scheme in SS industry.
Implications of Budget, 2013:-
Budget, 2013 has increased the duty under compounded levy scheme by Rs. 10000/-, now the effective duty under this scheme is Rs. 40000/- per machine per month. This is substantial increase after the increase in duty on utensils in previous budget. As already stated the big players have already switched to Cenvat scheme. Obviously, the cost of utensils manufactured by these companies will be low as they are availing the Cenvat at full rate and paying the concessional duty @ 6% only. However, those manufacturer who are paying the duty on utensils @ 2% without Cenvat will find it tough to survive as the excise duty paid by the manufacturers of patta patti, whether in compounded levy (which has increased substantially) or in normal scheme, is forming the part of their cost.
Under above circumstances, there are two options available with the manufacturers of utensils:-
(i) To purchase the flats as inputs and avail the Cenvat credit. Thereafter, get them processed in cold rolling mill on job work basis. Utilize the cold rolled patta patti in manufacture of circles and utensils thereafter and clear the same on payment of duty.
(ii) To get the SS patta patti from the manufacturer who is operating under Cenvat scheme. Avail the Cenvat, manufacture and clear utensils on payment of excise duty @ 6%.
The second option hereabove will not be followed by the manufacturers as there is direct outflow in form of excise duty and the only option available will be the option 1 hereabove. Thus, in any case, the utensil manufacturers will prefer to procure the flats and send it to for job work, rather than purchasing the same from patta patti manufacturers. Since the increased duty on compounded levy will ultimately increase the cost of such manufacturers (additional burden of increase in compound levy duty as well as direct outflow of 2%). Thus, the only feasible option will be to purchase the flats and get the cold rolled patta patti manufacture on the job work basis.
At the time of introduction, the compounded levy scheme under SS industry was very attractive. This attraction was also due the fact that the end product “utensils” were exempted. However, this attraction faded to some extent after the announcement of budget, 2011 when the duty was imposed on the utensils. After levy of duty on utensils, it has faced the increase by 1% in the previous budget which has let many of the utensil manufacturers to shift to Cenvat scheme. Now the substantial increase in the duty under compounded levy scheme also indicates the dimming attraction of this scheme…