CA Lalit Munoyat
A BRIEF ON THE Excise duty on items of jewellery levied by the Finance Bill/Act 2016
Now that the Jewellers have called off their strike and returned to the market, it is ripe time to understand some of the fundamentals of the levy of excise duty @ 1% on items of jewellery.
Excise duty of 1% (without CENVAT credit) or 12.5% (with CENVAT credit) is being levied on articles of jewellery [excluding silver jewellery, other than studded with diamonds/other precious stones]
Before dwelling deep into the subject, it would be appropriate to first understand the concept of excise duty.
Excise duty can be levied and collected on goods only if 3 tests are satisfied;
1) The goods must have been manufactured.
2) The goods are marketable.
3) The goods must be listed in the first schedule and the second schedule to the Central Excise Tariff Act 1985.
Page Contents
1. What is Manufacture
The definition of ‘manufacture’ given under the Excise Act is an inclusive one. It does not define the term manufacture but merely states that certain processes set out therein would fall under the definition of manufacture.
Supreme Court, in the case of Kores India Ltd, Chennai versus Commissioner of Central Excise defined the concept of manufacture as under:
Emergence of a new article
(a) Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation.
(b) Naturally, manufacture is the end result of one or more processes through which the original articles are made to pass. The nature and extent of processing may vary from one class to another.
(c) There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original article experiences a change.
(d) Whenever an article undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the article.
(e) But it is only when the change or a series of changes takes the article to the point where commercially it can no longer be regarded as the original article but instead is recognized as a new and distinct article that a manufacture can be said to take place.
(f) Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the article is subjected to change by different operations.
(g) It is the cumulative effect of the various processes to which the article is subjected to that manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture.
(h) Where any particular process is so integrally connected with the ultimate production of articles that, but for that process, processing of articles would be impossible or commercially inexpedient, that process is one in relation to the manufacture.
Therefore :
(a) Manufacture must bring about a transformation of the articles.
(b) Such a transformation must result in a new and different commercial article.
(c) Such new article must have a distinctive name, character and use.
(d) A mere change of form, shape or size of the same article or substance would not ordinarily amount to manufacture.
2. Marketability of the new article
(a) The manufactured goods must be marketable i.e. they must be something which can ordinarily come to the market and is brought for sale and must be known to the market as such. The goods must be capable for being traded in the market.
(b) In order that the new article can be charged to excise duty the new article must be something which can ordinarily come to the market to be bought and sold and is known to the market.
(c) Thus if goods have been manufactured but they can’t be bought or sold in the market or that they are not known by a name different from the name of the inputs, then excise duty can’t be levied.
From the above write up it can now be stated that Articles of jewellery will be leviable to excise duty only and only if they are manufactured and they are bought or sold in the market and are known by different name. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.
Perceived under the above context it can be stated that Articles of Jewellery which are not manufactured but are merely traded in the market can’t be charged with the excise duty i.e. there is no excise duty on trading of articles of jewellery.
3. Classification
Even if the goods have been manufactured and they have a market for its trading such goods will not be excisable if they are not listed in the First Schedule to the Central Excise Tariff Act 1985.
This Schedule is divided into 96 Chapters and in each chapter goods of similar properties are grouped and listed and each such listed product is popularly called Tariff Item and for each such tariff item the rate of excise duty applicable to that tariff item is mentioned and that rate is called Tariff Rate.
The Central Excise Tariff Act 1985 is an Act of the Parliament and can’t be amended frequently to change the rates of excise duty. Therefore the powers to tinker with the rates have been delegated to the Central Government who can change the rates by way of a Notification u/s 5A of the Central Excise Act.
Section 5A. Power to grant exemption from duty of excise.-
“(1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon.”
Therefore in many of the cases the Tariff rate (generally 12.5%) is never applied to any product. Instead, the government can give full or partial exemption to any product and can even reduce the rate to NIL. Such a rate is called the effective rate.
In the case of articles of jewellery while the Tariff Rate is 12.50%, the effective rate is 1% for jewellery made of gold and platinum and NIL for jewellery made of silver. These rates are prescribed by Notification No. 12/2012-Central Excise dated 17th March 2012 as amended by Notification No. 12/2016-Central Excise dated 1st March 2016.
This Notification No. 12/2016-Central Excise dated 1st March 2016 is the subject of our discussion.
4. Articles of jewellery
Articles of jewellery which have been made excisable vide this notification are classified under Chapter 71 of the Central Excise Tariff Act 1985 under the sub head 7113 as:-
“Articles of Jewellery and parts thereof, of precious metal or of metal clad with precious metal.”
“Precious metal” means silver, gold and platinum.
“Platinum” means platinum, iridium, osmium, palladium, rhodium and ruthenium.
“Metal clad with precious metal” means material made with a base of metal upon one or more surfaces of which there is affixed by soldering, brazing, welding, hot-rolling or similar mechanical means a covering of precious metal. The expression also covers base metal inlaid with precious metal.
“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.
For the purposes of this Chapter, any alloy (including a sintered mixture and an inter-metallic compound) containing precious metal is to be treated as an alloy of precious metal if any one precious metal constitutes as much as 2% by weight, of the alloy. Alloys of precious metal are to be classified according to the following rules:
(a) an alloy containing 2% or more, by weight, of platinum is to be treated as an alloy of platinum;
(b) an alloy containing 2% or more, by weight, of gold but not platinum, or less than 2% by weight, of platinum, is to be treated as an alloy of gold;
(c) other alloys containing 2% or more, by weight, of silver are to be treated as alloys of silver.
Articles of jewellery chargeable to excise duty:
| Articles of Silver | |
| 7113 11 10 | Silver articles of Jewellery with filigree work |
| 7113 11 20 | Silver Jewellery studded with gems |
| 7113 11 30 | Other Silver articles of Jewellery |
| 7113 11 90 | Parts |
| Articles of Gold | |
| 7113 19 10 | Unstudded |
| 7113 19 20 | Set with pearls |
| 7113 19 30 | Set with diamonds |
| 7113 19 40 | Set with other precious and semi precious stones |
| Articles of Platinum | |
| 7113 19 50 | Unstudded jewellery |
| 7113 19 60 | Parts of platinum |
| 7113 19 90 | Other items of platinum |
| 7113 20 00 | Of base metal clad with precious metal |
5. Practical issues connected with Jewellers:
1) Trading in items of jewellery:
All jewellers, small or big, who are engaged only in the Trading Activities involving any article of jewellery made from any precious metal like gold, silver, platinum etc. and whether or not studded with pearl, diamond, or any other precious stone , are not liable to excise duty because duty is applicable only and only if the articles of jewellery are manufactured and not otherwise.
2) Articles of silver jewellery :
Articles of silver jewellery which are not studded with diamond, ruby, emerald or sapphire are not chargeable to excise duty. It means articles of silver jewellery which are studded with any precious stone except with diamond, ruby, emerald or sapphire, are not chargeable to excise duty.
3) Articles of jewellery made of an alloy of precious metal
Articles of jewellery made of any alloy (including a sintered mixture and an inter-metallic compound) containing precious metal is to be treated as an alloy of precious metal if any one precious metal constitutes as much as 2% by weight, of the alloy. Alloys of precious metal are to be classified according to the following rules:
(a) an alloy containing 2% or more, by weight, of platinum is to be treated as an alloy of platinum;
(b) an alloy containing 2% or more, by weight, of gold but not platinum, or less than 2% by weight, of platinum, is to be treated as an alloy of gold;
(c) other alloys containing 2% or more, by weight, of silver are to be treated as alloys of silver.
(In the present case this classification is of no relevance because the rate of duty is same i.e. 1% in all of the above cases. If different rates are prescribed for different precious metal then the above classification would be very important to find out the rate applicable to articles of jewellery made of an alloy of precious metal.)
4) Manufacture of Articles of jewellery- Branding the articles
As stated above, excise duty will be chargeable only if articles of jewellery are manufactured. The concept of manufacture has been explained above. But in the case of articles of jewellery the scope of manufacture is very wide.
As per chapter notes to chapter 71, it is prescribed that for the purposes of heading 7113, the processes of affixing or embossing trade name or brand name on articles of jewellery of precious metal or of metal clad with precious metal, shall amount to ‘manufacture’
For example, if a jeweller buys some articles of jewellery of gold from the open market, brings them to his showroom and in the showroom he affixes brand of his shop, then the process of affixing the brand would amount to manufacture. In such a case, the showroom will be treated as a place of manufacture and the articles so branded will be chargeable to excise duty when they are removed from the shop by way of sale or transfer. But then What is brand name ?
“brand name” or “trade name” means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person.
Simply speaking, any mark on the item of jewellery which indicate that the particular item of jewellery belong to a particular jeweller, it will be treated as a brand name. However, the following are not treated as brand name:-
(a) Hallmarking of the jewellery shall not be considered to be branding.
(b) An identity put by a jeweller or the job worker, commonly known as ‘house-mark‘ shall not be considered as brand name.
(c) A manufacturer, say “ABC Jewellers”, getting jewellery or other articles manufactured on his behalf from gold smiths/ job-workers who put a mark/sign/initials, etc. on the jewellery/ article. This is only to identify that the article or jewellery was received from a particular goldsmith, etc. This is not branded jewellery and will not attract duty.
(d) “ABC jewellers”, when it sells articles of jewellery to customers, puts a distinctive sign/ mark/ initials etc. on the jewellery- very often a simple acronym of his name e.g. ABC. It may be noted that mere alphabets or numerals (unless stylized) cannot be registered as a brand name or trademark. This is again for the purpose of identification when the customer re-sells or returns the jewellery or article and goods bearing it would not attract the levy.
(e) “ABC jewellers” advertises and sells its products under the brand “Star” or puts a logo like ABC or ABC i.e. in a stylized manner. It also puts the same brand name or an abbreviation thereof or a mark which has a connection with such brand name either on the jewellery or article itself or on the packing such as the jewellery box or pouch or even on the warranty card or certificate of quality. Such goods will clearly be treated as branded and will be liable to duty.
5) The rate of 1% is not an absolute exemption but it is conditional
The concessional rate of 1% shall be applicable only and only If :-
(a) the articles of jewellery are manufactured from inputs or capital goods on which appropriate duty of excise leviable has been paid and
(b) no credit of such excise paid on inputs or capital goods has been taken by the manufacturer of such goods (and not the buyer of such goods)
(c) appropriate duty or appropriate additional duty includes nil duty or concessional duty, whether or not read with any relevant exemption notification for the time being in force.
Now here is a point on which jewellers are going to face a lot many problems. How will a jeweller prove that appropriate duty of excise leviable has been paid on the items of jewellery or precious metal which he has purchased in the open market under a proper VAT invoice ?
The onus to prove that appropriate duty of excise leviable has been paid is on the Revenue. However, once the Department has discharged its initial burden, the onus shifts to the other side.
Nearly an impossible task to prove. This may result in a lot of litigation. There is no clarification on this issue from the government. The jewellers must ask for clarification on this issue so as to avoid litigations in future.
If a jeweller is not able to prove that appropriate duty of excise leviable has been paid on the items of jewellery or precious metal which he has purchased in the open market he will not be eligible for the concessional rate of 1% but the tariff rate of 12.5% will be applicable in his case.
There are certain judicial decisions which suggest a way out for this situation.
in the case of Calcutta Paper Mills Manufacturing Company v. CEGAT and Ors. reported in 1986 (25) E.L.T. 939. The ld. Judge held:
“It is not possible for the petitioners to discharge onus that the base paper purchased by petitioners from the market is duty paid. The goods available in the market must be presumed to have been duty paid. It is absolutely impossible for a purchaser to know whether excise duty on the manufactured goods sold to the purchasers had already been paid by the manufacturers. If the purchaser has to satisfy the excise authorities that goods which he has purchased from the market suffers duty, it would impose a burden which no purchaser would be able to discharge. In the case of Sulekh Ram and Sons v. UOI and Ors. reported in 1978 (2) E.L.T. 525,1978 Delhi High Court has held that under excise system no goods can be removed from the place of manufacture without first paying the excise duty. Therefore, a purchaser can presume that the goods are duty paid. It would be incredible if the purchasers were required to ascertain whether Excise duty has already been paid by the manufacturer before the sale of such goods or not inasmuch as the purchasers have no means of knowing it.”
6) SSI Exemption
In the case of Small Scale Industries, notification 08/2003 provides exemption from payment of excise duty subject to the following conditions:-.
(a) No duty upto first sale of Rs. 1.50 Crore in a financial year.
(b) The turnover of excisable goods in the preceding financial year must not be more than 4 Crore.
(c) The manufacturer shall not avail the credit of duty paid on inputs used in the manufacture of the final goods upto the aggregate value of first clearances of Rs. 1.50 Crore.
(d) The manufacturer shall not utilise the credit of duty paid on capital goods upto the aggregate value of first clearances of Rs. 1.50 Crore.
(e) The goods manufactured shall not bear a third party brand. That is in case of third party branded goods, the duty shall be payable right from the first invoice itself without any exemption.
However in the case of jewellers the above limits of Rs. 1.50 crore and Rs. 4.00 crore respectively have been enhanced as under:
(a) No duty upto first sale of Rs. 6.00 Crore in a financial year.
(b) The turnover of excisable goods in the preceding financial year must not be more than 12 Crore.
(c) The manufacturer shall not avail the credit of duty paid on inputs used in the manufacture of the final goods upto the aggregate value of first clearances of Rs. 6.00 crore.
(d) The manufacturer shall not utilise the credit of duty paid on capital goods upto the aggregate value of first clearances of Rs. 6.00 crore.
(e) The goods manufactured shall not bear a third party brand. That is in case of branded goods, the duty shall be payable right from the first invoice itself without any exemption.
(f) Simply stated, jewellery manufacturer having aggregate value of clearances in a financial year exceeding Rs. 12 crore, will not be eligible for this threshold exemption of Rs. 6 crore in the subsequent financial year.
(g) The SSI exemption for the month of March, 2016 for jewellery manufacturers will be Rs.50 lakh, subject to the condition that value of clearances for home consumption during the financial year 2014-15 should not be more than Rs. 12 crore. For this purpose, a certificate from a Chartered Accountant, based on the books of accounts for 2014- 15, shall suffice.
(h) Similarly, for determining the eligibility for availing of the SSI exemption from 2016-17 onwards, a certificate from a Chartered Accountant, based on the books of accounts for 2015-16, shall suffice.
(i) where a jeweller clears articles of jewellery from one or more factories, the exemption in his case shall apply to the aggregate value of clearances not separately for each factory.
(j) where the items of jewellery are cleared by one or more manufacturers from a factory, the exemption shall apply to the aggregate value of clearances and not separately for each manufacturer.
(k) However excisable goods which were produced on or before 29.02.2016 but lying in stock as on 29.02.2016 shall attract excise duty upon clearance. Jewellery manufacturer shall keep a stock declaration of finished goods, goods-in-process and inputs as on 29.02.2016 in their records duly certified by a Chartered Accountant so as to enable the manufacturers to claim CENVAT credit on inputs or inputs contained in goods lying in stock as already provided for in Rule 3(2) of the CENVAT Credit, Rules, 2004, if he so desires. No stock declaration, will, however, be required to be made to the jurisdictional central excise authorities.
In order to understand the above concepts clearly, illustrative examples of some hypothetical situations are attached as a separate excel sheet.
Download Excel Sheet containing SSI Calculations
7) Job Work and duty liability:
In case a jeweller gets jewellery manufactured on job work basis from a job worker then the jeweller who gets jewellery made from the job worker, and supplies the raw materials such as gold/silver/gemstones to the job-worker for such manufacture, then the duty liability would be on the jeweller who gets articles of jewellery made from the job worker. In such cases, the jewellery manufacturer (and not job worker) will be required to get Central Excise registered, pay duty and follow other compliance requirements. This will ensure that small artisans/goldsmiths are not required to take any excise registration.
8) Rule 12AA Job work in article of jewellery.- Special Provision
(a) Every jeweller who gets article of jewellery or other articles of precious metals produced or manufactured on his behalf, on job work basis, shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with all the relevant provisions of these rules, as if he is an assessee.
(b) The responsibility in respect of accountability of such goods shall lie on the said jeweller.
(c) The job worker shall not be required to get himself registered or shall not be required to maintain any record evidencing the processes undertaken for the sole purposes of undertaking job work “unless he has exercised his option of being liable to duty in place of the actual manufacturer..
(d) Controversy: The phrase “unless he has exercised his option” is self contradictory. In the case of many products an option has been given to the job worker to obtain registration, maintain accounts, pay the duty leviable on such goods, prepare the invoice and comply with the other provisions of these rules and in such a case the provisions of these rules shall not apply to the principal manufacturer.
(e) However in order to ensure that small artisans/goldsmiths are not required to take any excise registration, this option of treating the job worker as a manufacturer (in place of the actual principal manufacturer) has been removed vide notification no. 8/2012 CE(NT) dated 17-3-2012.
(f) Therefore the phrase “unless he has exercised his option” needs to be omitted from Rule 12AA so that the intention of the government to keep job worker out of the excise rules is brought out clearly & loudly.
(g) Job worker definition– “job worker” means a person engaged in manufacture or processing on behalf and under the instructions of the principal jeweller from any inputs or goods supplied by the said jeweller or by any other person authorized by the said jeweller, so as to complete a part or whole of the process resulting ultimately in manufacture of articles of jewellery falling under heading 7113 of the First Schedule to the Central Excise Tariff Act, 1985, and the term “job work” shall be construed accordingly.
(h) However if the principal jeweller authorises the job worker to buy raw material on his behalf manufacture the jewellery and send the same to the principal manufacturer, then it shall not be treated as a job work because the essential condition “ goods supplied by the said jeweller” is not fulfilled. In such a case the job worker will have to pay the duty and comply with all the excise rules.
(i) In many cases the end use buyers of items of jewellery gives old jewellery to the jeweller and get it melted and manufactured into new items of jewellery. In such a case the jeweller will be treated as a job worker and the end use buyer who supplies the old jewellery will be treated as the manufacturer. This being so, the liability to pay excise duty will be on the end use Buyer and not on the jeweller. The buyer will have to follow all the provisions of excise duty rules and himself pay the duty. However if the buyer satisfies the condition that the total value of his purchases in the financial year does not exceed Rs. 6.00 crore, then he will be exempt from the payment of duty under SSI exemption
(j) If any goods or part thereof is lost, destroyed, found short at any time before the clearance of articles of jewellery or waste, by-products or like goods arising during the course of manufacture of such goods, the principal jeweller shall be liable to pay duty thereon. The job worker will not be liable to duty for such waste etc.
9) The department has issued the following simplified procedure and guidelines strict compliance:
(a) Registration once applied for shall be granted within two working days, along with simplified registration procedure as prescribed under Notification No. 35/2001-CE.
(b) Further, the requirement of post registration physical verification of the premises has been also done away with in this case.
(c) Moreover, documents being maintained by the jewellery manufacturers for State VAT or Bureau of Indian Standards (in the case of hallmarked jewellery) shall suffice for Excise purposes also.
(d) The private records of the jewellery manufacturers, giving details of daily stock for his own purposes, shall be accepted for the purposes of Rule 10 of the Central Excise Rules 2002.
(e) A notification, providing for an optional centralized central excise registration for jewellery manufacturers with centralized billing or accounting system is being issued under Rule 9 (2) of the Central Excise Rules, 2002.
(f) Also, jewellery manufacturers will be eligible for a simplified return applicable for optional excise duty of 1% 2% without CENVAT credit under notification No.1/2011-CE, under Rule 12 of the Central Excise Rules, 2002.
(g) The levy is based on self-assessment and therefore, no physical visits shall be made to registered units in the normal course.
(h) In order to assuage the feelings of the striking jewellers and by way of clarification the government of India has issued Circular No. 1021/9/2016-CX dated 21st March 2016 informing the jewellers that it has constituted a sub-committee of the High level committee to Interact with Trade & Industry on tax laws.
1. All associations will be given an opportunity to submit representation before the subcommittee in writing and the all India associations to state their case in person.
2. Terms of reference of the Sub-Committee will include the issues related to compliance procedure for the excise duty, including records to be maintained, forms to be filled including Form 12AA, operating procedures and any other issued that may be relevant. The Sub-Committee will submit its report within 60 days of its constitution.
3. Till the recommendations of the Sub-Committee are finalized, the following shall be adhered to:
a. All payments of central excise duty will be based on first sale invoice value;
b. The central excise authorities will not challenge the valuation given in the invoice provided the carat-age / purity and weight of the gold/silver with precious stones; and carats of diamond/precious stones are mentioned on the invoice;
c. The central excise officers will not visit the manufacturing units/ shops/ place of business/residence of the jewelers;
d. No arrest or criminal prosecution of any jeweler will be done;
e. No search or seizure of stocks by any central excise official will be effected;
f. Exporters will be allowed to export on self declaration and submission of LUT to customs without the need to get LUT ratified by central excise. Prevailing system will continue.
4. The registration of the establishment with the central excise department can be taken within 60 days from 1stMarch, 2016. However, the liability for payment of central excise duty will be with effect from 1stMarch, 2016, and as a special case for the month of March, 2016, the assessee jewelers will be permitted to make payment of excise duty along with the payment of excise duty for the month of April, 2016.
As suggested above for seeking certain clarification vide clause (5)” on the phrase appropriate duty has been paid” and vide clause (8) “ option to Job Worker to register” the Trade & Industry must get a clarification on these issue from the sub-committee so constituted.
I have discussed only those provisions of excise laws which are applicable to the option of 1% duty without cenvat credit. For jewellers who opt for full duty with cenvat credit of inputs and capital goods, some more rules of the Cenvat Credit Rules 2004 are applicable which will be discussed in the next part of this article.
Since the write up is meant for understanding the basic laws of excise duty as applicable to the items of jewellery, the rules of procedure, records keeping, invoicing etc will be discussed only after the report of the sub-committee is issued in the public domain.
Typographical errors are sincerely regretted. Any obvious error may be brought to the knowledge of the author for rectification.
Disclaimer
The above write up is the absolute personal opinion of the author and does not amount to an expert legal opinion. It may or may not depict the legal opinion sought to be conveyed by the statute. Readers are cautioned to evaluate the actual legal position before acting upon this write up. Further this write up is meant only for an academic interest and not for any other purpose.
| Compiled by: |
| CA LALIT MUNOYAT |
| B.Com.(Hons.), CS, FCA, DISA |
| munoyat@gmail.com |
|
98201 93508 |
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Author Bio
Very good article. Takes note of all relevant topics in a concise manner.
As regards classification, more clarity is required about coverage under tariff code 7114 pertaining to ARTICLES OF GOLDSMITHS’ OR SILVERSMITHS’ WARES AND PARTS THEREOF, OF PRECIOUS METAL OR OF METAL CLAD WITH PRECIOUS METAL, of any of the items dealt with by jewellers.
Since this is a new levy, it may be a good idea to form a Whatsapp Group of excise consultants dealing with such clients.
With regards
CA Mukund Abhyankar
09822475611
Nice article by you sir. It will really help to professional persons.