Budget 2016: Excise on Ready Made Garments and Made Ups

These items can be divided into two broad categories

First, having retail sale price (RSP) of Rs.1000 and above when they bear or are sold under a brand name.

Second, other than the above that is the readymade garments and made ups which don’t fulfill the above two conditions. On the second category i.e. where the retail sales price is less than Rs. 1000/- and the article does not contain the brand name, the optional NIL duty facility shall continue. In this case, if the garments or articles are of cotton only the optional levy of „Nil (without CENVAT credit) or 6% (with CENVAT credit) shall be available and if the garment of article contains any other item other than cotton also then option for clearance at „Nil (without CENVAT credit) or 12.5% (with CENVAT credit)‟ shall continue to be applicable

On the first category, Excise Duty has been levied with two options;

First option is to pay 12.5% excise and take CENVAT

Second option is to pay 2% excise and don’t avail CENVAT

An option has been given to the manufacturers TO PAY only 2% Excise duty on 60% being the tariff value, In this case the manufacturer shall not be allowed the CENVAT on the raw materials.

* 2 percent of the value after rebate

For textile industry, the major input is the cloth on which option of exemption of excise duty is available to the manufacturers. Cloth is generally cleared without payment of excise duty availing the option of NIL rate of duty and foregoing the CENVAT. Thus, for small manufacturers of Readymade Garments who buy cloth from the market, the option of 2% of Excise on 60% of the value shall be an easy going option in general.

Another major impact of MRP based excise shall be on the Readymade Garments which are sold on Major Discount Basis, these Readymade Garments will be attracting Excise if the MRP is Rs. 1000 or more. Normally the RSP of these articles is kept at higher side and realizable value is much lesser post impact the market driven discount rates of 50% to 60% (as we often encounter in sale or sale/big sale kind of sale strategies).

Extracts from the Letter of TRU, Ministry of Finance, Department of Revenue, Government of India dated today

Excise duty of 2% (without CENVAT credit) or 12.5% (with CENVAT credit) is being levied on readymade garments and made up articles of textiles falling under Chapters 61, 62 and 63 (heading Nos. 6301 to 6308) of the Central Excise Tariff except those falling under 6309 and 6310 of retail sale price (RSP) of Rs.1000 and above when they bear or are sold under a brand name. This optional levy would apply to such readymade garments and made up articles of textiles regardless of the composition of the garment / article. However, in respect of readymade garments and made up articles of textiles other than those mentioned above, the optional levy of „Nil (without CENVAT credit) or 6% (with CENVAT credit)‟ in case of garments / articles of cotton, not containing any other textile material and „Nil (without CENVAT credit) or 12.5% (with CENVAT credit)‟ in case of garments / articles of other composition, as the case may be, shall continue. The tariff value for readymade garments and made up articles of textile is also being increased from 30% to 60% which shall apply to all goods mentioned in the notification No.20/2001-CentralExcise (N.T.) dated 30.04.2001. It may be noted that the new levy is similar to the levy of mandatory excise duty of 10% on readymade garments and made up articles of textiles [goods falling under Chapters 61, 62 and 63 (heading Nos. 63.01 to 63.08)] when they bear or are sold under a brand name, which was introduced in the Budget 2011-12, except that:

The present levy is an optional levy, that is domestic manufacturers will have the option to pay excise duty of „2% (without CENVAT credit) or 12.5% (with CENVAT credit)‟,

1. The levy is restricted to such articles which have RSP of Rs.1000 and above, and
2. The tariff value is being revised from 30% of RSP to 60% of the RSP.

This document is based on interpretation of the law. Therefore, the views expressed above are matters of opinion based on the laws prevalent at the time the view being expressed, which may change as the law evolves from time to time. We have no responsibility to update these comments for events and circumstances occurring after the date of this note, unless specifically requested. This note is for the specific purpose of serving as an informative guide and is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.

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