Circular No. 419/52/98-CX
dated 2/9/1998
F.No. 207/20/98-CX.6

Government of India

Ministry of Finance

Central Board of Excise & Customs, New Delhi

Subject: Modvat Credit Scheme – Special measures to prevent and detect the misuses- instructions regarding.

I am directed to say that the Government is concerned about the present practices and their efficiency in properly administering the Modvat Scheme. It is noticed, inter alia, that the payment of duty from the Modvat Credit account as a percentage of total revenue has increased substantially and consistently during the last decade or so. Consequently, the marginal rate of increase in revenue is not high as it should be. It is felt that some of the manufacturers have taken credit for which they were/ are not entitled, thus causing unwarranted distortion in revenue collection. It has been decided to tone up the administration of the cases of Modvat misuse.

2.  In view of the above, the matter has been examined and analysed by the Board.

3.  It has been noticed that Modvat credit has been taken fraudulently by adopting, inter alia, the following modus operandi:
(i)    Credit taken on forged and fake documents.

(ii)    Credit taken on invoice without receipt of goods.

(iii)    Credit availed twice on the same invoice.

(iv)    Credit has been taken on inputs and capital goods which are not eligible.

(v)    Credit has been taken on inputs and capital goods which are not eligible.

(vi)    Excess credit available with the manufacturer is passed on to other parties without goods.

(vii)    The goods have been diverted while credit has been taken.

(viii)    Credit has been taken on capital goods meant for establishing new units in the existing duty paying unit and utilised.

4. The prevalence of such malpractice”s indicate that there is a need for conducting Modvat checks effectively.

5.  The Board desires that the field officers should check the Modvat credit utilisation of the units on monthly basis. They should lay particular emphasis on receipt of the raw material and its proper utilisation by the unit by cross checking transport documents, payment particulars, physical availability of the goods on which credit has been taken and the corresponding production. In order to ensure that no credit is taken on fake and forged documents, verification from the originating range should be strictly done. In suspected cases, the documents should be fixed to the divisional Assistant Commissioner/ or Commissioner for immediate verification. It is felt that if the proper checks are conducted, the misuse of credit can be effectively prevented and this will lead to buoyancy in the revenue collection in the current year.

6.  For checking the correctness of Modvat credit availed and utilised in the last five years, the commissioners should select the units who have availed more than one crore credit in a year and these should be checked by Special Modvat Verification Teams constituted especially for this purpose with clear instruction however that on harassment is caused to the assessees in the process.

7.  The audit parties should also be directed to lay emphasis on the verification of Modvat credit in scientific and analytical manner at the time of auditing the records of an assessee.

8.  Concerted efforts should be made to detect cases where credit has been taken without receipt of the goods or where excess credit has been taken. The receipt of the goods and its utilisation should be cross checked with the private documents of the assessees. They should check the total receipt of the major inputs and match it with production. Any abnormal utilisation should be probed in details.

9.  In order to achiever the aforesaid, it is directed that the Commissioners should chalk out a comprehensive plan for checking of Modvat credit and monthly detailed report of results achieved should be sent to DG (AE) by the 10th of every month.

10.  A suitable software should be developed for checking of Modvat invoices on TOP Priority Basis.

11.  The DGAE will compile these reports and submit a consolidated report to the Board by the 15th of every month.

Sd/-
(P.K. Sinha)
Under Secretary (CX.6)

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