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Compounded Levy Scheme (Under Section 3A of Central Excise Act, 1944)

COMPOUNDED LEVY SCHEME

with reference to the pan masala packing machines (capacity determination and collection of duty) rules, 2008

Introduction

Indian taxation system has been split up into direct taxation and indirect taxation. Direct tax is paid by the individual directly to the government whereas indirect tax is paid by the individual indirectly to the government.

Constitution of India bestows power on the Central and State Government to levy and collect taxes. Central government has the power to collect income tax and excise duty while State Government collects sales tax, excise on liquor and tax on agricultural income.

Excise duty is one of the intricate subjects in the domain of indirect taxation. The main focus of this article is to understand the significance and nature of excise duty and the concept of compounded levy scheme with reference to the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008 (hereinafter referred to as Pan Masala Rules).

Meaning and Nature of Excise Duty

An excise duty is a duty imposed on manufacturing of goods. Manufacturing means to bring out a substance of new identity and character distinct from the raw material.[1]However, manufacturing alone does not attract the duty but it is the nature of goods which is also a relevant factor for levying duty. Goods must be movable, mentioned in the Central Excise Tariff Act, 1985, marketable, and must be manufactured in India. Goods which possess all these attributes are known as excisable goods.

Charging Section

Section 3 of the Central Excise Act, 1944 (hereinafter referred to as CEA, 1944) empowers the Central Government to levy and collect a duty of excise on all excisable goods except in the case of the goods manufactured or produced in the special economic zones. Here, the taxable event is the manufacture of excisable goods and the payment of the duty has to be made by the 6th day of the following month.

Besides, Section 3A of CEA, 1944 and Rule 15 of Central Excise Rules, 2002 (hereinafter referred to as CER, 2002) also confer power on the government to levy duty on the basis of production capacity which is commonly known as compounded levy scheme.

Compounded Levy Scheme

In compounded levy scheme the duty is levied on the basis of production capacity while in normal process duty is levied on the basis of actual production. Production capacity is determined on the basis of the factors relevant to the production e.g. if a manufacturer operates one machine, it shall be deemed that the machine will produce 50,000 units of goods in a month. The government can fix a particular amount of duty payable for operating one machine.

A Brief Chronicle

Compounded levy scheme under section 3A was first introduced for induction furnace and steel re-rolling mills etc. where the evasion was significant. But later, section 3A had been omitted in 2001 due to some controversies. In 2001, the compounded levy scheme was again applied to the stainless steel (Patta & Patti) manufacturers on optional basis under Rule 15 of CER, 2001. In 2007, by deriving its power from Rule 15, scheme was implemented on optional basis for pan masala manufacturers. Eventually, in 2008, the compounded levy scheme for pan masala manufacturers was mandatorily enforced by framing Pan Masala Rules, 2008 by inserting Section 3A in the CEA, 1944.

The compounded levy scheme, at present, is governed under Rule 15 of CER, 2002 for stainless steel (Patta & Patti) and under Section 3A of CEA, 1944 for pan masala. Both the schemes are parallel to each other. Scheme under Section 3A is mandatory while it is optional under Rule 15. Thus stainless steel (Patta & Patti) manufacturers can opt to be governed under this scheme.

Powers of the Government Under Section 3A

Section 3A of CEA, 1944 confers power on the Government to make rules to charge excise duty on the basis of production capacity in respect of notified goods after having regard to the following factors:

  • Nature of the process of manufacture.
  • Production of excisable goods of any specified description.
  • Extent of evasion

Central Government may lay down rules in light of power conferred under Section 3A of CEA, 1944 in order to:

  • Provide for the manner of determination of the annual capacity of production of the factory (deemed annual capacity).
  • Specify factor relevant for production.
  • Determine deemed quantity to be produced by use of a unit of such factor.
  • Fix the rate of duty of excise.
  • Make provision for abatement of duty in case of non production for any continuous period of 15 days or more.

Pan Masala Packing Machines Rules, 2008

In 2008, the Central Government, in exercise of the powers conferred by Section 3A of CEA, 1944, framed Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008[2] to levy and collect the excise duty with respect to the manufacturing of notified goods.

Notified goods– For the purpose of Pan Masala Rules, notified goods have been specified by the government as under[3]:

i)    Pan Masala, except the Pan Masala containing not more than 15% betel nut; and

ii)  Pan Masala containing tobacco, commonly known as gutkha, manufactured with the aid of packing machine and packed in pouches as notified goods.

Factor Relevant– In compounded levy scheme the duty is imposed on the factor relevant for production of the notified goods. In case of Pan Masala Rules the factor relevant for production of the notified goods is the number of operating packing machines including all types of form, fill and seal and profile pouch making machines by whatever name called. The duty is imposed on the basis of number of operating packing machines in the factory.

Deemed Production

The whole theme of compounded levy is based on the deemed production instead of actual production. In deemed production a quantity is deemed to be produced by using one machine for a particular period of time.

Rule 5 provides a list which starts from retail sale price of Rs. 1 and goes up to Rs. 6 and above. It also specifies the quantity of notified goods of a particular retail sale price that one machine shall produce per month. For example, if a manufacturer operates one packing machine and manufactures goods of retail price Rs 1, it shall be deemed that the machine will produce 56,16,000 pouches per month. Similarly, Rule 5 provides the deemed quantity for different retail price.[4]

Procedure to levy and collect the duty

File the declaration form

First off, the manufacturer has to declare certain information, in accordance with Rule 6, in Form 1 to the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise with a copy to the Superintendent of Central Excise at least seven days prior to the commencement of production. Following information has to be declared by the manufacturer:

  • Number of single track packing machines available and installed in his factory and the number of machines which he actually intends to operate during a particular month.
  • Number of multiple track or multiple line packing machines[5]available and installed in his factory and the number of machines which he actually intends to operate during a particular month.
  • Number of multiple track or multiple line packing machines which are incapable of performing additional processes of branding or moulding the pouches. It is generally done to intimate the concerned Officer to seal the machines. Simply put, no manufacturer would desire to pay the duty for non-functional machine.
  • Name of the manufacturer of each of the packing machine, identification number of the machine, purchasing date of machine and the maximum packing speed of each of the machine. It is difficult to understand that why the department calls for the manufacturer to declare the packing speed of the machine when the duty is levied on the basis of deemed production. The purpose of such declaration is hard to construe in case of compounded levy scheme.
  • Description of goods and brand names which he shall manufacture i.e. pan masala or gutkha or both.
  • Retail sale prices of pouches to be manufactured. It is required to ascertain the duty to be levied on the basis of deemed production.
  • Besides, the manufacturer has to declare the part or section of the premise to be expended for the manufacture of notified goods of different retail price.

On receipt of the said declaration, the Deputy Commissioner shall approve the declaration within three working days after holding some inquiries and physical substantiation. The Deputy Commissioner may direct for some modifications in the plan or details of the part or section of the factory intended to be used by the manufacturer. If the manufacturer does not receive any such approval within five working days, the approval shall be deemed to have been granted.

In case of alteration

During normal course of business, the maximum number of machines shall be considered as the number of machines declared by the manufacturer, under Rule 6, which he intends to operate during a particular month. Rule 8 addresses the situation when some alteration is made by the manufacturer in the number of operating packing machines as declared under Rule 6.

Rule 8 envisages that the maximum number of machine shall be taken as the maximum number of packing machines installed on any day during the month irrespective of any alteration in the number of machines.

Illustration- If a manufacturer operates 10 machines on 7th day of the month and he removes one machine on 15th day of the month, the number of machines shall still be taken as 10 for the month.

In case of non production

According to Rule 10, if a manufacture does not manufacture the notified goods for any continuous period of 15 days or more, the duty calculated on the pro-rata basis shall be abated with respect to the period of non production. From the plain reading of Rule 10 it appears that the period of 15 days or more need not require falling in a particular calendar month.[6] It may start from one month and run up to the next month.

To claim such abatement, the manufacturer has to intimate the Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise at least three days before the commencement of such period of non production.

Three conditions must be fulfilled to claim such abatement:

  1. The entire factory must be closed for a continuous period of 15 days or more.
  2. During the period of closure there should not be any manufacturing activity whatsoever and no removal of goods by the manufacturer.
  3. Prior intimation at least three days prior to closure must be given to jurisdictional Central Excise Officer who shall seal all the packing machines available in the factory in such a manner that the same cannot be operated during the period of closer.
  4. The removal of the notified goods already produced before the commencement of such period of non-production must be done within two days after the commencement of such period.

Calculation of Duty

According to Rule 7 duty payable for a particular month shall be calculated by application of the appropriate rate of duty by the government to the number of operating packing machines in the factory during the month.

To exemplify it let’s assume that the rate of duty is 20,000 per operating packing machine and the manufacturer is operating 8 machines. The duty payable would be calculated by multiplying the rate of duty with number of machines.

Manner of Payment-Rule 9

The payment of the ascertained duty in normal scheme is made in the following month of the production. But, in case of compounded levy scheme (Pan Masala Rules) the payment is to be made in advance i.e. by the 5th day of the same month of production. It is also known as advance payment in taxation parlance.

The manufacturer of the goods has to pay the duty by the 5th day of the same month subject to the following conditions:

1. That the failure to pay the duty would attract a liability to pay interest along with the outstanding amount of duty.

2. In case manufacturer increases the number of machines, as declared by him under Rule 6, during the month by installing or adding new packing machines, the differential duty amount of those new machines becomes payable by the 5th day of the following month.

Illustration- If 5 machines have been installed during the month of April and the manufacturer installs one new machine on 25th day of the month, he shall have to pay the duty for that new machine by the 5th day of the following month.

3. If the manufacturer stops the production of goods of existing retail sale price permanently or starts manufacturing goods of a new retail sale price, the duty payable shall be calculated on pro-rata basis depending upon the total number of days in that month and the number of days remaining in that month. If the advance duty paid for the month is less than the duty payable, the differential duty has to be paid by the 5th day of the following month and in case the amount of duty paid is more than the duty payable, the balance has to be refunded by the 20th day of the following month.

4. Government, sometimes, may revise the rate of duty on account of various economic factors. The revision can be done by either increasing or decreasing the rate of duty which directly affects the amount of duty payable. In case Government revises the rate of duty, the duty shall be recalculated on the pro-rata basis for the remaining days of the month and the differential duty has to be paid by the 5th day of the following month. If the recalculated amount is less than the duty paid in advance, the balance has to be paid by the department by the 20th day of the following month.

Illustration- Suppose, if the total amount of duty has already been paid for the month at the rate of Rs. 50,000 per operating machine by the 5th day of the month and the government revises the rate of duty and fixes it to Rs. 20,000 per operating machine on the 20th day of the month, the surplus amount which the manufacturer has already paid shall be refunded to him by the 20th day of the following month.

5. In case the manufacturer manufactures the goods of different retail price which he had not declared, he will be liable to pay the duty for the goods of highest retail price in respect of all the goods manufactured by him during the month. The provision envisages penal action for the non-compliance with the declaration made under Rule 6.

Other Restrictions

The manufacturer is bound by the following restrictions as provided under Rule 13 of Pan Masala Rules, 2008:

  1. In case if he intends to stop operating any machine, he has to intimate the concerned Excise Officer about his intention at least 3 days in advance. No concession in the duty payable will be granted if he stops operating any machine without intimation.
  2. The concerned officer will get the machines sealed under his physical supervision. Same process is to be followed for addition or installation of any packing machine.
  3. A manufacturer shall not be allowed to keep as well as to trade in those goods of which no retail sale price had been declared by him.

Penalties

The penal provisions for non compliance of procedure are to be read with Section 11AC of Central Excise Act, 1944. Section 11AC applies to the situation where the duty payable has not been levied or short paid or erroneously refunded by reason of fraud or collusion or any willful mis-statement or suppression of facts with intent to evade payment of duty.[7]

Rule 17 subject to the Section 11AC provides that in case the manufacturer produces or removes any goods in contravention of any of the rules, he shall be liable to pay the penalty which in any case shall not exceed the duty leviable on the goods. The goods will be confiscated by the concerned officer.

In case of non-registration of the manufacturing unit with the jurisdictional excise office, the duty liability will be determined by the number of machines found available in the factory premises.

Conclusion

The compounded levy scheme has its own pros and cons. It was applied to pan masala manufacturer so as to reduce the practice of tax evasion prevalent in the market. It also reduces the burden of maintaining daily accounts with respect to the production.

However, contrary to the intention of the revenue department compounded levy scheme has never been very successful. Pan Masala rules are also no exception to this and the anti-evasion measures are still not proving very efficacious.

The real problem lies in the interpretation of rules. Both, Excise officers and manufacturers are confused regarding the rules made by the government. For example one such situation arises when the manufacturer claims for abatement. It is not clear from the rules that whether abatement can be claimed with respect to the duty paid in advance or duty has to be paid after claiming abatement.

The rules should have been clearer with respect to the time for the payment of duty on pro-rata basis. It is a burden on the manufacturer to pay the duty for the whole month when there is no actual production during the whole month. These rules should be remediated in order to make them efficacious.

[1] Union of India v. Delhi General Cloth Mills, AIR 1963 SC 793.

[2] Vide Notification No. 30/2008-C.E. (N.T.), dated 1-7-2008.

[3] Vide Notification No. 29/2008-C.E. (N.T.), dated 1-7-2008

[4] See Rule 5, Pan Masala Rules, 2008

[5] Multiple line packing machine is used to give definite shape to pouches in order to distinguish the products from the products of the other manufacturers. This process is commonly known as branding.

[6] Ashok & Co. Pan Bahar Ltd. Vs. Commissioner of C. Ex., 2013(295)ELT721(Tri. – Delhi).

[7] See Section 11AC, Central Excise Act, 1944

(Authored by-Navneet Gupta,NLIU Bhopal, 4th year Student (B.A.LL.B. Hons))

Categories: Excise Duty
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