Dilemma of Central Excise levy on Readymade garments

Advocate Pawan K. Pahwa and CA Vishal Garg

The Union Budget/ Finance Bill 2016 has introduced the levy of Central Excise duty on the 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 by withdrawing the exemption available to such goods. The Central Excise duty of 2% (without CENVAT credit) or 12.5% (with CENVAT credit) is levied on readymade garments and made up articles of textiles. However, branded articles or goods sold under a brand name having a Retail Sale Price (RSP) of less than Rs. 1000 are not liable to central excise duty.

In respect of all goods/ articles of cotton not containing any other textile material (other than those bearing a brand name or sold under a brand name and having RSP of Rs 1,000 and above), optional levy of “Nil (without CENVAT credit) or 6% (with CENVAT credit) shall be applicable.

The tariff value for readymade garments and made up articles of textile is also increased from 30% to 60% which shall apply to all goods mentioned in the notification No.20/2001-Central Excise (N.T.) dated 30.04.2001. In other words the effective rate shall be double the rate had the goods been taxable earlier.

The salient features of the levy are as under:

• The levy is an optional levy, the manufacturers will have the option to pay excise duty of 2% (without CENVAT credit) or 12.5% (with CENVAT credit)
• The levy is restricted to such articles containing brand name and which have RSP of Rs.1000 and above
• The tariff value is revised from 30% of RSP to 60% of the RSP

The plain reading of the scheme needs clarification in respect of the levy on the “goods or articles bearing brand name but RSP less than Rs 1000” and “goods or articles not bearing brand name but RSP more than Rs 1000”. However, the writer believes that the intent is to tax only the branded articles having RSP of Rs 1000 or more. In this background, we have tabulated below the various scenarios and the applicable levy:

Other salient features of Scheme/ other excise provisions having bearing on the levy are outlined below for better understanding:

• The brand name owner, who gets the goods manufactured on his account on job work, shall pay the duty leviable on such goods as if the goods were manufactured by him. The brand name owner (and not the job-worker) shall be required to register and comply with all the provisions of Central Excise law in terms of Rule 4(1A) of the Central Excise Rules, 2001. However, the brand name owner has the option to authorise his job-worker to pay the duty leviable on the goods. If such an authorisation is given, then the job-worker would have to obtain registration.
  

• The value for computing the eligibility as well as the exemption limit for purposes of SSI exemption would be the tariff value of the goods ie 60% of the RSP value of all goods other than bearing brand name of another person.

• The SSI exemption for the month of March, 2016 will be Rs.12.5 lakh, subject to fulfilment of other conditions of the notification No.8/2003-C.E., dated 01.03.2003. The value for the computation of SSI exemption would be tariff value of the goods.

• Manufacturers who intend to avail Cenvat credit on inputs or inputs contained in goods lying in stock shall keep the stock declaration of finished goods, goods in process & inputs, as on 29.02.2016 duly certified by Chartered Accountant.

The scheme of levy of central excise is quite complicated and complex which requires a deliberation to understand and apply and would still require clarification from the Board on certain aspects. Given this, one thing is clear that this is going to bring another round of litigation for garment industry similar to one seen by the textile industry in 2004 on introduction of Notification 29/2004 CE and 30/2004 CE in case suitable clarification or simpler scheme for levy of central excise duty is in not brought by the Government for the garment industry.