Whether Excise Duty should be included in cost of finished goods for inventory valuation
We all know that GST has been rollout from 1st July 2017 and it has subsumed a number of indirect taxes including excise duty. This means excise duty, technically, does not exist in India except on a few items such as liquor and petroleum. For petroleum and liquor manufacturing industries, it is necessary that everyone should know that whether it should be included in the cost of finished goods for inventory valuation.
Excise Duty: Excise duty is a tax or duty which is levied at the time of manufacture of goods. However, it will be payable at the time of removal of goods from factory. Therefore, excise duty is not payable on goods lying in the factory so as to put the goods in condition and location.
In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses.
As per accounting standard – 2, “valuation of Inventories”, Inventories should be valued at the lower of cost and net realisable value. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.
From the above reading we can say that, excise duty is levied at the time of manufacture of goods and it is necessary cost to bring the inventories in their present location and condition (saleable condition).
Excise duty contributes to the value of the product. A “duty paid” product has a higher value than a product on which duty remains to be paid and no sale or further utilization of excisable goods can take place unless the duty is paid. Therefore, it is a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or further used in the manufacturing process.
As also explained in the Guidance Note, the liability for excise duty arises at the point of time at which the manufacture is completed. Therefore, the excise duty paid or provided on finished goods should be included in inventory valuation. Similarly, excise duty paid on purchases (other than those subsequently recoverable by the enterprise from the taxing authorities) as well as intermediary products used for manufacture should also be included in the valuation of work-in-progress or finished goods.
On the basis of above analysis, we can conclude that:
- Excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an element of cost for inventory valuation.
- Where excise duty is paid on excisable goods and such goods are subsequently utilized in the manufacturing process, the duty paid on such goods becomes a manufacturing cost if the same is not recoverable from taxing authorities and must be included in the valuation of work-in-progress or finished goods arising from the subsequent processing of such goods.
- Where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made.
- Excise duty cannot be treated as a period cost.
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