Indian Electrical and Electronics Manufacturers` Association
IEEMA PRE-BUDGET MEMORANDUM 2007-2008
IEEMA (Indian Electrical & Electronics Manufacturers` Association) is the apex body representing the interests of Indian electrical and professional electronics industry, both in the private and public sectors.
Indian Electrical and Electronics industry today has a gross annual turnover in excess of Rs 70,000 Crores or US 11 Billion and exports worth Rs 8000 crores in 2005-2006. The Electrical Industry is a mature and confident industry and has built up enough capacities to supply quality equipment on time for generation, transmission, distribution and utilization of power for the on going, upcoming and planned projects for the 10th and 11th plan periods.
The Indian Electrical Industry is presently growing at an average rate of around 30%. Further Investment by the Industry in manufacturing capabilities, particularly for higher voltages, depends on the policies of the Govt. on investment in power sector.
Power has been recognized as one of the most important infrastructure Sectors in the Economic Survey published by the Govt. Electricity Transmission and Distribution, along with Water Supply and Sanitation, have been acknowledged as one of the most important necessities for unlashing high and sustained growth.
While the Govt. has provided a number of policy and fiscal support for other Infrastructure Sectors like Telecommunications and Housing and these sectors have seen exponential growth during the last few years, the Power Sector has not been treated at par with these infrastructure Sectors so far as the fiscal and policy support of the Govt. is concerned.
IEEMA is enthusiastic with recent announcement by Honble Prime Minister to aim at 10% GDP growth by the end of 11th Plan and enhancing Commercial investments in Power Sector. To achieve the targeted GDP growth of 10%, it is imperative that the Power Sector should grow at a rate not be less than 15% per annum. As per the planned Projection made by the Ministry of Power, the country requires addition of more than 100,000 mw capacity during the 10th & 11th plan period. This implies that the annual Capacity addition by the end of 11th Plan would be around 12,000 mw per annum, which would increase to an annual capacity addition requirement of 32,000 mw by the year 2022 onwards.
In order to achieve such ambitious target and to encourage all stakeholders to enhance their capacities & capabilities rather than only to Power utilities as at present, so as to provide "Electricity for All at affordable cost", the Govt. should provide adequate policy & fiscal support to this vital sector of economy.
The Govt. has been giving fiscal incentives to Mega and Ultra-mega Power projects. IEEMA feels similar benefits be extended to all Power sector projects, including the Transmission & Distribution (T&D) Projects.
All major Power Generation Projects are put up in rural areas. Also more than 90% of the Transmission and Sub-transmission lines pass through such areas. Govt. is also implementing the Rajiv Gandhi Gramin Vidyutikaran Yogna targeting a massive power infrastructure development for the rural India. Giving policy and fiscal support for large scale development in rural areas has always been the Govt. Policy. Such support is not available to Power sector manufacturers, EPC contractors and O & M agencies.
Under the APDRP Scheme, the Ministry of Power has been taking various initiatives in reducing the Transmission & Distribution (T&D) losses. We understand that this scheme is under review of the Planning Commission. Since distribution of electricity is under concurrent list and the distribution sector is plagued by various political & socio-economic malices, we strongly feel that the APDRP scheme need to be continued and the Ministry of Finance should provide adequate budgetary support to the scheme.
IEEMA fears that announcements for free power distribution by some states will further burden and increase sickness in the already ailing State Electricity Boards. Labour reform too needs to be taken up vigorously for the industry to remain viable and survive in an increasingly globally competitive scenario.
IEEMA thanks the Govt. of India for accepting a number of recommendations made by IEEMA in its previous Pre-Budget Memorandums, which includes rationalization of Customs duty structure to a large extent and early implementation of VAT system, which we trust was the first logical step in moving towards a Single Rate GST (Goods and Service Tax) as recommended by the Dr Kelkar Committee to make India, a truly common market.
The electrical industry still faces a few instances of inverted Duty structure and we once again propose the CUSCREDIT Scheme, which if implemented, would resolve the issue of Inverted Duty Structure once for all. IEEMA has been strongly advocating a single rate of Excise Duty for all products and their raw materials across the board. The Govt. is also moving towards a single rate of GST. Till the time a uniform GST is implemented, IEEMA proposes 8% merit rate of Central Excise Duty on all products and their corresponding raw materials supplied to Power Generation, Transmission & Distribution Projects.
IEEMA is deeply concerned with large number of Indias FTAs and PTAs with its neighbouring and other countries and frequent price rise of major raw materials like Steel, Aluminium, Copper, Zinc etc.
IEEMA strongly believes that the Industry and the Govt. should work together towards a common objective and help evolve policies, which are conducive to the development of a vibrant Domestic Industry. This would help in the growth of the nation, help employment generation, be globally competitive and successful in export markets.
The domestic electrical industry, which is looking at expanding capacities, therefore seeks reassurance that the Govt. will remain firm and continue on the path of reforms.
CRITICAL ISSUES & SUGGESTIONS
IEEMA, over the years, has been representing the difficulties and concerns of the industry to the Govt. of India, through its pre-budget memorandum / presentations to the Ministry of Finance and Power.
IEEMA is approaching the Govt. with hope and puts forth before the Govt. of India, the most critical issues / concerns of the industry requiring urgent attention of the Govt.:
1) CONTINUATION OF REFORMS
The Domestic industry is upbeat as a result of the Govt.s commitment to add 40,000 MW and 62,000 MW respectively during the 10th and 11th Five year Plan and announcements of power sector reforms and other initiatives.
The Indian Electrical industry is at a take off stage with regard to both domestic and global market scenario. Continuation of the reforms concerning Infrastructure, labour, banking, customs and procedures etc, is a must for the industry to remain globally competitive and face the inevitable competition from imports, given Indias WTO commitments, lowering import tariffs and increasing number of FTAs and PTAs.
Power Sector Reforms be continued and to expedite implementation, to attract the much required investments in this critical sector.
Power Distribution reforms included in "Electricity Act 2003" should not be diluted. We recommend an early implementation of "Electricity Act 2003"
Urge by states to give away free power, should be curbed.
Labour and Administrative reforms have become critically important, given Indias poor record in productivity.
Suggestions of Dr. Kelkar Committee on Tax reforms should be speedily implemented. This will help rationalize the Indirect and Direct Tax Regimes, streamline policies and procedure, reduce costs, boost the economy, exports and generate new employment opportunities.
2) INCLUSION OF POWER SECTOR FOR "INFRASTRUCTURE FACILITY" UNDER SECTION 80 IA
Indias overall growth has been averaging at about 8% since last few years. This could be boosted further if more electricity is made available to all at affordable cost, since power consumption is being directly linked with the GDP growth.
The Govt. has provided a number of incentives for promotion of the much needed infrastructure. Benefits under Section 80 IA is one such incentive, which allows deductions to undertaking engaged in infrastructure development, operation and maintenance of certain infrastructure facilities such as roads, toll roads, highways, housing, water supply etc.
Benefits under section 80 IA are also available to undertakings, which are engaged in generation, transmission or distribution of power, but in a restricted manner. The Developers (turnkey Contractors), O&M agencies (who operate or maintain the equipments) are not allowed these benefits, as allowed for other infrastructure projects covered under this facility.
This is also clear from the Form No. 10 CCB under IT Rules. These benefits are available to infrastructure projects commissioned till 31- 03-2010.
To realize the dream ELECTRICITY FOR ALL BY 2012 at affordable cost, the Govt. needs to take a number of steps to boost the power sector reforms and attract investment from more private players. One such step could be extending benefits under Section 80 IA of the Income Tax Act 1961 in full, to this critically important sector. Such incentives have made the Telecom and the Housing Sector an unqualified success.
Govt. has by and large exempted all activities carried out in rural areas as industrial or for infrastructure development in any form from the purview of taxation to encourage such activities. Govt. has recently launched a massive power infrastructure development program for rural areas designated as Rajiv Gandhi Gramin Vidyutikaran Yogna (RGGVY). The total outlay of the scheme is Rs.15,000 crores for electrification of 2 lacs villages. If the Govt. extend the tax benefits as envisaged for rural area development to this scheme, this will result in bringing down the cost of the scheme by 25% i.e. 25% more villages can be electrified in the same budget.
Power Generation, Transmission and Distribution business should be added to the list of "infrastructure Industry Status ", appearing under INCOME TAX ACT- SECTION 80 IA, and Service Tax Act, so that benefits currently available only to the Utilities (Owners of the projects) will also be provided to developers and those engaged in operating and maintaining of such projects both in public and private sector. Secondly, deduction facility under section 80 IA should at least be extended for such projects commissioned till 31st March 2012, keeping in mind the Govt. of Indias Programme "Electricity for All at affordable cost by year 2012".
3) MERIT RATE OF EXCISE DUTY FOR PRODUCTS AND CORRESPONDING RAW MATERIALS SUPPLIED TO POWER GENERATION, TRANSMISSION & DISTRIBUTION PROJECTS
Currently, all products and corresponding raw materials supplied to Power Generation, Transmission & Distribution projects attract 16% of Excise Duty. This rate of 16% Excise Duty is also applicable on FMCG and other Luxury products. We feel that 8% merit rate of Excise Duty should be charged on all products and corresponding raw materials supplied to Power Generation, Transmission & Distribution projects, since lowering of Excise Duty would lead to reduction of project cost thereby enabling execution of more such projects within the available resources. Finally this would also lead to lowering of the cost of electricity.
4) VALUE ADDED TAX - VAT
IEEMA congratulates the Govt. of India and the Empowered Committee for completing one year of VAT regime in all the states except Tamil Nadu & Uttar Pradesh, where VAT is still to be implemented. The most important achievement of VAT has been in limiting the tax rates to 2 slabs i.e. 4% and 12.5% for most of the goods. Unfortunately, the non uniformity of Tax rates in different states has been creating anomalies in respect of certain goods with which we are concerned. The earlier decided formula for the phasing out the Central Sales Tax (CST) on interstate transactions which distorts the VAT system has failed. The CST, imposed on inter-state trade of goods, was originally scheduled to be phased out from the beginning of the current fiscal from the present level of 4% to 2% but its reduction was diluted to 3% and timing deferred to October 1, 2006. Now, reportedly, the Empowered Committee has decided to defer phase out of the Central Sales Tax from next month to April, 2007 after its failure to arrive at an agreement with the Union Govt. on the compensation package for states to meet the revenue loss due to reduction in CST. This is despite the fact that CST is not in accordance with the VAT structure and cannot go hand in hand. Until CST is completely phased out, making purchase from outside state would continue to be attractive despite some states providing refund of the difference in taxation vis-à-vis VAT.
Recently, the newly formed Kerala Govt. took a major departure from the template of VAT, cast by the Empowered Committee with consensus of all the State Governments. In its State Budget proposals for 2006-07 it announced a new tax schedule of 20% VAT for consumer durables for household use. The Kerala Govt. also proposed to treat the earlier two slab VAT rates of 4% and 12.5% as floor rates, and the State proposed to charge higher rates depending upon the local conditions. The above proposals of the Govt. of Kerala, if implemented, will violate the letter and spirit of the White Paper and create a major distortion in VAT rates apart from setting a pernicious precedent for other State Governments. This trend, unless checked immediately, would defeat the very rationale and objectives of
introduction of common VAT tax regime throughout the country and would undo all the hard work done by the Central Govt. as well as most of the State Govt. in planning the successful implementation of VAT reforms over the past several years.
We suggest that for a simplified uniform VAT, all the states should follow a uniform schedule based on the already well-established HTS - HSN tariff code of classification used by customs and excise department. We suggest that a broadly classified item-wise list be prepared and released at the earliest. Ideally, VAT should cover both goods and services. Dr Kelker committee recommendations should be followed to move to single goods and service tax i.e. GST
Govt. should take urgent steps for an early phase out of CST.
The Govt. should intervene and prevent potential derailment of VAT reforms which has begun to stabilize now with the signs of buoyancy in local tax collections through improved tax compliance and reduction in cascading impact of multiple tax levies suffered under the erstwhile sales tax regime.
5) FREE TRADE AGREEMENTS (FTAs)
India has entered into a number of FTAs / PTAs, which we agree, are essential in a globalized and liberalized environment. Some of these FTAs have thrown up new challenges for the domestic Electrical industry.
Reportedly, some of these countries do not have the manufacturing capability and industry to manufacture sophisticated electrical equipment and meet the value added norms stipulated in the FTAs. Such countries could act as conduits for re-exports from countries like China, Korea, Japan and Malaysia which have overcapacities in number of electrical products.
Moreover, with regard to PTA with MERCOSUR and Indias proposed PTA with Brazil / South Africa and EU, our members fear intense competition, as some of the these countries are well-established manufacturers of electrical products.
The domestic industry apprehends dumping of finished goods as the FTA partner countries have comparatively lower import tariffs for e.g. FTAs with countries like Sri Lanka (e.g. copper winding wire exports at 0 duty) Bangladesh, Thailand and
Singapore from where members fear dumping of products like copper wires and cables.
Custom duties on raw materials should ideally be brought in line with those finished products appearing in the FTA with respective partner countries.
The Ministry of Finance may consider granting concessional Customs Duty to raw material required for producing finished goods covered under any of the FTAs /
PTAs with any country / block of countries. This is to care of inversion of Duty structure arising out of the FTAs.
Govt. should tread cautiously and stipulate certification by approved Indian agencies for value addition norms plus change in Tariff heading (CTH) and further consult / invite feedback form for apex associations before entering into future FTAs / PTAs.
Matching labour and administrative reforms too needs to be taken up vigorously for the industry to remain viable and survive in an increasingly globally competitive scenario.
6) SELECTIVE EXEMPTIONS/CONCESSIONS
The GOI in the previous union budgets had rationalized the custom duty structure to a large extent. However, some anomalies still persist which need correction.
Over the years a number of concessional / selective end use exemptions have been notified. However, with introduction of VAT and signing of number of FTAS, rationalization of these Selective exemptions/concessions, which break the VAT chain or create anomalies in the duty structure, has become paramount.
A typical example is when the Govt. earlier allowed capital goods imports for Transmission, Sub- transmission and distribution projects, at a reduced rate of 10% customs duty without corresponding reduction in import duty on input raw materials.
These concessions were apparently granted to reduce project cost. However they ended up as a serious concern for the domestic industry as the necessary corresponding reduction in the import duty of the raw materials required for such products was not provided for in the said notification.
Provide a level playing field for Domestic industry by allowing it to import raw materials at duties lower or equal to concessional imports allowed for finished goods supplied to Mega power and other projects like T & D etc.
We suggest introduction of CUSCREDIT scheme as given below as serial no. 7 which will resolve the Inverted Duty Structure once for all.
7) CUSTOMS CREDIT (CUSCREDIT) SCHEME TO TACKLE INVERTED DUTY STRUCTURE
Logically, the import duties on finished products should always be higher than those on intermediates and raw materials. Although the Govt. has rationalized the duty structure of electrical & electronic products to a large extent, anomalies still exist in case of some products where the import duty on finished Products is either lower or equal to that on intermediaries and raw materials.
IEEMA recommends a two-tier duty structure, with lower duty on Raw Materials and Intermediates and higher duty on finished products. We propose that the peak rate of Customs duty, which is now 12.5% on almost all the goods, may be levied across the board. The manufacturers using such goods as Raw Materials or intermediates for further processing or to use such goods in the manufacturing of Finished Goods (with minimum value addition criteria), should be given 50% Custom Duty Credit from the peak rate. This would make the effective rate of duty on all the goods, which are going into the manufacturing of finished products as Raw Materials / inputs as 50% of that of the goods, which are not used in the manufacture of Finished Goods. This can be done by amending the present Cenvat Credit Rules, wherein specific provision is to be made for taking the credit of the Customs Duty to the extent of 50%, which is not available at present.
The same can be termed as CUSCREDIT.
For example, if an importer imports a "final" steel product, falling under T.I. 72.25-"flat rolled product of other alloy steels", costing say Rs.10,00000/- (Rupees ten lakhs), he will pay customs duty of Rs.1,25,000/-, (Rupees one lakh twenty five thousand only), @12.5% at the time of clearance. If the importer is a manufacturer of excisable products falling under say T.I.85.01 -Electrical motors -, he can take a Cuscredit of duty of 50% i.e. Rs.62,500/- (Rupees sixty two thousand five hundred only), when the material is brought in his factory for using in production of excisable goods i.e. electric motors. On the other hand, if the importer is a builder, who wants to use the same as roofing, he will not be able to take the Cuscredit.
Thus for an electric motor manufacturer the effective duty will be Rs.62,500/- (Rupees sixty two thousand five hundred only), while for a builder the effective duty will be Rs.1,25,000/- (Rupees one lakh twenty five thousand only), though at the time of clearance both have paid the same duty. We have taken example of product under 72.25, since many experts will consider this as "final" product, while the Electrical industry or industry manufacturing "stampings and laminations" consider that the product is an intermediate product. For that matter even stampings and laminations are intermediate products.
The Govt. should amend the present Cenvat Credit Rules and incorporate specific provision for Custom Duty credit for the goods to be used as raw materials / inputs to the extent of 50%.
The Cuscredit system will assist industry by giving it a competitive edge through effective reduction in prices of inputs. The scheme will not only promote competition and indigenous value addition but also resolve the issue of inverted duty structure once for all. The other Advantages of this would be the reduction of Customs Tariff size and Classification disputes and there would not be much impact on the revenue collection of the Govt.
8) BURDEN OF ADDITIONAL DOMESTIC TAXES AND POOR INFRASTRUCTURE
The domestic industry in relation to project imports also faces some more disadvantages like
Entry Tax on inputs
Double Freight cost on raw material inputs
Higher Power Costs
Higher Finance Costs
These disadvantages can be quantified in percentage terms to be of the order of almost 15%-25% making domestic supplies uncompetitive vis-à-vis imports.
India unfortunately still suffers from severe weaknesses of infrastructure facilities including bad roads, congested ports, higher handling charges etc. This is apart from the high transaction cost for exports.
From a study of similar infrastructure facilities and transaction cost in China, Sri Lanka, Singapore, Malaysia and even in some cases Thailand, it is observed that our financial costs and time taken for such services for similar cargos is generally 100% more.
While improvement in infrastructure facilities should be on top priority, the new scheme replacing DEPB should be devised not only to take care of the actual cost of Customs duty but also the additional cost of comparatively poor infrastructure and the higher transaction cost as mentioned above.
* INDIAN ELECTRICAL EQUIPMENT INDUSTRY VIS-À-VIS FOREIGN
The domestic industry in addition to the prevailing inverted customs duty structure also faces some more disadvantages due to local levies, duties, taxes, lack of adequate infrastructure, number of procedural problems, misinterpretation of law etc.
The table appearing below clearly brings out this point, it can be noted that the domestic manufacturers due to a plethora of taxes and other factors beyond their control are at a disadvantage of almost 10% - 15% affecting their competitiveness
Disadvantage faced by domestic industry vis-à-vis Imports
(The above mentioned disadvantages remain uncovered in cases where zero - e.g. Mega Power Projects or marginal - e.g. Fertilizer, Refineries, Power Projects rates of Customs Duty apply).
The domestic manufacturer faces a cost disadvantage of almost 15 % vis-à-vis overseas supplier. To maintain competitiveness of the Indian industry, IEEMA suggests that the Central Govt. in co-ordination with the state and rationalize/evolve policies helping reduce the number of taxes, simplify procedures, reduce transaction cost, financing cost, etc.
Alternately these taxes should be made VATable.
Critical Infrastructure like roads, ports, and airports too require drastic improvements to increase throughput with faster clearance and reduced dwell time.
9) SERVICE TAX
Services contribute more than 55% to our countrys GDP. New services are being added and exemptions are given for certain services in the public interest through notifications and circulars.
While the notifications and circulars have been helpful in explaining the service tax law, there are also instances where certain specified services are not explained clearly, leading to confusion.
There is urgent need for improvement of tax administration, simplification and rationalization of service tax law for easier implementation and compliance.
Dr Kelker Committees recommendations for ultimately moving towards a combination of VAT and service tax as GST- Goods and Services Tax should be seriously pursued.
10) DEEMED EXPORTS AT PAR WITH PHYSICAL EXPORTS
Presently supplies under deemed exports, are not treated at par with physical exports with respect to duty drawback, direct tax and excise duty.
With regard to excise duty at present, the suppliers to the project authority are required to pay the excise duty @ 16% and then wait for period spanning more than 6-9 months after filing cumbersome applications for refund of terminal excise duty. This time delay leads to unnecessary blocking of the working capital for long periods ultimately increasing costs.
Moreover the Projects funded by agencies like the Japan Bank for International Cooperation (JBIC) are not covered under Privileges and Immunities Act 1947 under
Notification no. 108/95 dtd. 28.08.1995 issued by CBEC. As such the projects funded by JBIC do not qualify for exemption from payment of Excise Duty.
The foreign manufacturers, who supply to these projects, do not have these hardships since their supplies are totally duty free.
IEEMA feels that Deemed Exports should be treated at par with Physical exports thereby providing a level playing field with regard to the payment of terminal Excise
Duty and other benefits available to physical exports to help promote the domestic industry and further increase exports. Funding agencies like JBIC should also be specified under the Privileges and Immunities Act and the projects under such funding should be covered under Notification No. 108/95 to claim exemption from payment of Excise Duty.
11) WTO COMPLIANT INCENTIVES
For the growth of any industry R&D is an absolute necessity in todays competitive business arena. Unfortunately, there has not been much stress given in this area which presently accounts for only around 2-3% of total turnover. The Govt. should provide incentives, especially funding and tax benefits, to encourage interested companies.
IEEMA suggests the Govt. to offer WTO compliant incentives like encouraging R&D (like providing weighted deduction of 150% or more income tax benefit on deductable expenditure for R&D on electrical equipment. This weighted deduction of
150% of expenditure for R&D is already provided for Pharmaceuticals, Bio-technology, electronic equipments etc, facilitating IPR, expediting grant of patents and facilitating system compliance like ISO 9000, ISO 14000 etc. Extend benefits offered to Pharmaceutical, IT and biotechnology industry, to electrical industry.
12) SIMPLIFICATION OF PROCEDURES
In todays globalized and highly competitive scenario, time is money and cutting costs all around is the business mantra. To effectively achieve this, simplification of day-to-day procedures is a must. Manufacturers instead of concentrating on their core activities have to grapple with the day-to-day difficulties due to complicated and easily mis-interpretable procedures, in addition, giving rise to corruption. The SMEs are more seriously impacted by the complicated procedures and red- tapeism.
A current example is the, "Road Permit Raj" adopted and unleashed by a few states. Reluctance/delays in issual of road permits by a few states has created major hassles for manufacturers, hampering trade and timely deliveries leading to invoking of the LD clause, and unnecessary litigations and increase in costs.
Domestic manufacturers are already burdened with many disadvantages vis-avis foreign suppliers. Procedural difficulties adversely affect the Indian industry making them less globally competitive.
Complicated and difficult to understand policies/procedures lead to misinterpretation, litigation and corruption, which effect the day-to-day functioning of domestic manufacturers.
The Govt. should take immediate steps to rationalize and simplify the policies and procedures, so that every benefit promised by the policy reaches the Industry in its true spirit.
Easy to understand and implement policies / procedures will definitely help the Indian industry become more competitive.
These initiatives will attract more new investments and generate employment. It will also result in better tax compliance, increase revenue and reduce unnecessary litigations / disputes, which are a national waste.
We sincerely hope that the Govt. of India will give due consideration to IEEMAs Pre- Budget Memorandum 2007-2008.
Note: Typical examples of Anomalies in Duty Structure are given in Annexure A and other procedural issues related with customs, central excise and service tax are given in Annexure B
ANNEXURE A Typical example of Anomalies in Duty Structure
Insulators, though cost wise insignificant (approx 2%) in the over all project cost, are a critical link in the Electrical Transmission and Distribution chain. Our members are major manufacturers and export almost 60% of their production. The Govt. of India had lowered the Basic Customs Duty of Insulators in the last budget from 15-20% to 12.5%. In some T&D projects they can be imported at 10% duty.
The raw materials required for manufacture of Insulators as per the Table appearing below are placed at 12.5% import Duty, are still required to be lowered. We therefore suggest that the duties on these raw materials be reduced or Cuscredit scheme, as suggested earlier, should be made available to maintain a level playing field.
We therefore suggest that to partly offset the rise in prices, customs duty on LPG be reduced from 5% to "Nil" duty.
BOOST TO ENERGY EFFICIENT PRODUCTS
In view of the continuing energy shortages including rising peak demand shortages, investment and environmental concerns, the GOI has started in right earnest to save energy at various stages including at the user end. The Bureau of Energy efficiency, BEE, is actively promoting energy saving measures including awareness programmes, IEEMA too is playing a supporting role. Various products like Motors, Transformers, Capacitors, CFLs etc are in the process of being labeled as per their energy saving capacity and are being allocated Star ratings by the BEE. These initiatives are laudable.
The Industry is thankful to the Govt. of India for reducing the Excise duty on CFL in the last budget from its earlier rate of 16% to 8%. This was a welcome step in large use of this energy efficient lighting product. However despite a reduction in Excise Duty, the net impact on MRP is only between Rs 8 to 10, which is not enough to bridge the gap in the price levels of a CFL and a conventional GLS Lamp.
The Excise duty on this product should be further reduced to 4% to make it more price competitive that would give a Fillip to its use everywhere as a energy saving lighting devise.
The GOI should provide further boost to the Energy conservation initiatives. As a start, procurement of certified energy efficient products by PSUs and Govt. agencies including PWDs should be encouraged. Financial packages for such procurement too should insist on of labeled Energy Saving products.
Govt. should devise innovative schemes to promote end-use energy efficiency, energy labeling and energy audits, benchmark and enforce energy efficiency in power intensive industries like aluminum, fertilizers, iron & steel, cement, paper and chemical
CENVAT & JOB WORK
A manufacturer availing CENVAT can send his inputs to a job worker under rule 4(5)(a) for further processing and get back the processed material. The time limit within which processed goods are required to be returned to the parent factory is 180 days.
However, in order to avail this procedure it is mandatory that inputs should first come to the parent factory and thereafter only can be cleared to the job workers for further processing.
This unnecessarily necessitates movement of goods from the input supplier to the factory and thereafter to the job worker. If facility of direct supply from premises of input supplier to the job worker is allowed, then there will be considerable saving in time and freight charges which will be saved on initial movement between input suppliers and the parent manufacturers.
Moreover, the job worker cannot avail exemption under notification 214/86 if he needs to add his own material. In such cases, the job worker has to pay excise duty on full value, which includes the value of material received by him under rule 4(5)(a). Working capital to the extent of excise duty involved on free issue material gets blocked.
The input supplier supplying inputs under rule 4(5)(a) can avail CENVAT of duty paid by job worker. Thus the transaction is revenue neutral.
Excise auditors are raising objections to such transactions.
It is suggested that suitable amendments may be made in the relevant Cenvat Provisions where by inputs intended to be sent to the job workers be allowed to be sent directly to the job worker from the premises of input supplier. To safeguard against the misuse, suitable documentary discipline and checks can be introduced. As a matter of fact earlier such facility was available under erstwhile Rule 57J.
Accept Supreme Courts decision in case of International Auto Ltd. Vs CCE, Bihar [2005 (183) E.L.T. 239(S.C.)] holding that job worker is not liable to pay duty on inputs supplied by final product manufacturer. Amend relevant rule 4(5)(a)/notification 214/86 CE dt.1.3.86 suitably.
EXEMPTION & REVERSAL OF CENVAT
GOI issues many end use based exemptions like supplies to Water Treatment Projects, Non-conventional energy devices (Solar, Windmill), Defense, Navy, Indian Space Research Organisation, Delhi Metro Rail Corporation etc.
The manufacturer supplying goods to such projects without payment of duty have to reverse actual CENVAT or pay an amount of 10% of price in lieu of CENVAT claimed in terms of CENVAT Credit Rule 6(a)(b).
This amount is not recoverable from customer as duty. This results in increased cost of products and negates the objective of giving exemption.
Instead of granting full exemption, excise duty of 4% to 8% should be levied on such goods for operational convenience.
Alternatively, CENVAT credit on inputs used in these supplies should be allowed & utilized for other domestic clearance in line with supplies to deemed export, physical exports.
The relevant notifications / CENVAT Credit rules should be suitably amended.
CENVAT Credit and Capital Goods
Under Sub rule (2)(a) of Rule 4 of Cenvat Credit Rules, 2004, in respect of Capital goods, 50% of credit is allowed in the same financial year and the balance is allowed to be taken in the subsequent financial years.
This will be an un-due financial hardship to the manufacturer as his working capital is blocked for a considerable period.
Under Sub rule (4) of Rule 3 of Cenvat Credit Rules, when capital goods on which Cenvat credit has been taken are removed as such, the manufacturer has to pay an amount of duty equal to the credit taken.
However, vide Notification no. 27/2005 CE(NT) dt.16.05.05 in Sub rule 5(A) of Cenvat Credit Rules 2004, "If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value."
After 7-8 years of use, the Capital Goods will not fetch any commercial value. But if it is cleared as waste & scrap then only the duty shall be leviable on transaction value, otherwise, the dept. is insisting to pay an amount equal to the credit taken.
100% credit shall be allowed as soon as the capital goods are received by the assesse.
Notification No. 27/2005 CE(NT) dt.16.05.05 should be amended as: "If the capital goods are cleared after use the manufacturer shall pay an amount equal to the duty leviable on transaction value."
PROBLEMS CONNECTED WITH EXEMPTION GRANTED CLEARANCES TO RESEARCH INSTITUTE (NOTIFICATION NO. 10/97-CX DATED 01/03/97)
The notification no. 10/97-CX provides exemption to following specified goods supplied to specified research institution:
1. Scientific and technical instruments, apparatus, equipment (including computers).
2. Accessories and spare parts of goods specified in (a) above consumables.
3. Computer software, Compact Disc Read only Memory (CD-ROM) recorded magnetic tapes, micro-films, microfiches.
Various manufacturers especially in engineering industries are facing problems in interpretation of scope of above notification. The Research institutes are invariably claiming that engineering goods such as Switchboards, Electrical Motors, Switchgears, Automation products etc. are covered within the scope of above description given in the notification. On the other hand the excise Department is taking in view that the said goods are basically engineering goods and therefore cannot be considered as scientific and technical instruments, apparatus etc." Their have been many cases where the manufacturers have ventured to claim the exemption for such goods, but subsequently got Show Cause Notices for demand and even recoveries have been made from them.
As far as Research Institutes are concerned, who in fact have been given the benefit of above exemption never pay back and the amount of concession which is recovered from the manufacturers. Additionally manufacturers have to face the interest and penalties also.
The above anomaly is due to the reason that notification in question does not specify particular heading number to which the exemption in question is applicable. The problem can be solved if there is mention of specific heading for the relevant goods in which case assesses will be able to clearly know as to whether their goods are covered in the scope of exemption or not.
Alternatively the notification in question should be made applicable to "All Goods" in which case all excisable goods will be eligible for above exemption. In any case the basic objective of the notification is to allow exemption to designated Public Funded Research Institutions who are using the goods only for research purposes.
In all fairness, in the public interest said institution should get exemption of excise duty for all the goods on which excise duty is paid and not on specified goods.
Enlargement of definition of "DEPOT" for passing on Cenvat Credit
Presently under Cenvat Provisions, the invoices issued by the manufacturers from his factory and depot are considered the base documents for Cenvat purpose and dealers who are subsequently selling the goods are considered first stage dealers and second stage dealers respectively.
Various organized sectors have outsourced their manufacturing activities and goods complete in all respects are being manufactured by sub manufacturers i.e. franchisees which are as it is sold by the main manufacturers. Many a times the main manufacturers stock the goods in their premises and thereafter sells the same to the dealers/end users. However, the invoices issued by the manufacturers covering the goods of their sub manufacturers/franchisees are being treated as first stage dealers invoices and therefore the subsequent buyer are becoming second stage dealers.
The above situation is causing practical problems since main manufacturers are mainly selling the said goods to dealers network who are required to further sell to sub dealers etc. However main manufacturers being considered as a first stage dealer, the buying dealers are becoming Second stage dealers thus a restriction is getting imposed in the entire chain which appears to be unreasonable and unintended.
It is suggested that Rule 9(1)(a)(i) be suitably changed by including the invoices issued by main manufacturers covering the goods manufactured by their sub manufactures/franchisees "Depot Invoices". In other words the invoices issued from the Depot should cover the goods, which are manufactured by sub manufacturers/franchisees also. The Dealers buying said goods will then be regarded as First stage dealers. This amendment will give relief to large number of manufacturers of organized sector who have outsourced their manufacturing processes.
VALUATION OF EXCISABLE GOODS - RULE 6 OF VALUATION RULES: AMORTIZATION OF COST OF TOOLS.
Many large industries get components/intermediate goods manufactured by SSI / Auxiliary industries.
This leads to blocking of fund of such SSI/Auxiliary industry, which also creates unnecessary confusion and increases litigation.
It is suggested that where the SSI/Auxiliary industry is supplying components/ intermediate goods to OEMs, excise duty should be charged on transaction value of such SSI/Auxiliary industry only.
Since such SSI/Auxiliary industry cannot afford to spend for high cost and precision tools, large industry supply them necessary tools as free issue on temporary loan basis.
Since the large industry claims CENVAT of duty paid by such SSI/Auxiliary industry, there is no accrual of revenue to the Govt..
Clause 4 (a) Notification 8/2003 & 9/2003 CE dated 1.3.2003 can be referred to for similar provisions.
The valuation rules under excise require the SSI/Auxiliary industry to pay excise duty on amortised cost of tools provided by large industry.
AGRICULTURAL PRODUCTS CONCESSIONAL RATE OF DUTY
The Govt. of India has been actively and rightly supporting the agricultural sector, which largely drives the other sectors. A number of subsidies and incentives have been extended to this important sector.
Specific goods intended to be used for the installation of a cold storage, cold room or refrigerated vehicle, for the preservation, storage or transport of agricultural produce Notification 6/2002 (Sr No 196) - Duty Nil
Tractors -Notification 6/2002 (Sr.No. 295) Duty Nil
Power driven pumps primarily designed for handling water Notification 10/2003 (Sr No 35) Duty 8%
Our members manufacture Motor Starters for Power Driven Pumps. We submit as below:
Motor Starters are mainly used by agriculture sector.
It attracts excise duty rate of 16%.
IEEMA suggest that Motor Starters should be subjected to 4% excise duty rate.
PROBLEMS DUE TO TIME LIMIT OF 5 DAYS FOR PAYMENT OF EXCISE DUTY
The Excise Duty is required to be paid on the 5th of every month for dispatches made in previous months. The above provision requiring payment within 5 days of close of the month is resulting in practical problems to the assessee particularly those in large organized sector, since it is difficult for them to compute the Excise Duty liability and organize payment of the same within proposed period of 5 days.
During the 1st week of every month, substantial commitments have to be met by way of wages and salaries in addition to other statutory commitments like TDS, Power bill, contribution to PF etc.
The problem is compounded further if there is a public holiday or Sunday during the said period of 5 days on which days bank do not operate.
It is suggested that remittance of Excise Duty in PLA A/c be allowed to make during the 3rd week of the month around 20th for the dispatches made in previous month.
AVAILABILITY OF CENVAT CREDIT ON THE BASIS OF INPUT DOCUMENTS WITHOUT WAITING FOR PAYMENT OF THE RELEVANT INVOICES
Under the present Cenvat Credit Provisions, the credit in respect of input service-tax can be availed by an assessee only after ensuring that the payment of services has been paid to the input service providers. This is unlike excise duty Cenvat scheme in which case credit can be claimed merely on the basis of invoices without any requirement for establishing actual payment of value of goods.
The above requirement of holding Cenvat Credit till the actual payment is made to the service provider is causing administrative problems for assesses in organized sectors. In large companies, while credit is to be taken by tax departments on the basis of original invoices, the information about payment is available only with accounts department where payment is processed separately. On daily basis, there are hundreds of invoices from various vendors whose payments are processed by accounts department and therefore it becomes a tedious task to pinpoint the payment particulars for a particular bill covering input services for which credit is to be taken.
In Excise Cenvat, Credit for inputs is allowed to be taken merely on the basis of receipt of input accompanied by valid Excise Invoice and there is no requirement for establishing particulars of bill payments to the vendor.
A similar provision in Service tax Cenvat which is exactly on the lines of Excise Duty Cenvat, can be introduced. A specific provision should be introduced for reversal of Cenvat in the event of non payment of invoices covering input services.
WAREHOUSING OF GOODS FOR EXPORT
An exporter can establish warehouse to store goods meant for export manufacture in different manufacturing units or vendors. (Notn 46/2001 CE dated 26.6.2001). CBEC grants permission for place of such warehouse and class of exporter like "Super Trading" or "Trading House" (Circular 581/18/ 2001 dated 29.6.2001). All manufacturer-exporters exporting multi products manufactured in different manufacturing units and procured from their vendors are not eligible to this warehousing facility. Manufacturer-exporters have to therefore depend upon the CHA for storing and consolidation of export goods. This leads to increased transaction cost and delivery period.
This facility should be extended to all manufacturer-exporters also. The jurisdictional Asst./ Dy. Commissioner should be empowered to grant registration to such warehouse.
INTEREST CHARGES ON UPWARD PRICE VARIATION CLAIMS
Our members who enter into a numbers of contracts with State Electricity Boards and other utilities normally use the price variation clause wherever applicable. Members have informed us that the Excise Department has been insisting for payment of interest on the Duty amount whenever there is an upward revision of price variation under Section 11 AB of Central Excise Act
Normally the Indices are obtained and a draft of the PV working is prepared by the supplier and sent to the utilities for approval. Only after receipt of approval from the utility, the supplementary bill is prepared and submitted. The entire process normally takes 1 to 4 months from the date of despatch. The excise departments claim for interest is an additional burden and no utilities will entertain / reimburse or pay the interest.