Modvat stands
for "Modified Value Added Tax". It is a scheme for
allowing relief to final manufacturers on the excise duty borne by
their suppliers in respect of goods manufactured by them. eg ABC Ltd
is a manufacturer and it purchases certain components from PQR Ltd
for use in manufacture. POR Ltd would have paid excise duty on
components manufactured by it and it would have recovered that
excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay
excise duty on toys manufactured by it as well as bear the excise
duty paid by its supplier, PQR Ltd. This amounts to multiple
taxation. Modvat is a scheme where ABC Ltd can take credit for
excise duty paid by PQR Ltd so that lower excise duty is payable by
ABC Ltd.
The scheme was first introduced with effect from 1 March 1986.
Under this scheme, a manufacturer can take credit of excise duty
paid on raw materials and components used by him in his manufacture.
Accordingly, every intermediate manufacturer can take credit for the
excise element on raw materials and components used by him in his
manufacture. Since it amounts to excise duty only on additions in
value by each manufacturer at each stage, it is called
value-added-tax (VAT)
The modvat credit can be utilized towards payment of excise duty on
the final product.
When the scheme was first introduced, it covered only some
excisable goods. Gradually, the scope of the modvat scheme has been
enlarged from time to time under various notifications. From 16
March 1995, all excisable goods can take the benefit of the scheme
except those mentioned below:-
In case of inputs
» Tobacco and Manufactured Tobacco Products
» Matches other than pyrotechnics articles of heading number
36.04 of CETA
» Cinematograph Films
» Motor Spirits, Special Boiling Spirits, High Speed Diesel
» In case of final products
» Tobacco and Manufactured Tobacco Products
» Matches other than pyrotechnics articles of heading number
36.04 of CETA
» Cinematograph Films
» Woven fabrics classified under chapter 52,54 & 55 of
CETA other than cotton fabrics, man made fibre fabrics and filament
yarn fabrics
Advantages of Modvat
» It reduces the effects of taxation at multiple stages of
manufacture.
» It facilitates duty free exports.
» It increases the tax base.
Disadvantages of Modvat
» It increases paper work and leads to multiplicity of
records.
» It leads to corruption.
» It leads to litigation.
The modvat scheme is regulated by Rules 57A and 57U of the Central
Excise Rules and the notifications issued thereunder.
Rule 57A This rule specifies the
scope and applicability of the modvat. The modvat scheme applies to
all finished excisable goods which have been notified by the Central
Government in the Official Gazette for this purpose. The modvat
scheme may be made applicable in respect of certain goods or classes
of goods with restrictions and conditions.
For the purposes of the modvat scheme, input includes:-
» Inputs which are manufactured and used within the factory of
production in or in relation to the manufacture of the final
product.
» Paints and packing material
» Inputs used as fuel
» Inputs used for the generation of electricity, used within
the factory of production for manufacturing of final products or for
any other purpose, but does not include:-
A. Machines, machinery, plant, equipments, apparatus, tools or
appliances which are used for production or processing of any goods
or for bringing about any change in any substance in or in relation
to the manufacture of the final products. However, on and from
1994-95, the benefit of modvat has been extended to excise duty paid
on several capital goods like plant, machinery, equipments, etc
which are used for the manufacture of the finished product.
As long as the capital goods are used in the factory of production,
credit of modvat will be allowed. No modvat is available in respect
of capital goods not used within the factory of production.
» Packing Material in respect of which any exemption to the
extent of excise duty payable on the value of packing material is
being availed of for packaging of final products.
» Packing materials of the cost of which is not included or
had not been included during the preceding financial year in the
assessable value of the final products.
» The manufacturer can avail of the benefit of modvat credit
on the final product to the extent of specified duties paid on the
inputs. The benefit of modvat will be available only if the final
product is an excisable goods. Modvat credit will not be available
if the final good is not an excisable goods or is exempt from duty
or is chargeable at nil rate of duty. However, benefit of modvat
will be available to the final goods manufactured by a unit in a
Free Trade Zone or in an 100 per cent EOU where no excise duty is
payable on final goods which are exported.
For example ABC Ltd purchased raw materials of Rs9,900 inclusive of
excise duty @ nine per cent and sales tax @ 10 per cent. Modvat
credit available will be Rs743 (Cost excluding sales tax will be
Rs9,000 out of which excise duty will be Rs743 ie 9000/109*9)
Rule 57D Modvat credit will not be
denied or varied just because some of the raw materials and other
inputs in respect of which excise has been paid become waste or
scrap in the course of the manufacturing process.
Similarly, modvat credit will not be denied or varied just because
in the course of the manufacturing process of an excisable final
product, an intermediate product which is non-excisable or which is
chargeable to excise at nil rate of duty or which is exempt from
excise duty is created.
Intermediate products are those products which get produced in the
course of manufacture of the final product. eg in the manufacture of
alcohol from sugarcane, first molasses are produced from which
alcohol is produced. In such a situation, molasses are an
intermediate product, which are charged to excise duty. The benefit
of modvat will not be withdrawn if the intermediate product created
is non-excisable or is chargeable to excise at nil rate of duty or
is exempt from excise duty. Whether a product is an intermediate
product or a final product depends on the facts and circumstances of
each case. The product may be intermediate so far as a particular
process of manufacturing is concerned but may be a final product for
another manufacturing process.
Rule 57E If the excise duty paid on
modvatable inputs is subsequently increased or refunded, the modvat
claimed on the basis of those inputs will also be increased or
reduced, as the case may be. If any amount is found due as a result
of such increase, it shall be recovered from the manufacturer either
from the balance maintained by him with the excise authorities or in
cash.
Rule 57F The modvatable inputs must
be used in or in relation to the manufacture of final products for
which they have been brought into the factory. However, the inputs
may be removed from the factory for home consumption or for export
under bond but only after intimating the Assistant Collector having
jurisdiction over the factory and obtaining a dated acknowledgement
of the same. Where the inputs are removed for home consumption,
excise duty must be paid, at least of an amount equal to the modvat
credit claimed in respect of such inputs.
The modvatable inputs can also be removed from the factory to a
place outside either, as such or after they have been partially
processed in the course of manufacture but only after intimating the
Assistant Collector having jurisdiction over the factory and
obtaining a dated acknowledgement of the same for any of the
following purposes:-
» For testing, repairs, refining, reconditioning or carrying
out any other operation required for the manufacture of final
product provided that after such work, the inputs are returned to
the factory to be further used in the manufacture of final product.
The waste generated in such operation must also be returned to the
factory.
» For export of inputs under bond without payment of excise
duty
» For home consumption of inputs on payment of excise duty
» For manufacture of intermediate products necessary for the
manufacture of final products provided that after such manufacture,
the intermediate product is brought back to the factory to be
further used in the manufacture of final product. The waste
generated in such operation must also be returned to the factory.
» For export of the intermediate products under bond without
payment of excise duty
» For home consumption of the intermediate products on payment
of excise duty
However waste is not required to be returned in case appropriate
excise duty is paid on the waste.
» The main manufacturer as well as job worker are required to
maintain register giving details of materials sent, challan number,
etc. similar to a stock register showing goods lying with the job
worker, goods returned by the job worker, etc. Generally, the goods
sent must be returned to the main manufacturer within 60 days. If
the job is not completed within 60 days, the period may be extended
for another 60 days.
» The benefit of this rule is available only if the main
manufacturer does a certain amount of processing or value addition
to make the final product. There must not be complete manufacturing
outside the factory by the job worker.
» Modvat credit can be utilised for the following purposes:-
» Towards payment of excise duty on the final product
» Towards payment of excise duty on waste arising in the
course of manufacture of final product
» Towards payment of excise duty on inputs themselves where
they are cleared for home consumption.
» Modvat credit in respect of finished products exported
without payment of duty (like goods manufactured by units in a Free
Trade Zone or by 100 per cent EOUs or by units in an Electronic
Hardware Technology Park or by units in a Software Technology Park)
may be utilized for discharging duty liability on similar final
products cleared for home consumption. If the manufacturer does not
have any excise liability, the modvat credit may be refunded to him
provided he has not availed claimed drawback of duty under the
Central Excise Rules.
Any waste arising from processing of modvatable inputs in respect
of which credit has been availed may:-
» Be removed by payment of duty if such waste is produced in
the factory.
» Be removed without payment of duty where permitted by order
of the government.
» Be destroyed in the presence of a proper officer on
application made by the manufacturer and if found unfit for further
use or not worth the duty payable thereon provided the manufacturer
informs the appropriate authorities at least 7 days in advance in
writing as regards the quantity of waste and the date on which it is
supposed to be destroyed and after complying with all the conditions
as may be prescribed by the Collector of Central Excise in this
behalf.
The manufacturer may transfer or utilise modvat credit from one of
his factories to another with approval from the Collector of Central
Excise provided application is made by him in this behalf and all
conditions imposed by the Collector are satisfied.
Rule 57G For availing the benefit of
modvat, the manufacturer must carry out certain procedures. He must
file a declaration with the Assistant Collector of Central Excise
having jurisdiction over his factory indicating the description of
final product manufactured in the factory giving details of the
inputs used for such purpose.in each of the said products. He must
also give detailed information required by the Assistant Collector
of Central Excise and must obtain dated acknowledgement for such
declaration.
The manufacturer may avail of modvat credit only after the above
declaration is filed by him. However, he cannot take credit unless
the inputs are accompanied with an invoice prepared as per Central
Excise Rules, Form AR-1. In case of imported goods it must be
accompanied with triplicate copy of Bill of Entry or Certificate of
Appraisal by Custom posted in a foreign post office. In other words,
the goods must be accompanied with proof that duty has been paid on
them.
The Central Government has the power to direct that modvat credit
on specified inputs may be allowed at such rate and subject to such
conditions as it may direct without production of documents
evidencing the payment of duty.
Where copy of invoice meant for the purpose of claiming modvat is
lost or misplaced, the manufacturer can claim modvat credit on the
basis of or misplaced, the manufacturer may claim modvat credit on
the basis of the original invoice subject to the satisfaction of
central excise authorities.
A manufacturer of final products shall maintain:-
» An account in form of RG 23A - Part I and Part II in respect
of duty payable on final product. Part I is a record of inputs and
subsequent utilisation in the manufacturing process. Part II is a
record of modvat credit pertaining to such inputs.
» An account current to cover the excise duty payable on the
final product cleared at any time.
» A manufacturer of final products must submit within five
days after the close of each month to the Superintendent of Central
Excise, the following documents:-
» Original documents evidencing payment of duty
» Extract of RG 23A Part I and Part II
After verifying their genuineness, the Superintendent shall deface
the documents and return them to the manufacturer. The Collector
may, having regard to the nature, variety and extent of production
or frequency of removal provide for a period shorter than 1 month
for submission of such return in respect of any assessee or class of
assessees. He may also permit filing of the aforesaid return by an
assessee within a period not exceeding 21 days after the close of
each month. He may also permit filing of the aforesaid return by an
assessee within a period not exceeding 21 days after the close of
each quarter where the assessee is availing of an exemption based on
the quantity of clearances during a financial year.
In case the manufacturer is not in a position to file the aforesaid
return on time for sufficient cause, the Assistant Collector may
allow the manufacture to take credit of duty paid on inputs,
condoning the delay and giving reasons in writing for such
condonation. The Assistant Collector must see that the following
conditions are satisfied before giving allowing such modvat credit:-
» Input in respect of which credit of duty is allowed are
received in the factory not before six months from the date of
filing declaration and not before date of eligibility for modvat
credit.
» Amount of duty for which credit is sought has been actually
paid on these inputs.
» Inputs have actually been used or are to be used in
manufacture of final products.
» The persons issuing invoices for modvatable inputs must
follow certain procedures and must get registered with the Central
Excise authorities. He must maintain stock account in the RG 23D. He
shall make entries in RG 23D at the end of the day of receipt and
issue of excisable good and:-
» Shall enter the date of entry
» Correctly keep such book, account or register in the manner
required
» Shall not cancel, obliterate or alter any entry therein
except for correction of errors
» Keep such book, account or register open for inspection by
the concerned authorities and allow such inspection
» Allow the concerned officer to take copies or extracts or
send the records to the concerned officer.
Such person shall issue serial-wise invoice containing details as
prescribed by the Central Board of Excise and Customs or by the
Collector of Central Excise in quaduplicate as follows:-
» Original copy is for the buyer.
» Second copy is for the transporter.
» Third copy is for the excise department.
» Fourth copy is to be retained by the issuer.
The invoice contains the following details:-
» Evidence showing proof of payment of excise duty
» Rate of duty paid, amount of duty, duty debit entry in the
PLA, date and number of such entry.
» Postal address, range and division of the excise officer
under which the manufacturer falls, name and address and code
number, excise registration number of the factory and also the name
and address of the consignee, description and certification of
goods, number of packages, total quantity of goods, total price of
goods, total assessable value, rate of duty, total duty paid, serial
number of debit entry in the personal ledger account, date and time
of removal of goods, mode of transport, motor vehicles registration
number and certificate duly signed by authorised person stating that
what is stated above is true.
» Each invoice book must be authenticated by a working partner
or managing director or secretary.
» Each invoice shall bear a printed serial number running for
the whole financial year beginning on the 1St. April each year. Only
one invoice book of each type shall be used by the registered person
for removal of excisable goods at any one time unless otherwise
specially permitted by the collector in writing.
» Each foil of the invoice book shall be authenticated by the
owner or the working partner or the managing director or the company
secretary, as the case may be, before being brought into use by the
registered person. The serial number of the invoice before being
brought into use shall be intimated to the Assistant Collector of
Central Excise and dated acknowledgement of receipt of such
intimation shall be retained by the registered person. When the
invoice is generated through computer, serial number serial number
likely to be used in the forth-coming quarter shall be intimated to
the Assistant Collector of Central Excise and as soon as the same is
exhausted, a revised intimation must be send. Records and invoices
generated through computer are also recognised. Such registered
dealer shall send details in software used including the format for
information to the Assistant Collector of Central Excise.
Rule 57I The excise authority may
disallow modvat credit which has been wrongly availed or incorrectly
utilised. In case modvat credit has been taken on account of error
or misconstruction, the proper officer may send notice to the
manufacturer within 6 months from the date of filing of return to
show cause why such modvat credit should not be disallowed. In such
cases, where modvat credit has already been utilised, show cause
notice must state the utlised amount must not be recovered from the
assessee.
In case such wrong modvat credit is on account of willful
mis-statement, collusion or suppression of facts on the part of
manufacturer, instead of the aforesaid period of 6 months, notices
may be sent for a period within 5 years from date of availment of
modvat credit. The period of stay by court order will not be
considered while determining the aforesaid period.
The proper officer must consider the representation of the
manufacture with regard to the show cause notice and thereafter to
determine the amount of disallowance, if any.
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