PGDBLCourse13Block3Units1and2

SEMESTER

2 COURSE

13 - Taxation Laws BLOCK

3 - Introduction to Indirect Tax

UNITS

Units 1 and 2

AUTHOR

Mr. Harish K. Chandrasekaran

Rainmaker Training & Recruitment Private Limited, 2012. Any unauthorised use or reproduction of this material shall attract all applicable civil and criminal law remedies.

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Learning Objectives

After you go through these Units, you will be to:

Understand the terminology and the types of duties put forth

in the Indian Customs Act, 1962

Appreciate the concept of excise duty and understand the

steps involved in classification of excisable goods

Note: All content of this Block relate to the law prevailing and

effective under the Finance Act, 2011. Any changes to these

provisions made or sought to be made by the Finance Bill, 2012

and subsequently by the Finance Act, 2012 are not intended to be

covered in this material.


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Introduction

Indirect taxes are a major source of revenue for many governments

around the world. In earlier Blocksm we have looked at income tax

a levy on the income or property of a person. In contrast, indirect

taxes are charges levied by the State on consumption, expenditure,

privilege, or right. The taxes on consumption, expenditure and so

on are called indirect taxes since the burden of taxation in such

instances can be transferred to a subsequent person until the

goods and services are consumed by the end user, who actually

bears the burden of the levy.

The major form of levy of indirect taxes is in the nature of excise

duty, customs duty, service tax, and value added tax. Each of these

duties or taxes has a basis or an incidence that justifies such a levy.

For instance, customs duty is levied on import and export of goods,

while excise is a duty on manufacture of goods. We will see the

incidence of levy in detail in the forthcoming units. The Central

Board of Excise & Customs (CBEC) is the apex regulatory body

that supervises the levy and administration of indirect taxes in India.

In this Block, we will explore the general principles and concepts

that underlie the levy of indirect taxes.


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Unit 1: Introduction to customs law

Customs duty is a levy or tax, which is imposed by the Central

Government on the import of goods into, and export of goods from,

India. It is collected from the importer or exporter of goods, but its

actual incidence is borne by the final consumer of the goods and

not the importer or the exporter who remits the tax to the

Government.

Development of Indian customs law

There is historical evidence of the imposition of import duty during

the ancient and medieval era, wherein the development of

organised taxation on imports and exports can be found. The first

legislation in this regard can be traced back to 1786, when the

British formed the first Board of Revenue in Calcutta and each

province on an individual basis levied import and export duties. This

system was replaced by a uniform tariff law by way of the Customs

Duties Act, 1859, which was made applicable to all territories in the

country. The general rate of duty was ten per cent, which was

subsequently revised to 7.5 per cent in 1864. Several more

revisions in the customs policy and tariff took place during

subsequent years, though such revisions were mainly related to

textile products.

In 1878, the Government passed the Sea Customs Act, and the

Indian Tariff Act was passed in 1894. The Land Customs Act was

passed in 1924 and the law relating to air customs was covered

under the India Aircrafts Act, 1911. Considering the multiplicity of

legislation governing this area of law, there was an obvious need to

consolidate them into a single enactment. Thus, the Indian

Customs Act, 1934, was promulgated to govern all the above

customs laws. Post-independence, the existing law was repealed

and a consolidating and amending legislation, the Customs

Act, 1962 (the Customs Act), was enacted. The Customs Tariff

Act, 1975 (the Tariff Act) replaced the erstwhile customs tariffs contained in the Indian Customs Act, 1934.


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The Customs Act is the basic legislation that empowers the Central

Government to levy and collect duties on import of goods from

outside India as well as on export of goods from India. As we have

seen before, the Customs Act consolidates various enactmentsi on

the subject matter of import and export, and its scope extends

across the whole of India.

Legislation

The Customs Act was enacted by the government pursuant to the

powers conferred in Article 245 of the Constitution. The Customs

Act contains provisions that detail the levy and the manner of

collection of duties on imported and exported goods and lays down

the procedures governing import and export. It came into force on 1

February 1963 and its scopeii extends to the whole of India,

including the territorial waters of India that extend up to 12 nautical

miles inside the sea from the baseline of coasts of India. The

customs law comprises 161 sections and is grouped into seventeen

chapters. The CBEC is entrusted with formulating rules, schemes,

and policies to levy and collect custom duties and prevent illegal

transfer of goods in and out of India. The CBEC is also empowered

to levy penalties for evading tax and violating the provisions of the

law.

Important definitions under the customs law

The Customs Actiii defines terms that are essential to interpret its

provisions. The following table lists some important definitions in the

context of the Customs Act that serve as a guide to understanding

it.


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Term Definition

Goods

The law defines goods in an inclusive manner.

Goods include vessels, aircrafts, vehicles, stores,

baggage, currency and other negotiable

instruments, and any other kind of movable

property.

Duty Duty of customs leviable under the Act.

Dutiable goods

Goods chargeable to duty and on which duty has

not been paid and that can be stored in a

warehouse.

Baggage

It can be interpreted as any dutiable goods

imported by a passenger by means of a baggage

that accompanies the passenger. According to the

law, baggage also includes unaccompanied

baggage, which means any dutiable goods

imported without a passenger are also considered

to be baggage.

Imported goods Any goods brought into India from a place outside

India. However, it is pertinent to note that once

such goods are cleared for consumption in India

after due payment of duties, the goods will cease to

be called imported goods.

Exported goods Any goods that are to be taken out of India to a

place outside India.

Person-in-

charge

The customs law specifies the carrier of the goods

as a person-in-chargeiv. The duties and

responsibilities of such person are enumerated

below:

To ensure that conveyance or travel of

goods is through a customs-approved route

and that the goods land in a proper customs

area.

To submit import / export manifest or bill in

relation to the goods being carried.

To load / unload dutiable goods only after

approval from customs officer in a written

form.


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Bill of entry

The Customs Actv defines a bill of entry as a bill of

lading or any other receipt given by the carrier of

the goods to the consignor. This is an important

document from the perspective of customs law as it

gives details about the quantity, value and provides

description of the goods. Only upon submission of

this document is the person-in-charge allowed to

bring in the goods into the Indian customs zone or

area.

Bill of export

According to the Customs Actvi, a bill of export is a

receipt or shipping bill given to the buyer of

exported goods.

Warehouse

Warehouse is a storage area for dutiable goods

that is so appointed or licensed under the Customs

Actvii

Coastal goods

Goods which are transported in a vessel from one

port in India to another.

Custom area

The place in which imported as well as exported

goods are housed before clearance by the Custom

Authorities.

Custom station

Customs port, inland container depot, customs

airport or land customs station are commonly

known as custom station. The imported goods

should be unloaded only at a custom station.

Similarly, goods can be exported only form a

specified customs station.

Exporter

A person who claims ownership over goods at any

time between their entry in a custom station and

their clearance till dispatch to abroad.

Importer

A person who claims ownership over goods at any

time between their entry into India and their

clearance for home consumption from a

warehouseviii.


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Procedures for import of goods

In recent years, India has witnessed a steady rise in imports,

especially in the luxury goods segment. This can be explained by

rising levels of spending among middle income groups, especially

on durable consumer goods such as televisions, refrigerators,

vacuum cleaners and so on.

Illustration: Mr. A is an importer. He imports vacuum cleaners from

China, as there is huge demand for Chinese-manufactured vacuum

cleaners amongst middle-income groups in India. Normally, goods

imported from overseas are carried by ship or aircraft. Mr. A imports

the vacuum cleaners into India by the sea route. The following

enumerates the steps for clearance of imported goods in a case

such as this, for home consumption:

The master of the ship should submit the import manifest

within 24 hours of the goods arriving at the custom station.

The import manifest is submitted in order to account for the

goods as being imported legally. It contains details about the

master of the vessel and particulars of the goods carried by

the vessel.

After approval from the custom authorities, the goods can be

unloaded in a custom station.

The customs authority will examine and count the number of

vacuum cleaners on the vessel and will verify whether the

count matches with the number mentioned in the import

manifest. A penalty will be levied if there is mismatch in the

count of goods.

Mr. A is then required to submit a bill of entry for importing

the vacuum cleaners. There are three types of bills of entry,

namely, bill for home consumption, bill for warehousing and

bill for ex-bond clearance for home consumption. The color

of bill varies according to type of bill as white, yellow, green

respectively.

If the importer wants to clear goods immediately

without warehousing it for home consumption, he is


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required to submit the white bill of entry. The goods

will be cleared upon payment of customs duty.

If the importer doesnt want the goods immediately, he

can store them in a warehouse after notification of,

and obtaining requisite approval from, custom

authorities. In such cases, he is supposed to submit

the yellow bill of entry. The importer need not pay

customs duty at this juncture.

When an importer clears the goods for home

consumption after warehousing, he is supposed to

submit a green bill of entry and pay the requisite

customs duty. The rate of duty applicable in all these

cases will be the rate prevailing on the date of the

clearance of the goods.

Assuming that Mr. A submits a white bill of entry for direct

home consumption to the customs authorities, the

authorities will then check this bill against the import

manifest to validate the appropriateness of the goods, its

count, and value. In other words, the authorities will ensure

that particulars such as the description of the vacuum

cleaners, their count, their per unit cost, and their total cost

matches with the amounts stated in the import manifest.

After validation, the authorities will levy and collect the

duties. The amount of duty to be paid is equal to the rate of

duty charged on such goods, multiplied by the value of the

goods. The Tariff Act mentions the rate applicable for

importation of each class of goods. You will learn more

about valuation of imported goods in our next Block.

Once the duty is paid, the authorities issue an out of

customs charge order for the final clearance of the goods.

In the case of exports, the same procedure is followed in a reverse

manner. It involves submission of a bill of export, appraisal of the

bill by customs authorities, followed by a grant of permission by the

authorities to unload the goods into a custom location.


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Subsequently, there is a cross-verification of goods with the bill and,

upon payment of customs duty, the goods are cleared for loading

onto a carrier, such as a ship or an aircraft, that takes them out of

India.

Charge on imported as well as exported goods

According to the Customs Actix, the duties of customs shall be

levied on goods imported into or exported from India at such rates

as specified in the first or second schedule of the Tariff Act. The first

schedule of the Tariff Act contains classification of import goods

and their relevant tariff rates. Similarly, the second schedule

classifies export goods and their relevant rates.

Special cases on pilferage/ deterioration /damage/ destruction of

imported goods

If any imported goods are pilfered after their unloading but before

the receipt of a clearance order of the goods for home consumption

or for warehousing from the customs officer, then the importer shall

not be liable to pay the duty on such goods According to the

provisionsx of the Customs Act. In due course of time, if the

importer regains the pilfered goods, he will be liable to pay duty on

such goods.

Continuing with our previous illustration of Mr. A importing vacuum

cleaners in to India, assuming that in the process of validation of

the bill of entry submitted by Mr. A, the custom authorities observe

that the count of vacuum cleaners does not match the number

contained in the import manifest. The count in the import manifest

being 1000 out of which 100 vacuum cleaners seem to have been

pilfered after the goods were unloaded in the customs station. In

such case, the authorities will value only 900 vacuum cleaners and

levy customs duty only on that amount.


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If any imported goods are destroyed before the clearance for home

consumption, then the customs officer will remit duty on the

remaining amount of goods. Consider that all the vacuum cleaners

imported by Mr. A were destroyed in an accidental fire after

payment of customs duty but before the issuance of an out of

customs charge order being given by the customs authority. In this

case, the customs duties collected from Mr. A will be returned to

himxi.

If any imported goods are damaged or otherwise deteriorate, then

abatement of duty on such goods is allowed according to the

Customs Actxii. The value of abatement is calculated as a proportion

of the value of the goods after damage or deterioration to the value

of the goods before damage or deterioration multiplied by the duty

of the goods before their damage or deterioration.

Types of Custom Duties

In our earlier Blocks on income tax, we studied two types of rates

that is, normal rates leviable under the slab system and the special

rate applicable for capital gains, winnings from lotteries, and so on.

Similarly, under the Customs Act, all dutiable goods are chargeable

to tax at a basic customs duty. Further, special rates such as

counter veiling duty, anti-dumping duty, and so on are levied to

alleviate the impact of importation of goods on domestic industries.

The types of customs duties applicable on goods under customs

laws are enumerated below:

Basic Custom Duty (BCD): It is a basic charge on goods

imported into or exported from India. The prevailing rate of

BCD is ten per centxiii.

Counter Veiling Duty (CVD): CVD is levied on imported

goods at a rate equal to that of the excise duty levied on

goods locally manufactured in India. CVD is levied on the

imported goods in order to counterbalance the impact of


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excise duty that is applicable to an indigenous manufacturer

of the imported goods and to ensure a level playing fieldxiv.

In other words, the rationale behind CVD is to mitigate the

difference between the duty free goods exported from

abroad and the applicable excise duty on the same

indigenous goods. The rates of duty mentioned in the

Central Excise Tariff Act, 1985 specify the rate of CVD

applicable on a imported good.

Illustration: Assume that Mr. A imports vacuum cleaners

from China to India. The cost of manufacturing a vacuum

cleaner in China is much less than cost of manufacturing the

same vacuum cleaner here in India. Hence, the vacuum

cleaners from China can be priced for sale at a rate that is

less than that attributable to a vacuum cleaner

manufactured in India. This would result in more people

buying the Chinese vacuum cleaner rather than an Indian

one and would ultimately lower the threshold sale price of

vacuum cleaners in India.

This would also put Indian manufacturers in a position of

disadvantage as compared to their Chinese counterparts as

the Indian manufacturers would need to pay an excise duty

that the Chinese would not. In order ensure a level playing

field, CVD at a rate of 12% is charged on the vacuum

cleaner imported from China, which is the tax a local

manufacturer would pay as excise duty.

Special Additional Duty (SAD): Similar to the CVD we

discussed earlier, the SAD is levied to counterbalance the

impact of sales tax, including value added taxes and other

local charges. The normal rate of special additional duty is 4

per centxvi.

In our earlier Illustration, since the vacuum cleaner is a

complete good and doesnt require further processing, Mr. A

could directly sell the goods in the Indian market. On the

other hand, a domestic company producing vacuum

cleaners would need to buy the requisite raw materials, and

then process them to arrive at the complete good before


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selling it. The raw material purchased by the domestic

company would be subjected to sales tax and this would

increase the threshold sale price of domestic vacuum

cleaners. In order to balance this, the imported vacuum

cleaners are charged to SAD at a rate of 4 per cent.

A customs cess is leviable on the imported goods. We

already know the concept of cess from our discussions on

income tax in the previous Blocks. Educational cess is

charged at 2% and the secondary and higher education

cess is levied at 1%.

A National Contingency Calamity Duty (NCCD) is imposed

by Annual Finance Acts on item such as pan masala,

cigarettes, and tobacco. Generally, NCCD is levied on

goods that are injurious to public health in order to dissuade

their increased consumption. The rate of duty ranges from

10% to 45%. NCCD is levied on luxury motorcars and two

wheelers at 1%.

Safeguard duty: Safeguard duty is a kind of protection that

the government can provide in order to give temporary relief

to indigenous industries from bulk imports of similar kinds of

goods from abroad. This duty is levied on goods that are

imported in increased quantities and cause injury to the

domestic industry producing similar goods. Both anti-

dumping duty (discussed next) and safe guard duty are

levied to protect domestic industry. The difference between

two is that anti-dumping duty is levied on dumped goods

whereas safe guard duty is levied on a large import of goods

that would normally enjoy concessional tariff rates due to

World Trade Organisation obligations of a member State.

Anti-dumping duty: Dumping is an act of discharging the

goods from the exported country into India at price lower

than the normal price at which such goods are sold in the

exporting country. It is considered an unfair trade practice

and has a distorting effect on domestic industry. For

instance, the dumped goods will be available at a much

cheaper rate than indigenous goods in India and many


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buyers may, obviously, opt for such low-cost goods. This

can cause significant harm to domestic industry. In order to

ensure a control mechanism on dumped goods, the

government levies an anti-dumping dutyxvii. The margin of

dump is determined as the difference between the normal

price and the export price. The designated authorities

decide upon the duty to be charged on such unfairly

dumped goods.

In this Unit, we have learnt that customs duty is charged on goods

imported into or exported from India. It has been essential to cover

common terminology under the Customs Act in order to understand

this area of law better. In our next Block we will learn some

advanced concepts in customs law, such as the valuation

procedure for imported goods.


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Unit 2: Introduction to Excise Law

Excise duty is a charge on goods manufactured in India for home

consumption. The taxable event is 'manufacture' and the liability of

central excise duty arises as soon as the goods are manufactured.

It is a tax on manufacturing, which is paid by a manufacturer, who

passes its incidence on to customers.

The Central Excise Act, 1944 (Excise Act) contains provisions

which define the scope of excise duty on a given product, the

mechanism for levy and collection of the duty, procedure of

assessment, penalties, appeals, and adjudication. In this Unit, we

will focus on the basic principles of the Central excise law.

Legislation

The Excise Act came into force on 28th February 1944. It extends

across the whole of India and contains the basic provisions in

regard to levy and collection of duties on excisable goods

manufactured or produced in India. Although excise duty is

chargeable on the event of manufacture of any excisable goods, its

collection is postponed to the time of removal of such goods from

the factory. The term excisable goods has been defined under the

law to mean those goods specified in the Central Excise Tariff Act,

1985 (CETA) as being subject to the duty of exci,se. The word

'Goods' has not been defined in the Act. Therefore the meaning of

the term excisable goods is borrowed from the Constitution and

from the Sale of Goods Act, 1930 and understood according to the

decision of the Apex Court. Under the excise law, it is understood to

be items that are movable, i.e. capable of being moved, and

marketable, i.e. capable of being sold. Thus any manufactured

good that is capable of being moved and marketed is subject to the

levy of excise duty.

The Excise Act defines manufacture in an inclusive manner as

encompassing any process incidental or ancillary to the completion

of a manufactured product. The term manufacture, for excise

purposes, can be understood as a process wherein the name,

characteristic, and use of an input or raw material is changed or

made distinct into another product capable of being moved and


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marketed by application of the process. Thus a process that simply

changes the form or size of the same article or enhances the value

of the article would not constitute manufacture.For instance, a

process whereby cigarettes or bidis are cut to size does not

constitute manufacture. Similarly, the process of repairing or

reconditioning of an existing product does not constitute

manufacture as no distinct by-product emerges from this process.

On the other hand, the process of assembling the individual parts of

a car to form a whole would constitute manufacture as a product in

the form of car, that is distinct from its parts, is formed as a result of

such a process.

Therefore, the conditions for levy of excise duty on a product can be

summed up as below:

The duty is to be levied on goods.

The goods must be excisable.

The goods must be manufactured or produced.

Such manufacture or production must have been carried out

in India.

The Excise Act extends to whole of India including the Indian

territorial waters. The Excise Act along with CETA, excise rules,

circulars and notifications issued by CBEC and amendments by the

relevant Finance Act comprise the gamut of legislation on the

subject of excise duty in India.

The CETA deals with classification of excisable goods and

prescribes the relevant rate of duty for each class of goods. It

consists of 21 sections, and 96 chapters that provide a

comprehensive classification of all conceivable goods that can be

manufactured. The CETA also mentions the general rules that are

to be followed to interpret its schedules for the purpose of

classification of products.

The Excise Act empowers the Central Government to make rules

on various aspects such as the mechanism to levy and collect


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excise duty, methods to determine the value of excisable goods,

removal of goods at concessional rates from a factory, and so on.

The following is list of prevailing rules under the Excise Act:

Central Excise Rules, 2002

Cenvat Credit Rules, 2004

Central Excise Valuation (Determination of Price of

Excisable Goods) Rules, 2000

Central Excise (Removal of Goods at Concessional Rate of

Duty for Manufacture of Excisable Goods) Rules, 2001

Central Excise (Determination of Retail Sale price of

Excisable Goods) Rules, 2008

Central Excise (Advance Rulings) Rules, 2002

Central Excise (Appeal) Rules, 2001

Central Excise (Settlement of Cases) Rules, 2007

Central Excise (Compounding of Offences) Rules 2005

Charging section

As we discussed above, the Excise Actxviii prescribes that excise

duty can be levied on goods manufactured in India that are capable

of being moved and marketed. Thus the terms manufacture,

goods, and excisable goods define the scope of the levy of

excise duty. We will discuss these terms in detail to understand the

nature of excise duty.

Manufacture

According to the provisionsxix of the Excise Act, the term

manufacture is defined in an inclusive manner as follows:

Manufacture includes any process incidental or ancillary to

the completion of a manufactured product


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Manufacture includes any process specified in relation to

any goods in the section or chapter notes of the schedule of

the CETA as amounting to manufacture

In case of goods specified in the third schedule of CETA,

manufacture involves:

Packing or repacking of such goods in a unit container.

Labeling or re-labeling of containers, including the

declaration or alteration of retail sale price on it.

Adoption of any other treatment on the goods to

render the product marketable to the consumer.

Further, manufacture is said to be complete only if an article so

produced is recognised as a new and different article having a

distinctive name and character or use.

Goods

According to the Constitutionxx, the word Goods is defined to

include all kinds of moveable property other than a few items such

as actionable claims and money. According to the Excise Actxxi, the

term good is further extended to include any article, material or

substance, which is capable of being bought and sold for a

consideration, and such goods are deemed to be marketable. Thus,

a manufactured product shall constitute goods if they are

marketable and moveable.

Marketable

Marketability is the capability of goods to be bought and sold for a

consideration. Actual sale of goods is not necessary to prove

marketability. Essential tests for marketability according to the

decisions of various courts include the following:

An article known in the market as a distinct and separate

product having unique use is marketable.


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An article that is capable of being sold or consumed is

marketable

However, articles in crude or elementary form are not marketable

as they are merely intermediate products and are not goods. In the

case of CCEx v. Bakelite Hylam Limitedxxii, the tribunal held that a

good or product shall not be chargeable to excise duty merely

because it is so specified in the schedule of CETA, and that the

marketability of such goods are essential to the levy of excise duty.

Hence, we can discern that the concept of marketability of the

goods is integral to the levy of excise duty.

Moveable

According to the Excise Act, only moveable and marketable goods

can be subject to excise duty. In Union of India v. DCMxxiii, the

Supreme Court laid down the principle that an article shall be a

good if it is capable of being brought to the market to be bought and

sold. We can infer that only moveable goods can be brought to

market for a transaction between buyer and seller. Thus, excise

duty cannot be levied on immovable goods and property. According

to the provisionsxxiv contained in the General Clauses Act,

immovable property includes land, benefits to arise out of land, and

things attached to the earth or permanently fastened to anything

attached to the earth.

Excisable goods

According to the Excise Actxxv, a good is said to be excisable if it

satisfies the following:

It is specified as dutiable in the First or Second Schedule of

the Central Excise Tariff Act, 1985; and

It is subject to duty according to the Tariff.


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There are certain goods that the Excise Act exempts by charging nil

duty on them. However, even those goods are considered as

excisable goods according to the Supreme Courts decision in the

case of Wallace Flour Mills Ltd. v. CCExxxvi . The rationale behind

this case is that the taxable event for the levy of excise duty is

manufacture. Hence, there may be some goods that are exempt

from payment of excise duty, but that fall within the definition of

being manufactured. Thus, such exempt goods also fall under the

scope of the taxable incidence of excise, although the duty payable

on them is zero. Therefore, merely because a good is exempt does

not mean that it is not excisable.

Taxable events of special cases

Case of immovable property: According to the Excise Act,

only moveable goods satisfying the conditions of excisability,

discussed above, are subject to excise duty. It follows that

there cannot be a charge of excise duty on immovable

goods since such goods are not manufactured or produced

but, rather, are constructed. However, during the process of

construction of an immovable property, there can be a yield

of intermediate goods that can be subject to excise duty.

For instance, consider the following. An item of immovable

property, such as a building, is created by the input of a

combination of various components. All components

required for the construction of that immovable property are

purchased and assembled at the factory. Then these

assembled goods are carried to the site and attached to the

earth to make it immovable. In this case, during assembly of

such components in the factory, if any goods emerge with a

new identity, character and with distinct features from the

components used in the production process, they can be

chargeable to excise duty provided such new good can

be carried away to the market as such without any damage

to its components, and be sold.

On the other hand, if all the components required for the

construction of an item of immovable property are


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purchased and are erected piece by piece on top of an

erected component or on top of any civil foundation to

fabricate such immovable property, then excise duty cannot

be levied since the final good produced is immovable

propertyxxvii . Though a new, distinct marketable good might

arise during the process of construction, it will not be

chargeable to excise duty because the new product cannot

be dismantled without substantial damage to take it to the

market to be soldxxviii .

Waste and Scrap: In Khandelwal Metal & Engineering

Works V. UOIxxix, the Supreme Court has held that the waste

and scrap that emerges as an intermediate item during the

processing of a final product shall be chargeable to excise

duty if such waste or scrap is marketable and is covered in

the CETA. The Apex court also held that processed waste

and scrap could be a distinct and identifiable product and

have commercial value.

Captive consumption: Any goods produced within the

factory for the purpose of internal consumption or production

are construed as being captively consumed. In general, we

have seen above that an intermediate product emerging

during the process of manufacture is liable to excise duty if

such a product can be commercially identified as being a

distinct product.

Thus, a commercially distinct intermediate product that is

captively consumed must also be subject to excise duty. We

also know that the Central Excise Rules postpone the

collection of the duty on excisable goods to the time of

removal of such goods from the factory. Then a question

arises as to how excise duty can be charged when the

intermediate excisable products are consumed captively,

without being removed from the factory. The Finance Act,

1982 amended the provisionsxxxi of the Central Excise Rules

in respect of captive consumption to connote that excise

duty will be charged on captively consumed intermediate

goods at the time of their removal from an approved place of

storage within the factory. Therefore, goods captively

consumed shall be charged to excise duty if they are


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removed from the approved place of storage within the

factory for internal consumption purposes.

Types of excise duty

In the earlier Unit, we learnt that customs duty could be broken

down into the smaller components that comprise it. Similarly, excise

duty is also comprised of the following components:

Basic excise duty: This is the basic charge on excisable

goods. The basic excise rate is 10%. This rate is applicable

unless a different rate is specified under the CETA.

Special excise duty: The Annual Finance Actxxxii charges a

special duty on certain notified goods. The duty rates are

specified in the second schedule of the CETA.

Cess: Educational cess is leviable at 2% and secondary and

higher education cess at 1% of the excise duty.

National Calamity Contingent Duty (NCCD): This is

imposed by the Annual Finance Act on certain items like pan

masala, chewing tobacco and cigarettes produced in India.

Additional duty on goods of special importance: This duty is

levied as measure of relief from multi-level taxes and duties

on certain goods. This duty is charged at the single point of

manufacture.

Classification of excisable goods

Classification of excisable goods is essential as it provides the rate

of duty applicable for goods falling under each such heading. In

other words, excise duty payable shall be arrived at by levying the

excise on the value of the excisable goods at the rate specified in

the heading or subheading specific to the good. The Central

Excise Tariff Act consists of 20 sections. Each of the sections is

divided into various chapters. In total, there are 96 chapters. Each

chapter is further classified into various headings and sub-


23

headings. In order to ensure uniformity in the classification of

goods, a coding convention known as the Harmonized System of

Nomenclature (HSN) is used. It is an eight-digit system and digits

represent the chapter number, headings, sub-headings and sub-

sub-headings relevant to such goods. The following steps are

undertaken to classify the goods under the appropriate heading in

the CETA.

Read through the section and chapter notes given at the

beginning of each section and chapter respectively. The

most relevant and specific heading is identified. If no

ambiguity exists, then the classification is final and the

goods shall be charged at the rate specified in the heading.

In the case of incomplete or unfinished articles, the article

shall be classified in the heading applicable to the final or

finished goods, provided that the incomplete product has the

essential character of the complete good.

In the case of a mixture/combination of materials, the mixed

article shall be classified to the heading of one of the

materials to the mixture that provides the most specific

meaning and essential character to such a mixed article.

If a classification entry for the good is unidentifiable, then

such a good shall be classified under heading most akin to

it.

In this Unit, we have learnt that a good is said to be excisable if

such a good is movable, marketable and is specified in CETA.

Any excisable goods manufactured or produced in India are

chargeable to excise duty.


24

Conclusion

In Units 1 and 2 of this Block, we have gained a basic

understating of the concepts underlying excise law and customs

law. Some of the more advanced concepts such as valuation of

excisable goods and goods subject to customs duty will be

discussed in the next Block.

Units 3 and 4 of this Block will introduce you to the concepts of

service tax and sales taxes, including Value Added Tax.

-x-x-


25

Suggested Reading

Books

V.S. Datey, Indirect Taxes Law and Practice, 28th edition,

Taxmann, 2012.

Web pages

The Finance Bill, 2011, available at

http://www.bareactsonline.com/pdfs/2011/Finance%202011

%20BH.pdf

http://business.gov.in/taxation/vat.php

http://www.cbec.gov.in/

http://www.servicetax.gov.in/


26

i The Sea Customs Act, 1878, The Inland Bonded Warehouses Act, 1896, The Land Customs Act, 1924, and The Aircraft Act, 1934 were consolidated into The Customs Act, 1962. ii Section 2(27) of the Customs Act, 1962.

iii Section 2 of the Customs Act,1962. iv According to Section 2(31) of The Customs Act, 1962, person-in-charge in case of vessel, aircraft, railway or other conveyance means master of the vessel, commander or pilot in charge of the aircraft, guard of the train or driver of the conveyance respectively. v Section 46 of The Customs Act, 1962. vi Section 50 of The Customs Act, 1962. vii Public warehouse appointed under Section 57 or private warehouse licensed under Section 58 of The Customs Act, 1962. viii All definitions contained in this table are from Section 2 of the Customs Act, 1962. ix Section 12 of the Customs Act, 1962. x Section 13 of the Customs Act, 1962. xi Id. xii Section 22 of the Customs Act, 1962. xiii Section 3(1) of the Customs Tariff Act, 1985. xiv Id. xvi Id. xvii Section 9A of the Customs Act, 1962. xviii Section 3 of the Central Excise Act, 1944. xix Section 2(f) of the Central Excise Act, 1944. xx Article 366(12) of the Constitution of India. xxi Explanation to Section 2(d) of the Central Excise Act, 1944. xxii 1990 (26) ECC 353. xxiii (1977) ELT 199. xxiv Section 3(26) of the General Clauses Act, 1897. xxv Section 2(d) of the Central Excise Act, 1944. xxvi (1989) (44) ELT 598. xxvii www.icai.org/resource_file/16017finalselecte.pdf. xxviii Id. xxix (1985) (20) ELT 222. xxxi Rule 9 and 49 of the Central Excise Rules, 1944. xxxii Section 37 of the relevant Finance Act.

PGDBLCourse13Block3Units1and2

Documents

levy of indirect taxes

customs law customs

introduction indirect

import of goods

export of goods

incidence of levy

indirect tax units units

exporter of goods