The Hindu Business Line : Warp and weft of Cenvat

TO THE textile sector, the Finance Minister has offered the option to either claim exemption or pay duty at lower rate by availing itself of Cenvat credit. This may apparently be due to political expediency, or as part of an agenda to lure the industry players into the Cenvat chain.

There will be a level-playing field regardless of size or process between different segments — handlooms, powerlooms, small spinning units, composite mills, independent processors, and so on. All have the option to pay the same duty or claim exemption.

For those opting to pay duty, the rates of excise duty will be as follows:

i) All textile goods made of pure cotton, not containing any other textile material — 4 per cent.

ii) Other textile goods — 8 per cent.

These will also be the applicable rates for CVD purposes (Notification No. 29/2004).

Hobson's choice

Considering that a large number of small players in the weaving sector had come into the net only recently, a clarificatory circular guiding the players on making the decision would have helped.

The factors that would help them make a decision are:

In the case of players in the cotton textile industry, the choice appears to be clear — the exemption route.

In the case of synthetic textile industry — it appears that the choice has to be made based on the value addition. Since the tax on fibre and yarn is 16 per cent and 24 per cent respectively, and the Cenvat rate down the line is 8 per cent, it would be economical to choose the exemption route if the value addition is more than 100 per cent and 200 per cent respectively. If the value addition is lower that this, the credit taken on inputs would be sufficient to discharge the duty liability on the finished goods and there may not be any additional cash outflow.

So a thumb rule for small players who are not familiar with the excise jargon whether to opt for the exemption route or not appears be to check if in the recent past they had cash outflow on duty liability on finished goods. If yes, the best bet would be to choose the exemption route.

Procedure to opt out

One may opt out of the Cenvat route at any point of time and there is no need to communicate to the Department. The other relevant points are:

To avail of exemption, the manufacturer should not have "taken credit of duty on inputs". This means that the input tax credit on raw materials, goods in process and finished goods will have to be reversed.

The credit of duty taken on capital goods need not be reversed.

Since it may take time to calculate and reverse the input credit taken, it would be advisable to file a letter intimating the exercise of option to avail of the exemption and an undertaking to reverse the duty and to pay the shortfall of duty, if any.

The calculation of duty to be reversed should be completed expeditiously and a letter may be filed of the details of reversal of duty, stock statement, and application for surrender of licence in annexure III (if so decided), copy of Duty register evidencing reversal of duty, copy of PLA register with TR-6 challan for payment of duty shortfall.

It is not very clear as to whether a unit that has chosen the exemption route may opt it again for Cenvat route mid-year. Though it is informally clarified that the option applies for a financial year, it has not been specifically clarified.

Where each unit of the same company has separate excise registration, the option may be exercised individually for each unit.

It appears that where a company had different product lines, the option may be exercised product wise, but separate account of inputs will have to be maintained in terms of Rule 6 of Cenvat Credit Rules.

Who has to compulsorily opt out?

With the deletion of Rule 12B, a person who does not have any manufacturing facility but gets the goods manufactured through job workers and had registered earlier, will have to surrender his excise registration.

EOUs

Export-oriented units (EOUs) which account for about more than 50 per cent of the export of cotton textiles are at a disadvantage vis-à-vis units in the domestic tariff area (DTA). The new excise regime does not apply to them as they operate under a different dispensation.

The tax incidence on EOUs on sale in the DTA, inclusive of the education cess, will be 4.1 per cent on cotton yarn and 12.3 per cent on cotton knitted.

Level-playing field?

Though the option of exemption/Cenvat route has provided a level-playing field vis-à-vis the different players, the differentiation in excise duty between natural and the man-made fibres has widened.

To make the synthetic textile goods competitive, it is hoped that the Finance Minister would, in the near term, revisit the duty structure on synthetics.

(The author is a Madurai-based chartered accountant.)