Major amendments have been brought in Ready made garments and made-up articles through the budget 2011-12. These goods fall under chapter 61 of the Central Excise Tariff Act, 1985. Earlier these goods were exempted vide serial no. 16 of Notification no. 30/2004-CE dt. 09.07.2004. The entry at this serial no. exempted all the goods falling in chapter 61 subject to the condition of non availment of cenvat credit on inputs. This notification is amended vide notification no. 12/2011-CE dated 1.3.2011 the impact of which is that after budget, only those goods of chapter 61 will be exempted that neither bear the brand name nor are sold under the brand name. Further new Notification no. 1/2011-CE dated 1.3.2011 and Notification no. 2/2011-CE dated 1.3.2011 have also not prescribed any exemption for the same. Thus, the impact of this amendment is that no exemption is there and no specific rate of duty is prescribed for these items. Hence these will be taxable at normal rate of duty i.e. 10% advalorem. The whole situation can be noted in following manner:-
Position before Budget:-
Prior to the budget the goods classified under chapter 61, 62 and 63 were exempted from levy of excise duty and the option to pay duty was there for the goods of cotton, not containing any other textile material.
Exemption to the goods falling under chapter 61, 62 and 63:- Earlier in the notification no. 30/2004-CE dt. 19.07.2004 the exemption was provided to all goods falling under the chapter 61, 62 and 63 (except 63090000 and 6310). Further the notification also disallowed the cenvat credit of duty paid on the inputs used in manufacturing of these goods. Hence there was no any excise duty on the aforementioned goods irrespective to the fact that whether these were bearing any brand name and or sold under a brand name or not.
Option to go for exemption or pay duty:- Further the option to pay duty or avail exemption was also available with the assessee with regard to the aforementioned goods. The notification no. 29/2004-CE dt. 19.07.2004 provides 4% duty on all the goods of cotton falling under chapter 61, 62 and 63, not containing any other textile material. This notification was also applicable to all the goods including those bearing brand name or sold under a brand name. Thus, the manufacturer of branded goods made up of cotton had an option to avail either exemption vide notification no. 30/2004-CE and not to avail any cenvat credit or pay 4% duty vide notification no. 29/2004-CE with the benefit of availment of cenvat credit.
Position after Budget:
Taxability of branded cloths:- In the present budget the exemption of excise duty is removed on aforementioned goods having brand name or are sold under a brand name. Now the exemption on branded cloths has been removed vide notification no. 12/2011-CE dt. 01.03.2011. The provision of concessional rate of duty on these goods is also removed vide notification no. 11/2011-CE dt. 01.03.2011. Now the aforementioned goods falling under chapter 61, 62 and 63 having brand name or are sold under a brand name are under the tax net without any option to pay concessional duty or any exemption. The benefits of availment of cenvat credit will be available in this case.
Option lies for non branded specified items:- But the older provision to pay concessional rate of duty or availing exemption still lies for the goods which does not possess any brand name or also not sold under any brand name. Hence the optional duty regime will be continued for non branded clothes/garments.
Person liable to pay duty: - In normal trade practice as prevalent for garments, many times the goods are get manufactured from the job worker. Central Excise Rules, 2002 have been amended and rule 4(1A) is inserted which says that the person who is getting the goods (falling in chapter 61, 62 & 63) manufactured from job worker will be liable to pay the duty and comply with Excise rules and regulations. However, burden of the same can also be shifted to the job worker and in such case he will be liable to comply with the Rules and regulations. Thus, the manufacturer of the branded goods who gets the goods manufactured on job work will also be covered under this clause. Now the option is available for payment of duty i.e either the job worker or the brand owner can pay the duty. But in trade, it is told to us some manufacturers procures their own inputs and manufacture the branded goods for brand owner and sells them. In that case, these manufacturers will be liable to duty and they cannot shift their burden to brand owner.
Now the next question is that if the job worker does not fix the brand name and it is done by brand owner himself. This question is being asked by the many people in the industry. In this situation, the mandatory excise duty will be on brand owner only as fixing of brand name will amount to manufacture. We are discussing this point in depth in this article. Further, the mandatory duty is not applicable to unbranded garments.
SSI Exemption:- As per Notification no. 8/2003-CE dated 1.3.2003; the SSI exemption is given to the manufacturer of the dutiable goods. On the other hand, as per rule 4(1A); liability to pay duty has been shifted to other person. Accordingly, notification no. 8/2003 has been amended vide notification no. 8/2011-CE dated 1.3.2011 and in case rule 4(1A) is applicable, the person liable to pay the duty (i.e. the principle manufacturer/ supplier) will be deemed to the manufacturer for the purpose of SSI exemption under Notification no. 8/2003-CE. Thus, now even if the goods are manufactured by the job worker who is actual manufacturer, the benefit of SSI exemption will be given to the person liable to pay the excise duty in terms of rule 4(1A) of the Central Excise Rules, 2002.
The basic clause is that the aggregate value of clearances of all excisable goods in preceding financial year should be less than Rs. 4 crore then exemption will be available. For this purpose, all excisable goods whether dutiable or exempted is to be seen. Now, for the month of March 2011, the year 2009-10 is to be seen. If the aggregate value of clearances is less than Rs. 4 crore in year 2009-10 then exemption of 1.5 crore is available. For computing these 1.5 crore, only dutiable goods is to be seen. This limit of Rs. 1.5 crore will be available for March 2011 as the goods cleared prior to March 2011 were exempted and will not be considered in calculating the same. Thus, the exemption is available in March 2011 also.
Now the next question is whether the exemption is available to brand owner as well as to job workers. It can be said that this is available to both of them. But if we go through the conditions of notification then it is available to brand owner only. If the job worker clears the goods having brand name of other person then the SSI exemption is not available to him. Hence, the exemption is available when the brand owner decides to pay the duty. But the limit of Rs. 4 crore in preceding financial year is very small for a brand owner. Thus, practically speaking , SSI exemption is not applicable to either job worker or brand owner.
Definition of deemed manufacturing is amended:- The activities of labeling or re-labeling or affixing a brand name was already covered under the process of manufacturing regarding knitted or crocheted fabrics and Articles of apparel and clothing accessories, knitted or crocheted. But these processes were not deemed as manufacture for the goods of other made up textile articles, sets, worn clothing and worn textile articles, rags etc. Now from the Budget, 2011; a chapter note is included for these articles also. The effect of this amendment is that even where these goods are sent to job workers for the purpose of re-labeling or affixing a brand name, this activity will amount to manufacture and provisions of Central Excise Act and Rules made thereunder would apply. Thus, in the cases, where the goods are made ups of textile articles, sets, worn clothing and worn textile articles, rags, etc. and only brand name is affixed at the place of brand owner then it will amount to manufacture and he has to pay the duty. This point is being asked in the industry and we have replied in this article that if the brand owner fixes the brand name on clothes then the liability to pay duty will be on the brand owner only.
Tariff Value:- The tariff value for charging duty on readymade garments and textile made-ups falling under chapter 61 to 63 is fixed @ 60% of the retail sale price. This has been done vide notification no. 7/2011-CE(NT) dated 1.3.2011 which amends notification no. 20/2001-CE(NT). Now the duty of 10% will be payable on the assessable value which will be 60% of the retail sale price for the branded clothes. Thus, there is no dispute as regards valuation. Rule 10A will not come into picture even if the duty is paid by job worker.
In a nutshell it can be said that for unbranded goods, an optional duty regime would continue but the branded goods will become dutiable @10%. Also the Labeling and brand name on products would attract a duty. Earlier the assessees were paying duty voluntarily but now it is mandatory to pay duty on the branded clothes. Non-branded garments makers will get excise duty exemption if they have not availed facility of duty credit on inputs. Now the assessees who are manufacturing branded garments have to avail cenvat credit on inputs and to clear the goods after payment of 10% Excise Duty. But as the notifications no. 29 and 30/2004 is lying with the supplier of inputs the duty amount charged by the supplier will be either NIL or at concessional rate i.e. 4%. Consecutively he has to avail cenvat credit of 4% or NIL (not available if Notification no. 30/2004-CE opted) and has to clear the branded garments at 10% rate of duty. This will disturb the cenvat credit chain. These amendments can only be beneficial to those large scale manufacturers who are having the manufacturing facility of the garments from the very first input i.e. cotton, yarn to garments as finished goods.
But the other branded goods manufacturer will try to pursue the textile processing units and grey manufacturers to avail cenvat credit and pay duty so that they can also claim cenvat credit. Will it lead to textile industry coming in tax net again? Let us wait and time will tell.
CA. Preeti parihar
CA. Ridhi Anchalia