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         MODVAT
 
Rationale of modvat scheme.

Modvat abbreviates Modified Value Added Tax. The scheme is intended to avoid cascading effects of duty. Before the introduction of this scheme, barring some duty relief schemes provided to some specified goods, the inputs first suffered duty and the duty so paid became a part of the cost of the final product and the final product again suffered some duty. However, under Modvat scheme duty becomes payable at the value added at each stage of production as against on the gross value including duty paid in earlier stages of production. The scheme envisages taking of credit of duty paid on inputs as well as on capital goods.

The scheme in practice provides for an alternative method for payment of duty. The duty on the final product, in terms of the scheme, gets paid from the credit of duty available on the basis of duty paid on inputs in capital goods.

Modvat scheme with regard to inputs.

Availability of the scheme in respect of the duties.

The provisions relating to Modvat do not make available credit in respect of all the duties and taxes suffered by the inputs. The credit can be taken only of the following duties

  1. the duty of excise specified in the first schedule to the Central Excise Tariff Act, 1985, leviable under Central Excise Act, 1944;
  2. the special duty of excise specified in the second schedule to the Central Excise Tariff Act, 1985, leviable under Central Excise Act, 1944;
  3. the additional duty of excise under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978;
  4. the additional duty of excise under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957; and
  5. the additional duty under section 3 of the Customs Tariff Act, 1975.

Availability of the scheme in respect of inputs.

The credit of duty is available in respect of inputs specified in the notifications issued under Rule 57A of the Central Excise Rules, 1944. In order to be classified as inputs, the goods must be used either directly or indirectly in or in relation to the manufacture of final products. It is not essential that the input should be contained in the final product in order to be so classified. The following inputs are excluded from the scope of Modvat provisions

  1. the goods falling under sub-heading no.2710.11, 2710.12, 2710.13 and 2710.19 (except natural gasoline liquid);
  2. high speed diesel oil falling under heading no.27.10;
  3. matches falling under heading 36.05 and cinematographic exposed and developed falling under heading 37.06;and
  4. ingots and billets of non-alloy steel on which the duty of excise is paid under section 3A of the Central Excise Act, 1944 falling under sub-heading no.7206.90 and 7207.90.

The credit in respect of inputs falling under Chapter 24, i.e. the Chapter covering tobacco and manufactured tobacco is available only if the final product also falls under Chapter 24.

The credit of duty on the following items is available as credit on inputs if they are specified

  • inputs which are manufactured and used within the factory of production;
  • paints;
  • inputs used as fuel;
  • inputs used for generation of electricity or steel, used for manufacture of final products or for any other purpose, within the factory of production;
  • packing materials and materials from which such packing materials are made provided the cost of such packing materials is included in the value of the final product;
  • accessories of the final product cleared along with such final product, the value of which is included in the assessable value of the final product.

The credit on the following items is not available as inputs

  1. machines, machinery, equipment, apparatus, tools, appliances or capital goods as defined in Rule 57Q used for any purpose in the factory. However, the credit is available on the component parts as inputs if they are used in the manufacture of final products;
  2. packing materials in respect of which any exemption to the extent of duty of excise payable on the cost of packing material is being availed ; and
  3. crates and glass bottles used for aerated waters.

Availability of scheme in respect of final product.

The scheme is applicable in respect of all the final products except the following:-

  1. Match boxes falling under heading no.36.05 and cinematographic films falling under heading 37.06;
  2. ingots and billets of non-alloy steel on which the duty of excise is paid under section 3A of the Central Excise Act, 1944 falling under sub-heading no.7206.90 and 7207.90.
  3. hot re-rolled products of non alloy steel, on which the duty of excise has been paid under section 3A of the Central Excise Act, 1944, falling under sub-heading no.7211.11, 7211.19, 7211.30, 7211.52, 7211.59, 7211.60, 7211.92, 7211.99, 7213.90, 7214.90, 7215.90, 7216.10 and 7216.90.

The manner of utilisation of inputs in respect of which the credit is taken.

The inputs in respect of which the credit is taken are essentially to be used in or in relation to the manufacture of final product. However, the inputs can be removed for home consumption on payment of duty equal to the amount of credit availed in respect of such inputs or exported under bond. These provisions are incorporated in Rule 57F(1), 57F(2) and 57F(3).

Removal of inputs or partially processed inputs.

The removal of inputs or partially processed inputs is governed by the provisions of Rule 57F(4) of the Central Excise Rules, 1944. The inputs and partially processed inputs can be removed for the purposes of test, repair, refining, reconditioning or carrying out any other operation necessary for the manufacture of final products or for manufacture of intermediate products necessary for the manufacture of final products. The inputs or the partially processed inputs after they are subjected to the requisite process are to be brought back to the factory within 180 days and are either to be used in the manufacture of final product or removed after payment of duty for home consumption or for export under bond. The inputs or partially processed inputs after they have been subjected to the requisite process and brought back to the factory, can be removed without payment of duty to a unit in Free Trade Zone or to a 100% EOU or to a unit in Electronic Hardware Technology Park or Soft ware Technology Parks or supplied to the United Nations or an International Organisation for their official use or supply to projects funded by them, on which exemption of duty is available under notification no. 108/95-CE dated 28.8.95.

The waste generated during the process performed outside the factory, is required to be returned to the factory. However, the requirement can be dispensed with, if the excise duty leviable on such waste, is paid.

The removal of inputs or partially processed inputs under Rule 57F(4) is undertaken after debiting an amount equal to 10% of the value of such inputs or the partially processed inputs. The amount can be debited either in the RG-23A Pt.-II account or in the current account.

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