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Accounting Treatment For Excise Duty

The following is the text of the revised Guidance Note on Accounting Treatment For Excise Duty issued by the Institute of Chartered Accountants of India.

INTRODUCTION

1. The Institute of Chartered Accountants of India, had issued a Guidance Note on Accounting Treatment for Excise Duties m 1979. In order to bring uniformity in the accounting treatment of excise duty and inventory valuation, the Guidance Note was revised in 1988. Keeping in view further developments, viz., issuance of the revised Accounting Standard (AS) 2, "Valuation of Inventories" (which has come into effecting respect of account­ing periods commencing on or after 1.4.1999 and is mandatory in nature), it has been decided to revise this Guidance Note again. This revised Guidance Notes being issued in supersession of the earlier Guidance Note issued in 1988 and is effective in respect of accounting periods beginning on or after April 1, 1999.

2. This Guidance Note recommends accounting treatment for Excise Duty in respect of excisable goods produced or man­ufactured by an enterprise. A separate Guidance Note on Accounting Treatment for MODVAT sets out principles for accounting for MODVAT (now renamed as 'CENVAT'.

3. At the outset, this Guidance Note briefly deals with nor­mally accepted accounting principles for inventory valuation as prescribed in revised Accounting Standard (AS) 2 "Valuation of Inventories" issued by the Institute of Chartered Accountants of India, and nature of excise duty For details, reference should be made to revised Accounting Standard (AS) 2 and Central Excise Act, Rules, Notifications and Circulars.

Normally Accepted Accounting Principles For Inventory Valuation

4. Normally accepted accounting principles with regard to the val­uation of inventories (i.e. materials or supplies to be consumed in the production process or in the rendering of services, work‑in­process and finished goods), as prescribed in revised Accounting Standard (AS) 2,"Valuation of Inventories", are reproduced below:

"5. Inventories should be valued at the lower of cost and net real­isable value".

"6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition."

"7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase."

"8. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred m converting materials into finished goods. Fixed production overheads ate those indirect costs of production that remain relatively constant regardless of the vol­ume of production, such as depredation and maintenance of fac­tory buildings and the cost of factory management and adminis­tration.  Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour."

"9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the nor­mal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates; nor­mal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed pro­duction overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities."

"11. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropri­ate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories."

Nature Of Excise Duty

5. Excise duty is a duty on manufacture or production of excisable goods in India. Section 3 of the Central Excise Act; 1944, deals with charge of Excise Duty This Section provides that a duty of excise on excisable goods which are produced or manufactured in India shall be levied and collected in such a manner as may be prescribed. This prescription is continued in the Central Excise Rules, 1944 which provide that excise duty shall be collected at the time of removal of goods from factory premises or from approved place of storage (Rule 49). Rate of duty and tariff valuation to be applied is the one in force on that date, ie., the date of removal (Rule 9A) and not the date of manufacture. This difference in the point of time between taxable event, viz., manufacture and that of its collection has been examined and discussed in a number of judgements. For instance, the Supreme Court m the case of Wallace Flour Mills Co. Ltd. vs. CCE 11989 (44) ELT 599 summed up the legal position as under:

"It is well settled by the scheme of the Act as clarified by sev­eral decisions that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience. The Scheme of the said Act read with the relevant rules framed under the Act particularly Rule 9A of the said rules, reveals that the tax­able event is the fact of manufacture of production of an excisable article, the payment of duty is related to the date of removal of such article from the factory."

Supreme Court in another case, viz., CCE vs. Vazir Sultan Tobacco Co. [1996 (83) ELT 3] held as under:

"We are of the opinion that Section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manu­facture or production alone. Only the collection part of it is shifted to the stage of removal."

6. The levy of excise duty is not restricted only to excisable goods manufactured and intended for sale. It is also leviable on excisable goods manufactured or produced in a factory for inter­nal consumption. Such intermediate products may be used in manufacture of final products or for repairs within the factory or for use as capital goods within the factory. Excisable goods so used for captive consumption may be eligible for exemption under specific notifications issued from time to time. Finished excisable goods cleared from the place of removal may also be eligible for whole or partial duty exemption in terms of notifications issued from time to time. Such exemption, subject to specified limits, if any, may relate to a manufacturer, e.g., a small scale indus­trial unit. Exemption may be goods specific, eg., handicrafts are currently wholly exempt from duty. The exemption may also be end‑use specific, e.g., goods for use by defence services. Excisable goods can be removed for export out of India either wholly without payment of duty or under bond or on payment of duty under claim for rebate of duty paid.

7. Excisable goods, after completion of their manufacturing process, are required to be kept in a storeroom or other identified place of storage in a factory till the time of their clearance. Each such storeroom or storage place is required to be declared to the Excise Authorities and approved by them. Such storeroom or storage place is generally referred to as a Bonded Storeroom. Dutiable goods are also allowed, subject to approval of Excise Authorities, to be removed without payment of duty, to a Bonded Warehouse outside factory. In such cases, excise duty is collected at the time of clearance of goods from such Bonded Warehouses.

8. Amount of excise duty forming part of the sale price of the goods is required to be indicated separately in all documents relat­ing to assessment of duty, e.g., excise invoice used for clearance of excisable goods (Section 12A). It is, however, open to a manu­facturer to recover excise duty separately or not to make a sepa­rate recovery but charge a consolidated sale price inclusive of excise duty The incidence of excise duty is deemed to be passed on to the buyer, unless contrary is proved by the payer of excise duty (Section 12B).

Excise Duty As An Element Of Cost

9. In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is nec­essary to consider whether excise duty should be considered differently from other expenses.

10. Admittedly, excise duty is an indirect tax but it cannot; for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use / disposal of goods thereafter, e.g., sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expendi­ture incurred by him and it does not cease to be an expenditure merely because it is an exaction or a levy or because it is unavoid­able. In fact, in a wider context any expenditure is an imposition which a manufacturer would like to minimise.

11. Excise duty contributes to the value of the product. A "duty paid" product has a higher value than a product on which duty remains to be paid and no sale or further utilisation of excis­able goods can take place unless the duty is paid. It is, therefore, a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or fur­ther used in the manufacturing process.

12 Excise duty cannot therefore be treated differently from other expenses for the purpose of determination of cost for inventory valuation. To do so would be contrary to the basic objective of carrying forward the cost related to inventories until these are sold or consumed.

13 As stated in para 6 above, liability to excise duty arises even on excisable goods manufactured and used in further manufacturing process. In such a case excise duty paid (if the same is not exempted) on the intermediary product becomes a manufacturing expense. Excise duty paid on such intermediary products must, therefore, be included in the valuation of work-in-process or finished goods manufactures by the subsequent processing of such products.

Provision For Unpaid Excise Duty

14. Since the point of time at which duty is collected is not neces­sarily the point of time at which the liability to pay the duty arises, situations will often arise when duty remains to be collected on goods which have been manufactured. The most common of these situations arises when die goods are stored under bond, i.e., in a bonded Store Room, and the duty is paid when the goods are removed from such bonded Store Room.

15. Divergent views exist as to whether provision should be made in the accounts for the liability in respect of goods which are not cleared or which are lying in bond at the balance sheet date.

16. The arguments in favour of the creation of liability are briefly summarised under:

(a) The liability for excise duty arises at the point of time at which the manufacture is completed and it is only its collection which is deferred, and

(b) failure to provide for the liability will result in the balance sheet not showing a true and fair view of the state of affairs of the enterprise.

17. The arguments against the creation of the liability briefly summarised, are as under:

(a) Though the liability for excise duty arises at the point of time at which the manufacture is completed, it gets quantified only when goods are cleared from the factory or the bonded warehouse,

(b) the actual liability for excise duty may get modified by the time the goods are cleared from the factory or bonded warehouse,

(c) where goods are damaged or destroyed before clearance, excise duty may be waived by the competent authority and there­fore the duty may never be paid, and

(d) failure to provide for the liability does not affect the profits or losses.

18. Since the liability for excise duty arises when the manufac­ture of the goods is completed, it is necessary to create a provision for liability of unpaid excise duty on stocks lying in the factory or bonded warehouse. It is true that the recovery of the duty is deferred till the goods are removed from the factory ot the bonded warehouse and the exact quantification will, therefore, be at the time of removal and that estimate of duty made on balance sheet date may change on account of subsequent events, e.g., change in the rate of duty and exports under bond. But, this is true of many other items also, e.g., provision for gratuity and this cannot be an argument for not making a provision for existing liability on estimated basis.

19. The estimate of such liability can be made at the rates in force on the balance sheet date. For this purpose, other factors affecting liability should also be considered, e.g., exemptions being availed by the enterprise, pattern of sales - export, domes­tic etc. Thus, if a small scale undertaking is availing the benefit of exemption allowed in a particular financial year and declares that it wishes to avail such exemption during next financial year also, excise duty liability should be calculated after taking into consideration the availability of exemption under the relevant notifica­tion. Similarly, if an enterprise is captively consuming all its pro­duction of a specific product and has been availing of exemption from payment of duty on that product, no provision for excise duty may be required in respect of non‑duty paid stock of that product lying in factory or bonded warehouse. An auditor must, however, apply appropriate audit tests while verifying statements and declarations made by an enterprise in this regard.

Auditor's Responsibility

20.Theauditor has a responsibility to express his opinion whether the financial statements on which he reports give a true and fair view of the operating results and state of affairs of the entity. In the case of companies, under MAOCARO, 1988, the auditor has to express an opinion whether the valuation of inventories is fair and proper in accordance with normally accepted accounting principles and is on the same basis, as in the earlier years. If there is any change in the basis of valuation, the effect of such change, if material, is to be reported.

21. As explained in this Guidance Note, the liability for excise duty arises at the point of time at which the manufacture is com­pleted. The excise duty paid or provided on finished goods should, therefore, be included in inventory valuation. Similarly, excise duty paid on purchases (other than those subsequently recoverable by the enterprise from the taxing authorities) as well as intermediary products used for manufacture should also be included in the valuation of work‑in‑progress or finished goods.

22. If the method of accounting for excise duty is not in accordance with the principles explained in this Guidance Note, the auditor should qualify his report. In the case of a company, reference to this qualification should also be made in the auditor's report under Section 227(4‑A) of the Companies Act, 1956.

23. Summary Of Recommendations

(i) Excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an ele­ment of cost for inventory valuation.

(ii) Where excise duty is paid on excisable goods and such goods are subsequently utilised in the manufacturing process, the duty paid on such goods, if the same is not recoverable from taxing authorities, becomes a manufacturing cost and must be included in the valuation of work‑in‑progress or finished goods arising from the subsequent processing of such goods.

(iii) Where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made.

(iv) Excise duty cannot be treated as a period cost.

(v) If the method of accounting for excise duty is not in accor­dance with the principles explained in this Guidance Note, the auditor should qualify his report.

 

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