Welcome Clarity on Excise Duty Waiver

Excise duty exemptions have had a significant impact in attracting investments into Uttarakhand and Himachal Pradesh.

Towards the close of 2010, the Central Board of Excise and Customs (CBEC) issued a circular with clarifications about the excise duty exemption for industrial units in Uttarakhand and Himachal Pradesh. “Even as the units set up there are trying to figure out the impact of the proposed GST (Goods and Services Tax) on the duty holiday, this clarification was a pleasant surprise,” observes Mr Sriram B., Executive Director – Tax & Regulatory Services, PricewaterhouseCoopers Pvt Ltd, Chennai, in a recent e-mail interaction with Business Line. Excerpts from the interview:

How attractive has been the excise duty exemption for enterprises to choose Uttarakhand and Himachal Pradesh as destinations?

Certainly, these exemptions have had significant impact in attracting investments into these States. Facts and figures would substantiate the same, as reported in the media, around the close of the last fiscal.

“A total of 1,967 industrial units worth Rs 17,352 crore have been set up in Uttarakhand since the launch of the scheme, providing jobs to 1,21,811 people, according to the State Investment Commissioner's office.

The bulk of the investment has been concentrated in Haridwar (840 units), Uddham Singh Nagar (597 units), Dehradun (350 units), and Nainital (79 units).”

Reports also spoke of investments in the State by auto-makers Mahindra and Mahindra (Rs 1,500 crore), Tata Motors (Rs 1,000 crore), Hero Honda Motors (Rs 600 crore), Ashok Leyland (Rs 110 crore), and Bajaj (Rs 150 crore), under the exemption regime.

Mr Sudheer Nautiyal, Uttarakhand's Director of Industries, has reportedly spoken of how investors propose to put in another Rs 30,024 crore to set up 3,237 units that would employ at least 2,00,000 people.

In Himachal Pradesh, too, investments in value terms have tripled from Rs 3,087 crore (in the year 2002-03) to Rs 10,408 crore (in the year 2009-10), according to http://himachal.nic.in/industry/indstatus.htm.

What have been the typical disputes as regards the above duty exemption?

Largely, the issues hover around the point, “What is ‘substantial exemption' to qualify for exemption?”

This has been a very important interpretation issue which the courts and the Board were busy with in the past. Substantial exemption as per the notification requires expansion in the installed capacity of an existing unit by not less than 25 per cent as a result of installation of additional plant and machinery.

The other disputes typically faced include: (a) whether peripheral activities undertaken would qualify for exemption; and (b) exemption to contract manufacturers in the pharma industry, etc.

Does the recent CBEC circular resolve some long-standing posers of the industry?

The circular clarifies the scope of the two extant notifications (issued in the year 2003) relating to excise duty exemption for industrial units Uttarakhand and Himachal Pradesh. The circular talks of four scenarios, as follows:

(i) New products with existing machine: Whether a unit can produce new products with the machines installed up to March 31, 2010.

(ii) Existing products with new ancillary machines: Whether a unit can upgrade the installed capacity after March 31, 2010, so as to increase the efficiency of the machinery by installing ancillary machines or replacement of some parts etc, but in such a way that it does not lead to increase in capacity of production.

(iii) New products/ product variants with existing machinery: Whether new dosage forms can be manufactured after March 31, 2010 on the same line of production with the same machinery.

(iv) New products with new machinery: Whether a unit can manufacture a new product by installing fresh plant, machinery or capital goods after March 31, 2010.

The Board has answered all the questions in the affirmative for the reason that “the provision of these notifications do not place a bar or restriction on any addition/ modification in the plant and machinery or on the production of new products by an eligible unit after 31.3.2010”.

Are there still any grey areas that would continue to perplex the industry?

Though the clarification would be welcomed by the trade and industry, the ambit of question 4 needs to be cautiously approached, as it seeks to provide unlimited scope of interpretation to cover any possible situations.

For example, can an existing unit manufacturing pharma products manufacture cosmetics by installing fresh plant and machinery. Or, what is the sanctity of having a cut-off date for commercial production as March 31, 2010?

The reading of the circular should be in conjunction with the prevailing law (such as in the form of notifications).

So, the following two clarifications need to be examined in detail in the context of notifications before a final view is arrived at:

(a) Whether a unit can upgrade the installed capacity after March 31, 2010, so as to increase the efficiency of the machinery by installing ancillary machines or replacement of some parts etc., but in such a way that it does not lead to increase in capacity of production; and

(b) Whether a unit can manufacture a new product by installing fresh plant, machinery or capital goods after March 31, 2010.

Business line, New Delhi, 09-01-2010