Excise Duty on Readymade Garments and Impact on Business and E-Commerce
In Budget 2016-17 government increased the excise duty on readymade garments from 0 to 2%, I have used INCREASED instead of taxed because readymade garments were not exempted from excise, readymade garments were taxed even earlier but at 0% rate without input credit.
The tax rate is for garments with RSP (Retail Selling Price) of 1000 or more. Before we conclude whether you should charge Excise Duty or not lets understand what is manufacturing and whether you are covered under manufacturing definition or not.
As per Excise laws, manufacturing is defined as:
Section 2(f), "manufacture" includes any process, -
- Incidental or ancillary to the completion of a manufactured product;
- Which is specified in relation to any goods in the section or chapter notes of the first schedule to the central excise tariff act, 1985 (5 of 1986) as amounting to manufacture; or
- Which, in relation to the goods specified in the third schedule, involves packing or repacking of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;
and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
From definition, it is clear that manufacturing not only involves actual manufacturing of goods but covers vide activities involved up to its selling.
Manufacturing involves any process which is involved in completion of manufactured goods. Important thing to note is that even labeling or relabeling of goods amounts to manufacturing.
If you are importing anything and goods are covered in Third schedule, changing a label or repacking it will amount to manufacturing.
Companies which get goods manufactured out of India are exempted from Excise Duty since goods are not manufactured in India, however once upon importing if company changes label or change the RSP or adopt any treatment to make it marketable, Excise Duty become applicable, since the process is covered under definition of manufacture.
If you are not manufacturing but outsourcing the manufacturing job, even then you are covered under definition and liable to pay Duty.
Budget 2016-17 imposed increased Excise Duty on readymade garments, it was proposed to increase rate of excise duty from 0 to 2 and 12.5%, with input credit and without credit. The increase rate is applicable only for Branded readymade garments with RSP of 1000 or more and are sold under a brand name.
For goods sold without brand name or are with RSP below Rs. 1000, increased rate is not applicable.
Who is liable to pay excise duty? Brand owner who gets goods manufactured or job worker who manufactures readymade garments?
As per Notification no.4/2011-CE dated Mar 1, 2011, liability to pay excise duty and comply with the provisions of Central Excise Rules, 2002 (CER), is on the merchant manufacturer (i.e. person on whose behalf the goods are manufactured by job workers, viz. the owner of raw materials) as per rule 4(1A) of CER.
If you are getting your goods manufactured from a job worker, liability to pay tax is on you and not on job worker, however authorization can be given to job worker to pay duty, in this case job worker has to take registration and comply.
How to calculate Excise duty on readymade garments?
If excise is applicable as per the above definition and conditions, then you have 2 options. First option is to charge excise at 2% without taking input credit or charge 12.5% after taking input credits.
Most of the manufacturers follow first option, as input is rarely available on fabric bought. Rebate of 40% is available on RSP.
You should calculate excise duty on readymade garments as explained below:
RSP of Product =1500
Less: Rebate 40% = -600
Taxable value = 900
Excise duty @ 2%=18 (900*2%)
What are the compliances and procedures to be followed in case excise is applicable to your unit?
You need to maintain stock registers containing details or Goods manufacture, goods cleared, stock lying, returns among other requirements. You need to file periodically returns with department and pay taxes.
As per my opinion excise is a big reason still our laws are considered outdated and a burden on business community. Though tax rates are higher in proposed GST but still business community wants GST, they prefer it because of compliances and complicated time consuming process under active laws.
Should you pay Excise on goods manufactured before budget day and lying in Stock?
Goods produced on or before 29.02.2016 but lying in stock as on 29.02.2016 attract excise duty upon clearance. You have to pay excise duty once you clear them.
Impact on E-Commerce and Branded Garments Industry
According to experts, this move will hit hard branded readymade garment industry. Almost all items are priced above 1000 Rs., and price is expected to go up by another 3%-4% due to increase in duty and administration cost associated with compliances and documentations.
Many small units selling online with heavy discounting will come under the excise applicability due to RSP declared on products.
Big brands will have no option but to pay Excise duty. Smaller sellers on online portals have to divert from discounting model and price goods at actual selling price to avoid excise.
Please advise me if My MRP is 1599 or selling price is 899 then on which price i have to pay excise
Thanks and Regards
Need to understand , if company is purchasing readymade garments from a small manufacturer and price on which company is purchasing is less than 1000 for that small manufacturer ( no job work) , is that manufacturer is out of the preview of excise liability ?
Also company who is purchasing readymade garments but selling it online with its brand name , is this impose excise liability on this online ecommerce company ?
Your prompt answer will be highly appreciable.
Please note that definition of Manufacture as per Excise laws include manufacturing done through job workers (outsourced), if you are getting products manufactured on your brand name, excise becomes applicable.
Excise is on RSP after rebate, so whatever price charged by manufacturer to you is irrevelant and RSP on product should be considered.
The current levy has become a headache for E-commerce sellers, you can avoid excise duty by authorising your job workers to pay Excise Duty on your behlaf.
Note: Excise duty is applicable on branded goods only, if you buy goods without brand name and you do not fix you brand label on them excise is not applicable.
You have to pay on MRP after taking rebate. In your case Excise is to be paid as:
MRP/RSP = 1599
Less: Rebate @ 40% = 639
Excisable Amount = 960
Excise duty @ 2% without input credit = 19.2