Post Qualification Course in International Trade Laws &

WTO

Economic Offences : Central Excise Law

Tax – Price for Civilized Society

“Tax is the price which we pay for a civilized society”– - Justice Holmes

US Supreme Court

Direct & Indirect Taxes

• Tax Collection

• (2004 – 05)

• Union Excise Duty - Rs.1,04,1999 crore

• Customs Duty – Rs. 54,250 crore

• Income Tax & Corporate Tax – Rs.1,39,365 crore

Offences – Causes

– Central Excise Duty is an indirect tax– Result - Entrusted to Subordinate Management

Offences – Causes II

• Indirect taxes are regressive

• Are they?

• CE Duty is a kind of “expenditure tax”

Offences – Causes III

• High tax rates induce temptation to evade

• To sell cheap & break barriers

• (Anti dumping duty example)

• To enjoy unjust enrichment.

Minimal Control Necessary

• But economic progress calls for industrial development

• Industrial development requires liberalised environment

Liberalization: CE Law & Procedure

• 1968 – Introduction of SRP

• 1986 – Modvat ( 2000 – cenvat)

• 1992 – One time registration

• 1994 – Modvat on capital goods–Invoice by Dealers

Liberalization: CE Law & Procedure

• 1996 : Mandatory penalty for evasion

• 1999 : Rationalisation of tax rates

• 2000 : Abolition of Statutory records– Reliance on private records

Liberalization: CE Law & Procedure

• 2001: New Central Excise Rates

• 2004 : Integration of Cenvat credit of CE duty & ST

Liberalization : CE Law Procedure

• 10 September 2004

• Cenvat Credit Rules 2004– Compounding of offences.– Duty liability from successor in business– Maximum 3 adjournments– Increase in fee for appeals

Liberalization : CE Law & Procedure

– Audit under section 14 A & 14AA– Excise Audit – 2000

Excise Audit 2000

• Selective audit – unit & frequency based on risk assessment

• Audit preceded by Desk Review• Specific audit duration:• Duty > 5 crore - 7 days• Duty 1 – 5 crore – 5 days• Duty 0.5 – 1 crore – 4 days• Duty 0.1 – 0.5 crore – 3 days• Duty < 0.1 crore – 2 days

Why CAs Should Study Economic Offences

– Certification role– Tax Auditor role – Advisory role

Certification Role – Examples

– Inventory » GSM case

» Excess stock - not clandestine removal

– Credit records– Disclosures– Suits involving audit certificates– Call as witness

Tax Auditor Role

• Waste and scrap is practically treated as final product for excise purpose

• There are about 85 entries of waste in CETA

• Waste & scrap - importance

Case Study on Waste & Scrap

• Activated clay is used for refining & bleaching edible oil. The spent earth is subsequently sold. It is specified in the tariff. Offence case was made for failure to pay daily.

• Discuss.

Waste & Scrap

• Mention in CETA

• Marketable commodity (spent nickel)

• There should be manufacture

• Ancillary process is not manufacture (Cinder)

Offences vs. Activism

• Thorough knowledge essential to guard against overzealousness

Offences vs. Technology

• Computer assembly is not manufacture• Triveni Engineering – Marketability test –

goods “as such”• No duty on immovable property• No duty in case of dismantling• Removal without dismantling attracts duty• Turnkey project not dutiable but

components, if marketable.

Offences vs Technology

• Computer assembly is manufacture• Information supplied by e-mail• Software is goods for ST & Octroi; but is

software manufactured?• Recording of cassette is manufacture• Receiving cassette and recording music as

per choice is service activity• Packing of CD, pan masala etc.

Important Concepts

• Manufacturer

• Job Worker

• Hired Labourer

• Master-Servant relationship

• Owner of Raw material

• Brand name owner

• Manufacturer should not be dummy

Basic Procedures

• Registration vs. exemption (> 40 / 100 lakh)• Daily stock register (R 10) for goods

manufactured, cleared & in stock. • Form not prescribed• Nil entry- when entry – QC & packing• Clearance under invoice duly authenticated• Triplicate / Additional copy – proforma

invoice

Basic procedure

• Monthly return in ER 1

• Quarterly return by SSI in ER3

• Monthly return by EOU in ER2

• ER4 by assessee paying duty > 1 crore

Basic procedure

• W.e.f. 25.11.2004 information about principal input in ER5 by 30th April

• First return by 31st December, 2004• Changes within 15 days in ER5• Only for specific tariff heading and by

assessees paying duty > 1 crore• Monthly return of receipt and consumption

of principle input in ER6

Basic procedure

• Submission of list of records maintained for purchase, receipt, sale or delivery of goods including inputs and capital goods

• Changes in boundary, management etc. to be intimated in EA 1.

Cenvat Offences

• If cenvat wrongly taken or availed, interest is payable. (R 14) (S 11 A & B)

• Interest for wrong utilization - appears valid

• Interest for wrong availment – debatable

• Taking – attempting to commit offence

• Utilising – committing offence

Cenvat Offences

• Penalty for taking wrongly cenvat credit (R 15)

• Not ensuring inputs suffered duty

• Contravention to Cenvat Credit Rules

• Penalty – confiscation on goods + monetary penalty (limited to duty or Rs.10,000/- whichever is high.

Cenvat Offences

• Penalty in case of fraud, etc. (S 11/ R 15)

• Mandatory penalty – equal to duty

• 25% reduction in penalty for prompt payment

• For service tax – mandatory minimum penalty = duty; maximum is twice duty.

Offences – SSI Units

• Common office, common partners• No financial flow back• No common funding• One unit belongs to FIL; another DIL; both under

SIL; no common funding or financial flow back• One unit belongs to husband; another to wife; both

managed by husband under POA• Other facts of case to be seen

Payment under protest

• Refund possible when payment under PLA

• Refund not possible when payment through cenvat credit

• No provision for cash refund of cenvat credit except for exports and other cases of departmental lapses.

SCN & Time Limit

• SCN for normal cases - one year• SCN for fraud – five years• Time limit valid even when there is interim stay• SCN needed even if party admitted liability• Mere letter is not SCN• Mere endorsement is not SCN• No SCN - No Penalty

Suppression, Misstatement or Fraud

• Conscious withholding not mere in action

• No suppression, if no disclosure requirement

• When facts disclosed, fraud cannot be alleged.

• No suppression, if department knows the facts.

Important Factors

• Demand on fuel consumption basis is arbitrary.• Demand without reckoning wastage is

unsustainable .• Raw material shortage is inadequate for

clandestine removal.• False statement to bank etc. cannot prove

suppression of production.• Demand on private slips basis without

corroborative evidence not valid