1.13 Query: Accounting for MODVAT credit.
1. A private limited company, registered as a small scale unit, has opted for availing the benefits of MODVAT credit on its inputs, i.e., purchases of raw materials and stores procured either by direct import or from the indigenous manufacturers, or from the channelised agencies. Such purchases are used for the manufacture of excisable finished products. The annual sales turnover/clearances of the company are more than Rs.300 lakhs, exclusive of excise duty paid on its finished products and its components a part of which is sold and the balance is mainly used for captive consumption for the manufacture of its excisable finished products. There is no export. The turnover/clearance as referred, had fluctuated from Rs.300 lakhs to Rs.800 lakhs in the previous four years.
2. The querist has stated that normal statutory rate of excise duty is 15% but the company had effected the clearance of its excisable finished products @ 5%, thereby availing the concession of 10% ad valoram on the plea that it is registered as a small scale unit with the appropriate authority. Also, the wastage arising out of the MODVAT earned raw materials and stores in the course of carrying out the manufacturing process, and the raw material and stores discarded because of non-conformity with the technical specifications, though paid for fully and MODVAT earned, had been sold-off without paying the excise duty on its clearance.
3. The querist has further stated that clearance of its excisable finished products by the company @ 5%, against MODVAT credit allowed by the excise authorities on its ‘inputs’, has resulted in a huge credit balance in MODVAT account in the records of the Central Excise department with a corresponding debit balance in the books of account of the company. However, this huge credit balance of MODVAT account in the Central Excises’ records may not be duly supported with the MODVAT- earned stock of raw material and stores of the company.
4. The querist has informed that the company is regularly filing its monthly returns, declaring the overall monthly value of its clearance, with the Central Excise department. The querist has presumed that the said company is filing the annual return in the prescribed form, declaring its clearance in the preceding financial year and estimate of its clearance for its current financial year, in terms of notification No.174/86 CE dated 1st March, 1986. The excise returns are duly checked and audited by the Central Excise department.
5. The querist has stated, on the basis of the opinion of some experts, that:
(a) The company cannot avail the benefits of concessional rate of 5% ad valoram on its clearances as against 15% ad valoram excise duty, as the goods manufactured by it are covered as per the rates specified under excise tariff. Clause 3 of the notification No.175/86 of 1.3.1986, read with the notification No.1/93 of 28.2.1993, restricts the clearance of excisable goods, vide notification No. 119/89-CE, dated 27.4.1989 to SSI units, to Rs.200 lakhs. Therefore, the company does not come within the definition of SSI unit for the purpose of availing the concession of 10% ad valoram.
(b) Under rule 57-I of the Excise Rules, the Central Excise Collector is empowered to issue show cause notice upto 5 years for the short recovery/payment of the excise duty on clearance by a private limited company and the penal provisions of excise laws shall be evoked depending upon the merits of the case.
6. As per the querist, the Guidelines of the Institute of Chartered Accountants of India have been followed while adjusting the MODVAT credit in the company's books of account.
7. The querist has sought the opinion of the Expert Advisory Committee in respect of the following:
(i) It is advisable for the company to write off its debit balance of MODVAT receivable to profit and loss account? If yes, what precautions the statutory auditors should take while finalising their audit reports? The precise language in this regard may be advised.
(ii) Will such adjustments made in the profit and loss account be allowed as a deduction out of taxable profits under the Income -tax Act, 1961, read with its rules? (Some excise experts, as per the querist, have, however, pointed out that there is no provision under Excise Rules either for refunding the amount or to allow its adjustments in the books of account, excepting for export of excisable finished products).
(iii) What shall be the position of sales tax liability in this regard under both the local and Central Sales Tax Act, as the sales tax is charged on sales price which constitutes the gross value of goods plus the excise duty?
Opinion January 4, 1994
1. The Committee notes that paragraphs no. 4.5 ad 4.6 of 'Guidance Note on Accounting Treatment for MODVAT issued by the Institute of Chartered Accountants of India, recommend as below:
“4.5 Balance in MODVAT Credit Receivable Account should be reviewed at the end of the year and if it is found that the balance of the MODVAT credit is not likely to be used in the normal course of business within a reasonable time, then, notwithstanding the right to carry forward such excess credit in the Excise Rules the non-usable excess credit should be adjusted in the accounts. The consequence would be that the balance of the MODVAT Credit Receivable Account in the financial accounts may be lower than the credit available as per the RG 23A register. A reconciliation statement would have to be prepared indicating the amounts adjusted so that a track is kept for the difference between the two balances and the difference between the financial accounts and the credit as per the excise registers can be explained in subsequent years also.”
“4.6 The above adjustment of excess credit should preferably be made to the raw material or input purchase account. The effect would be to increase the cost of purchase and thereby to increase the cost of inputs for the purpose of accounting for consumption and valuation of closing stocks. Where it is not possible to debit or identify this excess credit to a particular lot or lots of materials purchased, such excess credit may be apportioned over the entire purchases of raw materials, components etc., entitled to MODVAT credit during the year on pro-rata basis.”
2. The Committee notes that the other issues raised by the querist involve interpretation of law. As per Rule 2 of the Advisory Service Rules, the Committee does not answer such queries.
3. On the basis of the above, opinion of the Expert Advisory Committee on the issues raised by the querist in para 7 above, is as below:
(a) If, keeping in view the existing legal position and other relevant aspects, it is not likely for the company to use the MODVAT credits received by it, then, at the year end, the company should adjust the debit balance of MODVAT receivable in the accounts, as recommended in paras 4.5 and 4.6 of the Guidance Note, reproduced at para 1 above. In case the statutory auditor is satisfied, he need not refer the matter in his audit report. For this he will have to consider the relevant legal position and perform other relevant audit procedures in this regard. If the auditor is not satisfied then he should consider whether it would be necessary to qualify his report on this matter. In making the qualification the auditor may include therein the basis of arriving at his opinion, e.g., the reliance on the view of legal experts* etc. In any case the manner of making qualification should be in accordance with “Statement on Qualifications in Auditor’s Report” issued by the Institute of Chartered Accountants of India.
(b) & (c) The Committee refrains from expressing any opinion on these issues in view of para 2 above. ___________________________ * In this regard the auditor should follow statement on Standard Auditing Practices (SAP) 9 on 'Using the Work of an Expert', issued by the Institute of Chartered Accountants of India. |