Query No. 34 Subject: Consideration of excise duty in valuation of closing stock.1 A. Facts of the Case
1. A company registered under the Companies Act, 1956, is engaged in the manufacture of writing and printing paper from the secondary raw material mainly paddy straw with a mixture of gunny waste, jute waste, kraft paper waste, banian cutting, etc., and sometimes imported pulp. In the process of manufacture, caustic soda, chlorine, alum and other chemicals are used on which MODVAT credit is allowed. The company has been consistently valuing closing stock of finished goods at cost or net realisable value whichever is lower. It has not been considering excise duty in the valuation of closing stock of finished goods.
2. With effect from 1.4.1999, as per Accounting Standard (AS) 2 ‘Valuation of Inventories’, it became mandatory to include excise duty for the purpose of valuation of closing stock.
3. According to the querist, the paper industry has been exempted from levy of excise duty on the clearances of paper during a financial year upto 3500 MT. The company’s stock as at 31.3.2000 was 532 MT.
4. As per the erstwhile Central Excise Rule 57CC, if MODVAT credit has been availed on the inputs utilised for the manufacture of finished products and such finished products are cleared under exempted category, an amount calculated at the rate of 8% of the assessable value of such finished products has to be debited to the profit and loss account or RG 23A towards reversal of MODVAT credit.
5. According to the querist, the company is exempted from payment of excise duty on the first 3500 MT of clearances in a financial year. The company is also effecting sales to government text book printing press/agencies which are exempt from excise duty. These sales are of the order of nearly 1000 – 1500 MT a year. The company’s production and sales during the last few years has been in the range of 6000 – 7000 MT.
6. As per the querist, the company claims exemption from excise duty to the extent of say, on an average sale of 5000 MT and it pays excise duty only on the balance of 2000 MT considering the total sales of 7000 MT in a year.
B. Query
7. The querist has sought the opinion of the Expert Advisory Committee on the issue as to whether excise duty paid on excisable goods manufactured during the year should be considered in the valuation of closing stock of finished goods keeping in view the provisions of section 145A of the Income – tax Act and AS 2 which is mandatory.
C. Points Considered by the Committee
8. The Committee expresses its opinion on valuation of inventories only with respect to AS 2. It refrains from expressing its opinion with respect to section 145A of the Income – tax Act keeping in view Rule 2 of the Advisory Service Rules which prohibits the Committee from expressing opinions on queries involving interpretation of law.
9. The Committee notes paragraphs 18, 19 and 21 of the ‘Guidance Note on Accounting Treatment for Excise Duty’ (Revised) issued by the Institute of Chartered Accountants of India, which state as below:
“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 or 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.”
“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.”
10. The Guidance Note, thus, provides that the excise duty paid or payable on the finished goods inventories should be included in inventory valuation. In the estimation of the provision required for the purpose, the Committee is of the view that the factors stated in paragraph 19 of the Guidance Note reproduced above should be considered, e.g., whether the finished goods lying in stock in the current year would form part of the exempted goods next year and whether the exemptions will continue in the next year. Thus, apart from any other relevant factor, in case it is estimated that the finished goods in stock will be exempted from the payment of excise duty, no provision for excise duty may be made.
D. Opinion
11. On the basis of the above, the Committee is of the opinion that in respect of excise duty paid on finished goods in stock, e.g., goods cleared from factory/bonded warehouse but lying in sales depots, the valuation of inventory of finished goods will be inclusive of such duty. In respect of finished goods lying in factory/bonded warehouse on which excise duty has not been paid, whether a provision therefore should be made and included in the value of such inventories in the case in question would depend upon the considerations stated in paragraph 10 above. The manner of the valuation of finished goods inventories as aforesaid is as per AS 2 .
1Opinion finalised by the Committee on 25.9.2000 |