Whether to make a provision for excise duty payable in respect of

goods manufactured and held in stock.

1. A company manufactures a variety of products including intermediary items for own use, which are subject to different rates of excise duty. It also executes export and defence orders which are exempt from excise duty.

2. The company has not provided for excise duty on goods manufactured and held in stock since it considers that it is not possible to ascertain the amount of the duty due to the following reasons:

i) The goods are not manufactured against specific orders. Therefore, it is not possible to pre-determine, at the end of the year, which items/products will be despatched against defence/export orders on which no excise duty is payable.

ii) The component parts/intermediary product manufactured may also be used for own consumption. In such a case the rates of excise duty applicable thereon, if any, would be different from the rates applicable to the finished products.

iii) Under Rule 56 A of the Central Excise Rules, the company is entitled for credit in respect of the duty already paid on components/intermediaries for use in the manufactured finished goods. This credit cannot be quantified at the end of the year.

3. The querists have referred to Rule 9A of the Central Excise Rules according to which the rate of duty and tariff valuation, if any, applicable to excisable goods is the rate and valuation in force on the date on which duty is paid.

4.The querists have raised the following issues for the opinion of the Expert Advisory Committee:

i) Whether the company is right in not making a provision for excise duty on goods manufactured and held in stock at the end of the year, or should the provision be made by making an estimate of the excise duty payable on the assumption that all goods held in stock excisable.

ii) If no provision is made, whether disclosure by the company, without quantifying the amount of the liability is, sufficient.

Opinion April 29, 1983

1. The Committee notes that Para 13 of the ‘Guidance Note on Accounting Treatment for Excise Duties’ published by the Institute of Chartered Accountants of India, states that the “liability for excise duty arises as soon as goods are produced though the collection of duty may be deferred to the time the goods leave the factory or bonded godown. Even when duty is levied on an ad valorem basis, the liability arises immediately on production but may not be crystallised until the sale price is determined.”

2. The Committee further notes that Paras 28 and 29 of the Guidance Note state as below:

“28…………If it is accepted that liability for excise duty arises when manufacture is completed but only its recovery is delayed then clearly provision becomes necessary. While it is true that the exact amount of the liability may subsequently change, this would be true of many other items (for example, provision for retiring gratuity) and cannot be an argument for not making a provision on an estimated basis. At the same time it cannot be denied that in circumstances where excise duty is not fully expensed out, failure to make provision does not vitiate a true and fair view of the profits. It is also true that when provision is made for a significant amount of excise duty payable on goods lying in the factory or in bond, it may have a significant effect on the financial ratios as also on the inventory figures disclosed to financial institution. A company may therefore prefer not to provide for liability.

29…………When provision for excise duty is not made for goods which have not been cleared from the factory premises or which are laying in bond, it will be necessary to make adequate disclosure of the fact in the accounts”.

3. From the above, it may be seen that difficulty in ascertaining the precise amount of excise duty liability on inventory items is not a sufficient ground for not making a provision for such liability. The amount of excise duty liability can be estimated on reasonable basis, e.g., the past experience of the company regarding defence/export orders, internal consumption of components manufactured/intermediary components etc., and not on the assumption that all goods held in stock are excisable as suggested by the querists in para 4(i) of the query.

4. It may also be noted from Para I of the opinion that the said Guidance Note permits not to make a provision for excise duty liability on inventory items if the excise duty is not fully expensed, provided adequate disclosure thereof is made in the accounts. In this context, the Committee is of the view that where the amount of the liability can be estimated as discussed in para 3 of the opinion it should be disclosed in the accounts.

5.On the basis of the above, the opinion of the Committee on the issues raised by the querists is as follows:

(i) The Company should provide for the excise duty liability in respect of goods manufactured and held in stock. The amount of the provision should be estimated on a reasonable basis, e.g., the past experience.

(ii) If the company does not provide for the excise duty liability in respect of goods manufactured and held in stock, it should make an adequate disclosure of the fact in the accounts. The Committee is of the opinion that where the amount of the liability can be estimated, it should also be disclosed.

______________________