Circular No. 243 dated 3^rd September 1996

As part of this year's budget, it was proposed to introduce the Modvat Scheme on Textile fabrics. The Scheme will come into force from 4.9.96.

2.     The proposals made in the budget have been modified in certain respects. Notification Nos. 26/96-CE, 27/96-CE, 29/96-CE (N.T.) to 31/96-CE (N.T.) all dated the 3rd September 1996 have been issued in this regard. These notifications come into force on 4.9.1996.

3.     The salient features of the modifications are as follows:

(i)       The cut-off point for the confessional rates of AED (ST) and BED, both at 5% applicable to 100% cotton fabrics has been           increased to Rs. 30/sqm.

(ii)      The rate of BED in respect of other fabrics has been increased from 10% to 12% but that of AED reduced from 10% to 8%.

(iii)      "Composite mills" will function under conventional Modvat Scheme, except for fabrics processed on job-basis.

4.     The implications in respect of composite mill as well as independent processor are discussed below:

COMPOSITE MILL

(i)       The definition of a composite mill has been modified so as to include only such composite mills who are engaged in the processes of spinning of yarn from fibres (mills engaged in drawing of filament yarns alongwith weaving and processing are not covered) alongwith weaving or knitting or crocheting and processing of fabrics in the same factory. In other words, credit of actual duty paid on inputs will not be allowed to a mill, which undertakes these operations at factories located in different places, even though all these factories may belong to the same company.

(ii)      The credit of BED paid on fibres as well as bought out yarns including PFY has been allowed.

(iii)      They will not be required to pay duty on yarn consumed captivity in the manufacture of dutiable final products.

(iv)      The extension of Modvat scheme on the basis of actual duty paid has been allowed only to the composite mills.

(v)       Multi-locational mills (that is a mill, which undertakes operations at factories situated at different places) will continue to pay   duty at the yarn stage. However, grey fabrics when processed by the processing units of the same mill located separately will be eligible for deemed credit at the same rate as applicable to independent processor.

(vi)      The facility of movement of fabrics under rule 96D of the Central Excise Rules 1944 has been withdrawn. Henceforth, all   processed fabrics will move under the cover of duty paying documents.

(vii)     A composite mall would be eligible for credit of duty paid on various inputs on actual basis. However, as such mills may also   undertake processing of fabrics on job work basis, provision has been made to provide for deemed credit when such fabrics   are cleared after processing. It may be noted that for fabrics processed by a composite mill on job-basis, the deemed credit   would be at the rate of 40% or 60%.

(viii)    In case of a composite mill, the credit of duty pad on inputs lying in stock on the transitional day will be available as per the   provision of the rule 57H. This credit has been provided for on all inputs including yarn lying in stock as such or contained in   grey fabrics lying in stock or contained in processed fabrics lying in stock or are used in the manufacture of processed   fabrics which are cleared on or after 4th September, 1996. In respect of such stocks of grey fabrics and processed fabrics   received on job work, provision has also been made to allow credit on the deemed basis in notification No. 29/96-CE (N.T.).

        Rate structure for Composite mills when they clear their own fabrics:

4.2   Composite mills will not be required to pay duty on yarn manufactured and consumed captively in the manufacture of dutiable final products. The credit of actual duty paid on all inputs except specified goods falling within Chapter 27, will be available, as per prescribed Modvat rules. (refer notification No. 30/96-CE (N.T.).

          Rate structure for Composite mills when they clear fabrics received on job work:

4.3   Deemed credit is in lieu of duty paid on only fibres and yarns. The credit of duty paid on dyes, chemicals, consumables, packaging materials as well as capital goods will be available on actual basis. In case partially processed fabrics are received for further processing the credit of actual duty paid on such fabrics will be available. Such partially processed fabrics, when cleared finally will be required to pay appropriate duty without any deemed credit for fibres and yarns.

4.4      INDEPENDENT PROCESSORS

The rate of deemed credit in case of fabrics other than 100% cotton fabrics, has been in creased from 50% to 70% which is in lieu of duty paid on inputs by such processors except that on capital goods. In other words independent processors will get credit of duty paid on capital goods on actual basis. For all other inputs no actual credit will be permitted. In the case of cotton fabrics in deemed credit at 50% is also inclusive of duty paid on dyes, chemicals etc.

          Rate structure for Independent processor as well as multi locational mills

4.5      Deemed credit is in lieu of duty paid on fibres, yarns, dyes, chemicals consumables and packaging materials.

5.0   Other Changes:

5.1   It is important to note that a provision has been made to the effect that deemed credit should not apply to fabrics removed clandestinely or on which duty has been evaded on account of fraud, suppression of facts, and including suppression of value, etc. It may further be noted that even if a manufacturer is willing to pay duty subsequently after the processed fabric had been removed clandestinely he will not be permitted benefit of deemed credit in respect of such clearances. In other words, the duty on clandestine removals shall have to be paid or demanded at full ad valorem rate of 5% or 12% as the case may be. The provision will apply even if only AED has been evaded even though BED might have been paid at appropriate rate.

5.2   It has also been provided that the benefit of deemed credit will be inapplicable to a manufacturer who avails any credit of duty under any notification issued under sub-rule (1) or rule 57A of the said rules except the following cases:

(i)     in case of a composite mill, who is eligible for credit of actual duty paid on various inputs as well as credit on deemed basis in respect of fabrics processed on job work basis.

(ii)    in case the inputs are partially processed fabrics and are cleared after final processing on payment of duty. In this case, the credit of actual duty paid earlier on partially processed fabrics will be available under sub-rule (1) of rule 57A.

(iii)  in case of capital goods where the credit of actual duty paid will be available under sub rule (1) of rule 57A.

5.3   The reduction in BED rates from 20% to 10% in respect of various fabrics as proposed in the Finance Bill, 1996 has not yet become effective. The increased rate of BED as well as reduction in AED rates have been prescribed by amending notification Nos. 8/96-CE, 9/96-CE, 16/96-CE and 17/96-CE suitably. Necessary amendment will be carried out in the Finance Bill through official amendment.

5.4   The restriction of exemption for minor processes to only such units as do not have the facility of bleaching, dyeing or printing continues. In case a processor having facilities for bleaching, dyeing or printing also undertakes the minor processes, he will be required to pay duty at the above-mentioned rates on the full value of the fabrics.

5.5   The revised percentage of deemed credit also apply equally to unprocessed fabric falling under relevant heading of chapter 58 or 60 of the tariff on which basic excise duty has been imposed in this budget.

5.6   As was mentioned in the budget instruction the deemed credit has to be taken and also utilised simultaneously at the time of clearance of fabrics. However, in the case of final products, which are exported under bond under rule 13, the deemed credit shall not be denied and the manufacturer can utilise the credit for paying duty on other any final products cleared for home consumption. In such cases, the manufacturer cannot claim drawback of duty under the cases, the manufacturer can not claim drawback of duty under the Drawback rules or rebate of duty paid on inputs under Rules 12. In cases a manufacturer is not able to so utilise the deemed credit earned on export clearances, he will be eligible to claim refund subject to such procedure to be prescribed in this regard. Suitable procedure for grant of refund in such cases will be notified soon.

6.0   The Commissioner are requested to kindly go through these changes carefully and issue suitable instructions to field formations wherever necessary. They are also requested to issue Trade Notices immediately so that the trade and industry are made aware to these changes.

7.0   Any problems or difficulties in the implementation of these changes may be brought to the notice of the undersigned by Fax or telex.