Explain “Excise” and
related taxes Fundamental concept & how excise works…
to this article:-
People who wish to get
a generic idea on what “Excise” Tax and related topics are all
about.
Oracle consultants who wish to implement modules
generally referred to as “India Localization” – and these are
mostly software modules which involve recording and calculating
taxes that a manufacturing organization has got to pay to the
concerned authorities.
Just thought that I shall
try and explain Excise Tax and related stuff in a generic way…..
probably just try and explain the fundamental concept involved in
it…..
Explanation:-
Let’s consider that
there’s a manufacturing plant located close to your home, and
they’re manufacturing a discrete product called “Finished
Good”, or “FG” in short.
This FG that they
manufacture is made using an item called “Raw Material”, or
“RM” in short.
They perform a few
operations on RM, and these operations convert this RM into FG. A
simple representation of the same is as in this figure below:-
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Manufacturing Plant |
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Buy RM |
__________ |
Perform some operation on RM and Convert it to FG |
__________ |
Sell FG |
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The obvious first step
will be to buy RM ...
Let’s say that
exactly 1 unit of FG needs to be manufactured. So, for doing this,
the first activity that the manufacturing plant needs to do is buy
exactly 1 unit of RM .
To be able to easily
convert numbers into percentages, I’ll assume that the “assessable
cost” of 1 unit of RM is Rs 100/-.
What do I mean by
assessable cost?
It can be described as the
price that the supplier of RM wants to receive and keep for himself
end of the day. The assessable price is the price which is
absolutely free from any form of tax. Whatever tax needs to be
calculated and paid, will be done so by considering this Rs 100/- as
the base price.
Now, these two items
that I’ve defined as RM and FG are “Excisable Items”. This
means that a government authority called “Excise Authority.. “
already have a rule defined in their rule book which states that
items RM and FG are standard items, and they would charge a tax on
these two items called “Excise Duty”.
(Kindly note that all
the numbers I’ve considered here are generic and are used only to
explain a concept. The actual percentage of the tax could be
different.)
Coming back to buying/ procuring of RM from the
supplier, here below is a list of taxes that will be charged on it’s
assessable cost of Rs 100/- per unit:-
Basic Excise Duty
(B.E.D) = 10% of Assessable Cost.
Higher Education Cess
(H.E.C) = 2% of Basic Excise Duty.
Secondary Higher Education Cess (S.H.E.C) = 1% of
Basic Excise Duty.
All three above taxes that
I’ve defined are “Excise Taxes”. It’s just that they’re
split into 3 components. Apart from this, generally there are about
one or two more taxes which are known as VAT and CST.
VAT
and CST are not “Excise” taxes. In general, VAT is a tax charged
by the State Government and CST is a tax charged by the central
government. . For simplicity purpose, we’ll forget them for now. As
of now, I’ll consider all other taxes like VAT, CST, etc as non
-existent. We’ll consider that, only the three taxes that I’ve
mentioned above, are there.
When the Manufacturing Plant
purchases 1 unit of RM from their supplier, they would receive a Bill
which looks similar to this:-
| XXX Supplier |
| Sl No: |
Item Name |
Qty |
Cost |
Currency |
| 1 |
RM |
1 |
100 |
INR |
| 2 |
10% Basic Excise Duty |
|
10 |
INR |
| 3 |
2% Higher Edu. Cess |
|
0.2 |
INR |
| 4 |
1% Sec. Higher Edu. Cess |
|
0.1 |
INR |
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Total Bill Amount |
|
110.3 |
INR |
I believe the view of
this bill is self explanatory. However, to prevent any sort of
confusion, here's an explanation of the same:-
Cost of
RM ("assessable value") = Rs 100/-
10%
Basic Excise Duty is applied on Assessable value = 10% of Rs 100/- =
Rs 10/-
2%
Higher Edu. Cess is applied on the Basic Excise Duty = 2% of Rs 10/-
= Rs 0.2/-
1% Sec.
Higher Edu. Cess is applied,
again on the Basic Excise Duty = 1% of
Rs 10/- = Rs 0.1/-
So, the Total amount that
the manufacturing plant is paying = Rs ( 100 + 10 + 0.2 + 0.1) = Rs
110.3/-
As you can see, out of Rs 110.3/-, Rs 10.3 is “excise
tax” and Rs 100/- is the price of RM. But here, when the
manufacturing plant is paying the above bill, they’d pay the full
amount of Rs 110.3/- to the supplier. The point I’m trying to drive
is, the manufacturing plant cannot tell the supplier that they’ll
pay them Rs 100/- and pay up the remaining amount of Rs 10.3/-
directly to the Excise Department. The manufacturing plant has got to
trust the supplier that the Rs 10.3/- which he is paying to the
supplier will in turn be paid to the “Excise Authority… “ by
the supplier.
Now, considering that the purchase of RM by the
manufacturing plant is completed, let’s assume that they take about
3 days to perform the required operations to convert RM into a FG.
So, 3 days later, the FG is ready. Again, the process repeats. The
manufacturing plant does their mathematics and decides that their
“assessable cost” of FG is Rs 200/- (let’s assume for
calculation purposes… ).
They’ve also found a customer
who has found this “assessable” price of Rs 200/- to be
competitive in the market and has decided to purchase it for this
price.
As I said, the process repeats. The manufacturer sells
the FG to their customer and gives them a bill which looks similar to
the figure below:-
| FG Manufacturer |
| Sl No. |
Item Name |
Qty |
Cost |
Currency |
| 1 |
FG |
1 |
200 |
INR |
| 2 |
10% Basic Excise Duty |
|
20 |
INR |
| 3 |
2% Higher Edu. Cess |
|
0.4 |
INR |
| 4 |
1% Sec. Higher Edu. Cess |
|
0.2 |
INR |
|
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Total Bill Amount |
|
220.6 |
INR |
Now, the price that the
customer pays to “FG Manufacturer Ltd.” is Rs 220.6/-. And out of
this, Rs 20.6/- is the “Excise Tax”.
All apologies for
being repetitive, but again, as you can see, this Rs 20.6/- is
collected from the customer by the manufacturing plant. The end
customer has just got to trust that the manufacturing plant pays up
this money to the “Excise Authority.. “.
Whenever such
buying of RM and selling of FG happens, it gets recorded as
“transactions” by the accounts department of the manufacturing
plant. Here, in this above example of a purchase of RM and a sale of
FG, a total of two transactions have happened. To simplify things,
I’ll assume that these two transactions are the only transactions
that have happened in a duration of 1 month. (assume… )
In this case, the accounts department of the
manufacturing plant will have recorded all the tax related
transactions as shown in the tables below:-
Records of “Basic
Excise Duty”:-
| Basic Excise Duty |
| Paid (while purchasing items) |
|
Received (while selling items) |
| Date |
Item Name |
Qty |
Amount |
Currency |
Date |
Item Name |
Qty |
Amount |
Currency |
| dd/mm/yy |
RM |
1 |
10 |
INR |
dd/mm/yy |
FG |
1 |
20 |
INR |
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| Total Paid Amount |
10 |
INR |
Total Recieved Amount |
20 |
INR |
Records of “Higher
Education Cess”:-
| Higher Education cess |
| Paid (while purchasing items) |
|
Received (while selling items) |
| Date |
Item Name |
Qty |
Amount |
Currency |
Date |
Item Name |
Qty |
Amount |
Currency |
| dd/mm/yy |
RM |
1 |
0.2 |
INR |
dd/mm/yy |
FG |
1 |
0.4 |
INR |
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| Total Paid Amount |
0.2 |
INR |
Total Recieved Amount |
0.4 |
INR |
Records of
“secondary Higher Education Cess”:-
| Secondary Higher Education cess |
| Paid (while purchasing items) |
|
Received (while selling items) |
| Date |
Item Name |
Qty |
Amount |
Currency |
Date |
Item Name |
Qty |
Amount |
Currency |
| dd/mm/yy |
RM |
1 |
0.1 |
INR |
dd/mm/yy |
FG |
1 |
0.2 |
INR |
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| Total Paid Amount |
0.1 |
INR |
Total Recieved Amount |
0.2 |
INR |
Consider
the “Basic Excise Duty” Table:-
Transactions like these keep getting recorded as and when they take
place. At the end of a fixed period, lets say, 1 month, the
manufacturing company has a record of “Total Paid Amount” and
“Total Received Amount” in each category. This is the time when
they decide to pay up the money they’ve collected as “taxes”
from their customers.
“Excise
Duty” = (Basic Excise Duty) + (Higher Education Cess) + (Secondary
Higher Education Cess);
Now, whatever I’m
going to explain from here on is what this article is really all
about. I shall use “Example Scenarios” to explain the concept:-
SCENARIO 1
:-
If we look at the “Basic Excise Duty” table, the “Total
Received Amount” here is Rs 20/-. The “Total Received Amount”
is essentially the amount received as tax by the manufacturing plant
from the customer whenever they made a sale.
The
next activity that the manufacturing company does, at the end of the
month is send a cheque of Rs 20.6/- to the “Excise Authority.. “
. The amount is Rs 20.6/- since, out of Rs 220.6/- , this amount of
Rs 20.6/- was collected as “Excise Duty” to pay to the “Excise
Authority.. “. And so, they’re sincerely sending a cheque of Rs
20.6/- to the “Excise Authority..” .
But if you notice,
there is something wrong with this numerical value of Rs
20.6/-.
What
exactly is wrong?
Let
me explain. According to me, if the manufacturing plant sends a
cheque amount of Rs 20.6/- to the “Excise Authority.. “ , then in
my view, the “Excise Authority.. “ has acted very smart and has
actually collected a total of Rs 30.9/- as “Excise Duty” for this
particular product called “FG”. And Rs 30/- as “Excise Duty”
for a product (FG) with an “assessable cost” of Rs 200/-,
essentially makes the “Excise Duty” equal to 15% of the
“Assessable Cost”.
What
makes me think that “Excise Authority.. “ acted smart and has
actually collected 15% instead of 10% as “Excise Duty”?
FG
contains an item called RM, and the manufacturing plant has already
paid a tax called “Excise Duty” for this item called RM.
To
elaborate, When the manufacturing plant purchased the item called
“RM” for the purpose of manufacturing FG, the manufacturing plant
paid Rs 10.3/- there itself as “Excise Duty”. Even though they
made the payment to “ABC Supplier”, they paid it with a belief
that Rs 10.3/- out of the Rs 110.3/- will in turn be paid by “ABC
Supplier” as “Excise Duty” to the “Excise Authority.. “.
This form of payment of tax is generally referred to as “Indirect
Tax”. Now, how sincerely “ABC Supplier” goes ahead and pays
this Rs 10.3/- to “Excise Authority.. “ is not really something
that the manufacturing plant is interested in knowing.
If
you are getting error from above scenario.
SCENARIO 2:-
At
the end of 1 month, the manufacturing plant sends a cheque of Rs
10.3/- to “Excise authority.. “ to clear the total amount
remaining to be paid as “Excise Duty”.
If
you see and are able to automatically give the reason why sending Rs
10.3/- as “Excise Duty” to the “Excise Authority.. “ solves
this tax problem, then Congratulations!! You’ve understood the
concept!!
“If
any Finished Good that is manufactured, contains Raw Materials within
it for which excise tax was paid during the purchase of Raw
Materials, then those values of tax paid during the purchase of Raw
Materials, can be subtracted from the total amount received as tax
during sale of Finished Goods, and the value obtained on this
subtraction, is the balance excise tax that the manufacturing plant
has got to pay.”
I’ll admit that the above statement is
slightly confusing. I looked at every possible way to simplify it,
but I couldn’t. So I’ll come back to my FG and RM example to
explain the above statement:-
In my
above example, the customer who is buying 1 unit of FG is paid a
total of Rs 220.6/- to buy it.
This FG purchased
contains 1 unit of RM in it. The Manufacturing Plant paid a total of
Rs 110.3/- to buy 1 unit of RM. When the manufacturing plant paid Rs
110.3/-, they took a bill which clearly stated that a total of Rs
10.3/- out of Rs 110.3/- was tax. So, the accounts department of the
manufacturing plant concluded that they’ve already paid a tax of Rs
10.3/- .
The
accounts department records it in their books and their computer.
Next,
the manufacturing plant sold 1 unit of FG for a price of Rs 220.6/-.
While doing this, the manufacturing plant gave a bill stating that Rs
20.6/- out of Rs 220.6/- is tax. So, the accounts department
concludes that they now need to give a total of Rs 20.6/- as tax to
concerned authorities. But then, they’ve already paid a tax of Rs
10.3/- while buying RM. So, the total amount remaining to be paid as
tax, according to them, now is the value obtained when Rs 10.3/- is
subtracted from Rs 20.6/-.
That
is:-
| Manufacturing Plant:- |
| Sl No. |
Description |
Amount |
| 1 |
Tax to be paid due to sale of FG |
Rs 20.6/- |
| 2 |
(minus) Tax already paid during purchase of RM |
Rs 10.3/- |
| 3 |
Balance Tax to be paid |
Rs 10.3/- |
So,
now if the manufacturing plant pays Rs 10.3/- to the concerned
authorities, they’re done with paying up all their taxes!!
