• Tobacco and Manufactured Tobacco Products
• Matches other than pyrotechnics articles of heading number 36.04 of CETA
• Cinematograph Films
• Motor Spirits, Special Boiling Spirits, High Speed Diesel
• In case of final products
• Tobacco and Manufactured Tobacco Products
• Matches other than pyrotechnics articles of heading number 36.04 of CETA
• Cinematograph Films
• Woven fabrics classified under chapter 52,54 & 55 of CETA other than cotton fabrics, man made fibre fabrics and filament yarn fabrics

• It reduces the effects of taxation at multiple stages of manufacture.
• It facilitates duty free exports.
• It increases the tax base.

• It increases paper work and leads to multiplicity of records.
• It leads to corruption.
• It leads to litigation.

The Modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rules and the notifications issued there under.

Rule 57A This rule specifies the scope and applicability of the Modvat. The Modvat scheme applies to all finished excisable goods which have been notified by the Central Government in the Official Gazette for this purpose. The Modvat scheme may be made applicable in respect of certain goods or classes of goods with restrictions and conditions.

For the purposes of the Modvat scheme, input includes:-

• Inputs which are manufactured and used within the factory of production in or in relation to the manufacture of the final product.

• Paints and packing material

• Inputs used as fuel

• Inputs used for the generation of electricity, used within the factory of production for manufacturing of final products or for any other purpose, but does not include:-

A. Machines, machinery, plant, equipments, apparatus, tools or appliances which are used for production or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products. However, on and from 1994-95, the benefit of Modvat has been extended to excise duty paid on several capital goods like plant, machinery, equipments, etc which are used for the manufacture of the finished product.

As long as the capital goods are used in the factory of production, credit of Modvat will be allowed. No Modvat is available in respect of capital goods not used within the factory of production.

• Packing Material in respect of which any exemption to the extent of excise duty payable on the value of packing material is being availed of for packaging of final products.

• Packing materials of the cost of which is not included or had not been included during the preceding financial year in the assessable value of the final products.

• The manufacturer can avail of the benefit of Modvat credit on the final product to the extent of specified duties paid on the inputs. The benefit of Modvat will be available only if the final product is an excisable goods. Modvat credit will not be available if the final good is not an excisable goods or is exempt from duty or is chargeable at nil rate of duty. However, benefit of Modvat will be available to the final goods manufactured by a unit in a Free Trade Zone or in an 100 per cent EOU where no excise duty is payable on final goods which are exported.

For example ABC Ltd purchased raw materials of Rs9,900 inclusive of excise duty @ nine per cent and sales tax @ 10 per cent. Modvat credit available will be Rs743 (Cost excluding sales tax will be Rs.9,000 out of which excise duty will be Rs.743 i.e. 9000/109*9)

Rule 57D Modvat credit will not be denied or varied just because some of the raw materials and other inputs in respect of which excise has been paid become waste or scrap in the course of the manufacturing process.

Similarly, Modvat credit will not be denied or varied just because in the course of the manufacturing process of an excisable final product, an intermediate product which is non-excisable or which is chargeable to excise at nil rate of duty or which is exempt from excise duty is created.

Intermediate products are those products which get produced in the course of manufacture of the final product. e.g. in the manufacture of alcohol from sugarcane, first molasses are produced from which alcohol is produced. In such a situation, molasses are an intermediate product, which are charged to excise duty. The benefit of Modvat will not be withdrawn if the intermediate product created is non-excisable or is chargeable to excise at nil rate of duty or is exempt from excise duty. Whether a product is an intermediate product or a final product depends on the facts and circumstances of each case. The product may be intermediate so far as a particular process of manufacturing is concerned but may be a final product for another manufacturing process.

Rule 57E If the excise duty paid on Modvatable inputs is subsequently increased or refunded, the Modvat claimed on the basis of those inputs will also be increased or reduced, as the case may be. If any amount is found due as a result of such increase, it shall be recovered from the manufacturer either from the balance maintained by him with the excise authorities or in cash.

Rule 57F The Modvatable inputs must be used in or in relation to the manufacture of final products for which they have been brought into the factory. However, the inputs may be removed from the factory for home consumption or for export under bond but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same. Where the inputs are removed for home consumption, excise duty must be paid, at least of an amount equal to the Modvat credit claimed in respect of such inputs.

The Modvatable inputs can also be removed from the factory to a place outside either, as such or after they have been partially processed in the course of manufacture but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same for any of the following purposes:-

• For testing, repairs, refining, reconditioning or carrying out any other operation required for the manufacture of final product provided that after such work, the inputs are returned to the factory to be further used in the manufacture of final product. The waste generated in such operation must also be returned to the factory.

• For export of inputs under bond without payment of excise duty

• For home consumption of inputs on payment of excise duty

• For manufacture of intermediate products necessary for the manufacture of final products provided that after such manufacture, the intermediate product is brought back to the factory to be further used in the manufacture of final product. The waste generated in such operation must also be returned to the factory.

• For export of the intermediate products under bond without payment of excise duty

• For home consumption of the intermediate products on payment of excise duty

However waste is not required to be returned in case appropriate excise duty is paid on the waste.

The main manufacturer as well as job worker are required to maintain register giving details of materials sent, chalaan number, etc. similar to a stock register showing goods lying with the job worker, goods returned by the job worker, etc. Generally, the goods sent must be returned to the main manufacturer within 60 days. If the job is not completed within 60 days, the period may be extended for another 60 days.

The benefit of this rule is available only if the main manufacturer does a certain amount of processing or value addition to make the final product. There must not be complete manufacturing outside the factory by the job worker.

Modvat credit can be utilised for the following purposes:-

• Towards payment of excise duty on the final product

• Towards payment of excise duty on waste arising in the course of manufacture of final product

• Towards payment of excise duty on inputs themselves where they are cleared for home consumption.

• Modvat credit in respect of finished products exported without payment of duty (like goods manufactured by units in a Free Trade Zone or by 100 per cent EOUs or by units in an Electronic Hardware Technology Park or by units in a Software Technology Park) may be utilized for discharging duty liability on similar final products cleared for home consumption. If the manufacturer does not have any excise liability, the modvat credit may be refunded to him provided he has not availed claimed drawback of duty under the Central Excise Rules.

Any waste arising from processing of modvatable inputs in respect of which credit has been availed may:-

• Be removed by payment of duty if such waste is produced in the factory.

• Be removed without payment of duty where permitted by order of the government.

• Be destroyed in the presence of a proper officer on application made by the manufacturer and if found unfit for further use or not worth the duty payable thereon provided the manufacturer informs the appropriate authorities at least 7 days in advance in writing as regards the quantity of waste and the date on which it is supposed to be destroyed and after complying with all the conditions as may be prescribed by the Collector of Central Excise in this behalf.

The manufacturer may transfer or utilise Modvat credit from one of his factories to another with approval from the Collector of Central Excise provided application is made by him in this behalf and all conditions imposed by the Collector are satisfied.

Rule 57G For availing the benefit of Modvat, the manufacturer must carry out certain procedures. He must file a declaration with the Assistant Collector of Central Excise having jurisdiction over his factory indicating the description of final product manufactured in the factory giving details of the inputs used for such purpose. in each of the said products. He must also give detailed information required by the Assistant Collector of Central Excise and must obtain dated acknowledgement for such declaration.

The manufacturer may avail of Modvat credit only after the above declaration is filed by him. However, he cannot take credit unless the inputs are accompanied with an invoice prepared as per Central Excise Rules, Form AR-1. In case of imported goods it must be accompanied with triplicate copy of Bill of Entry or Certificate of Appraisal by Custom posted in a foreign post office. In other words, the goods must be accompanied with proof that duty has been paid on them.

The Central Government has the power to direct that Modvat credit on specified inputs may be allowed at such rate and subject to such conditions as it may direct without production of documents evidencing the payment of duty.

Where copy of invoice meant for the purpose of claiming Modvat is lost or misplaced, the manufacturer can claim Modvat credit on the basis of or misplaced, the manufacturer may claim Modvat credit on the basis of the original invoice subject to the satisfaction of central excise authorities.

A manufacturer of final products shall maintain:-

• An account in form of RG 23A - Part I and Part II in respect of duty payable on final product. Part I is a record of inputs and subsequent utilisation in the manufacturing process. Part II is a record of Modvat credit pertaining to such inputs.

• An account current to cover the excise duty payable on the final product cleared at any time.

• A manufacturer of final products must submit within five days after the close of each month to the Superintendent of Central Excise, the following documents:-

• Original documents evidencing payment of duty

• Extract of RG 23A Part I and Part II

After verifying their genuineness, the Superintendent shall deface the documents and return them to the manufacturer. The Collector may, having regard to the nature, variety and extent of production or frequency of removal provide for a period shorter than 1 month for submission of such return in respect of any assessee or class of assessees. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each month. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each quarter where the assessee is availing of an exemption based on the quantity of clearances during a financial year.

In case the manufacturer is not in a position to file the aforesaid return on time for sufficient cause, the Assistant Collector may allow the manufacture to take credit of duty paid on inputs, condoning the delay and giving reasons in writing for such condonation. The Assistant Collector must see that the following conditions are satisfied before giving allowing such Modvat credit:-

• Input in respect of which credit of duty is allowed are received in the factory not before six months from the date of filing declaration and not before date of eligibility for Modvat credit.

• Amount of duty for which credit is sought has been actually paid on these inputs.

• Inputs have actually been used or are to be used in manufacture of final products.

• The persons issuing invoices for modvatable inputs must follow certain procedures and must get registered with the Central Excise authorities. He must maintain stock account in the RG 23D. He shall make entries in RG 23D at the end of the day of receipt and issue of excisable good and:-

• Shall enter the date of entry

• Correctly keep such book, account or register in the manner required

• Shall not cancel, obliterate or alter any entry therein except for correction of errors

• Keep such book, account or register open for inspection by the concerned authorities and allow such inspection

• Allow the concerned officer to take copies or extracts or send the records to the concerned officer.

Such person shall issue serial-wise invoice containing details as prescribed by the Central Board of Excise and Customs or by the Collector of Central Excise in quadruplicate as follows:-

• Original copy is for the buyer.

• Second copy is for the transporter.

• Third copy is for the excise department.

• Fourth copy is to be retained by the issuer.

The invoice contains the following details:-

• Evidence showing proof of payment of excise duty

• Rate of duty paid, amount of duty, duty debit entry in the PLA, date and number of such entry.

• Postal address, range and division of the excise officer under which the manufacturer falls, name and address and code number, excise registration number of the factory and also the name and address of the consignee, description and certification of goods, number of packages, total quantity of goods, total price of goods, total assessable value, rate of duty, total duty paid, serial number of debit entry in the personal ledger account, date and time of removal of goods, mode of transport, motor vehicles registration number and certificate duly signed by authorised person stating that what is stated above is true.

• Each invoice book must be authenticated by a working partner or managing director or secretary.

• Each invoice shall bear a printed serial number running for the whole financial year beginning on the 1St. April each year. Only one invoice book of each type shall be used by the registered person for removal of excisable goods at any one time unless otherwise specially permitted by the collector in writing.

• Each foil of the invoice book shall be authenticated by the owner or the working partner or the managing director or the company secretary, as the case may be, before being brought into use by the registered person. The serial number of the invoice before being brought into use shall be intimated to the Assistant Collector of Central Excise and dated acknowledgement of receipt of such intimation shall be retained by the registered person. When the invoice is generated through computer, serial number serial number likely to be used in the forth-coming quarter shall be intimated to the Assistant Collector of Central Excise and as soon as the same is exhausted, a revised intimation must be send. Records and invoices generated through computer are also recognised. Such registered dealer shall send details in software used including the format for information to the Assistant Collector of Central Excise.

Rule 57I The excise authority may disallow Modvat credit which has been wrongly availed or incorrectly utilised. In case Modvat credit has been taken on account of error or misconstruction, the proper officer may send notice to the manufacturer within 6 months from the date of filing of return to show cause why such Modvat credit should not be disallowed. In such cases, where Modvat credit has already been utilised, show cause notice must state the utilized amount must not be recovered from the assessee.

In case such wrong Modvat credit is on account of willful misstatement, collusion or suppression of facts on the part of manufacturer, instead of the aforesaid period of 6 months, notices may be sent for a period within 5 years from date of availment of Modvat credit. The period of stay by court order will not be considered while determining the aforesaid period.

The proper officer must consider the representation of the manufacture with regard to the show cause notice and thereafter to determine the amount of disallowance, if any.