Asking companies to declare annual installed capacity is retrograde.
The bad old days of the control raj could just be making a comeback. Under the pretext that excise duties are not rising in the same way that income tax or customs collections are, the excise authorities are asking industrial units to furnish all manner of details. These include asking for the annual installed capacity with the details of the machinery purchased, the year or installation, name of manufacturer, model numbers and other such information. So while the economic liberalisation of 1991 did away with the licence raj and the need to file all manner of information with different government departments for various permissions, at least part of this process is being reversed.
The ostensible reason for doing this is that when there are enough sources of information on production capacity, it will be more difficult to avoid paying excise duties. The real reason for excise duty collections not rising fast enough, however, have more to do with the fact that (a) there are too many exemptions, and (b) inputs and outputs now bear mostly the same rate of duty of 14 per cent. In which case, excise collections can rise only if there is a substantial amount of value addition in different phases — so, a comparison with customs or income tax collections is quite meaningless. Earlier, input duties used to be lower and output duties higher. So it cannot be necessarily concluded that evasion is the real culprit for the slow growth in excise duty collections. There are many other ways of checking evasion and increasing revenue collections. Some ways are:
The revenue department is of the view that measures such as declaring annual capacity are necessary for detecting evasion on the basis of ‘third party information’. Nobody objects to collecting third party information and it is not a new idea either. I have seen it in the excise department for ages and it was not done through draconian measures of declaring annual installed capacity every year with accompanying details of the main machinery and plants along with technical specifications of the make, model, etc, including the year of installation.
If plants like the Durgapur Steel Plant, Tisco, Reliance Petroleum and Reliance Industries and ACC have to give details of the make and model of their plant and machinery along with the year of installation, sanctioned electricity load, meter number, consumer number, etc, can you imagine what will happen? These factories were established decades ago and are so huge that to get this data the companies will have to go through the details of machinery purchased 50 or even 100 years ago. One wonders what the superintendent of excise will do with such information apart from the fact that he will have no place to store them in his office. So far as the yearly additions of machineries are concerned, they are all available in the department itself as Cenvat credit is taken for the duty paid on these machinery.
What the Finance Ministry has not kept in mind is that if a show cause memo is issued on the basis of the capacity being higher than the actual production on which duty is paid, all these show cause memos will be unceremoniously thrown out in the adjudication and appeal stage. I have myself seen very many cases where show cause memos were issued asking for paying higher duties (and these officers walked away with rewards too). But all these cases were rejected at the stage of appeal. One of the third party data relied upon are statements given by the factories to banks while asking for loans. But these show cause memos were also set aside because the data used for banks were of a different nature than the actual production with which the excise department is concerned.
One thing that has been legally and factually settled is that installed capacity has nothing to do with actual production. Most factories produce either less or more on the basis of the same capacity. During the festive period, more textile articles, motorcycles and consumer durables are manufactured with the same machinery, by the use of multiple shifts. Actual production and clandestine removal from the factory have to be proved in order to make out a case for evasion. The government has issued many circulars earlier regarding what have been called ‘multi-pronged strategy to check evasion of excise duty’ which have rightly emphasised on measures such as (a) intelligence gathering for risk assessment, (b) creating a database where risk assessment is high, (c) selective scrutiny of suspect units including small scale ones, (d) surprise verification of stock, (e) selective checking Cenvat credit more thoroughly, and (f) scientific auditing on the basis of the Canadian experience.
The system of elaborate declaration of annual installed capacity will be counter productive and is most likely to be misused in the hands of unscrupulous elements in the department. There will be infructuous litigation galore. It would be much better to work on the basis of methods prescribed earlier rather than harassing everybody — which, in any case, will yield no result. Whenever necessary, the government is free to collect details of annual capacity from suspect factories. But indulging in large scale flogging of all manufacturers will be wholly counterproductive. It will also have a disastrous effect on an already sagging morale in the manufacturing sector.
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