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The saga called excise - I

M K Panthaki -

It was two years ago that the finance ministry struck a near-mortal blow to the garment industry through levy of excise duty. Initially, the duty was meant to be levied only on the branded section of the industry which caters to the upper class of the society as evidenced by the extremely high unit prices of garments manufactured by them. The FM only needed to clarify that by branded garments, his intention was to cover garments bearing the label of foreign brands. Had that been the case, the FM perhaps would have good reason to do so. In the first place, such branded garments, though representing only around 10 per cent of the entire industry, sell at extremely high prices which a common man can ill-afford to pay. Secondly, in view of the high selling prices, the revenue to the government would have been substantial without increasing the cost of collection. Thirdly, this group is a fairly compact group and hence administering the collection would be easy, and finally, even with all the known methods of harassment and extortion by excise inspectors, their efforts of lining their nests would hardly succeed since the data of such units is easily accessible and hence the monitoring of the collection could present no problem whatsoever.

Unfortunately, in his avarice and may be also his mis direction by the foreign branded sector, the FM chose to cover all brands especially describing a brand as a label, tag, name, etc, which connect the garment to the manufacturer. Since every manufacturer attaches some sort of label to the garment (in normal course), the FM sought to cover the entire industry.

Had the ministry done its homework, it would have realised that the industry which, until only three years ago, was classified as an industry in the small-scale sector and further even variously classified as being in the cottage sector and/or the "tiny’ sector (a new phraseology) can ill afford the luxury of an excise duty.

Nearly 80 per cent of this industry is single-operator owned with the owner being a manufacturer, investor, accountant all rolled into one employing some three to four persons to operate the small number of machines owned by him.

Another 10 per cent of the industry can be said to be semi organised with anything between 15 and 100 machines per unit with a semblance of staff but on no scale whatsoever with the foreign brand sector of the industry.

The ministry was also not aware of the umpteen number of job workers in the industry through whose hands the unfinished garment passes before emerging as a finished garment. By his initial announcement, the FM had brought them too in the excise net without even specifying on what value of the garment they were to pay the excise duty.

The initial announcement so upset the industry that there was complete turmoil, chaos, protests, morchas throughout the country and the industry came to a standstill for almost a fortnight throwing millions of workers on the streets for that duration without any means of livelihood.

Meanwhile, several garment organisations under the banner of Clothing Manufacturing Association of India (CMAI), drew up a memorandum to the FM pointing out the futility of such a levy on the industry and suggesting an alternative source of revenue for the government. The FM was so picked by the morchas and protests that he refused even an interview to the delegation stating that he should have been approached before the agitation had started. The FM did not realise that it was easy for him to say so cushioned in his AC cabin, whereas outside lakhs of units were being harassed by almost daily visits of excise inspectors targeting the small, single-owned manufacturers in the sure belief that they would not have any records to show and consequently be successful in demanding their "pound of flesh" in return for escaping the sealing of their unit. It is this that prompted complete closure of the industry.

On the flip side, this one single legislation of the FM contributed towards a blinding unity of the industry that it had not seen for almost 75 years. All sections of the industry branded/unbranded, wholesalers, retailers, small, medium or big, stood rock steady on a single platform. This certainly unnvered the ministry which was bent on breaking into its ranks to divide the industry - an old and well known obnoxious British policy to smoke out opposition.

What made matters worse, was the fact that the excise duty was to be paid on the maximum retail price of the garment which had to be stamped on the garment. This only further exposed the greed of the government aimed at collecting the maximum revenue in the shortest possible time in the full knowledge of the fact that the difference between the ex-factory price of a garment and its retail sale price can vary by 200 per cent to as much as several times the ex-factory price depending on whether the sale was within the state or outside, the distribution chain, as well as the popularity that the particular garment commands.

Snubbed by the FM, the representatives of the industry (CMAI) had no choice but to approach the elected representatives of the country right upto the highest level of the prime minister himself.

The pressure appeared to work and the vast number of job workers were exempt from the purview of duty. It was, however, stipulated that unfinished garments can move from one job workers to another on challans accompanying such movements with the challans containing the name and full address of the job worker concerned until the finished garment reaches the original manufacturer for clearance from the factory. However, if the job worker volunteered to sell the garment on behalf of his principal, viz, the original manufacturer, he can do so, at his option, after registering with excise and paying duty thereon. With that relief, the struggled continued for exemption to the small single owned manufacturer.

In the cabinet re-shuffle that followed, the erstwhile FM was transferred to External Affairs. The new FM showed understanding of the plight of the industry and reduced the duty from 9.6 per cent of the maximum retail price to 7.2 per cent of the maximum retail price with a set-off of 20 per cent of the excise duty so calculated, towards excise duty paid on the inputs of the garment without duty-paid documents on the inputs. If, however, the duty paid documents were available, the set off could be claimed on that basis. Effectively, this meant that the excise duty was reduced from 7.68 per cent of the maximum retail price to 5.76 per cent of the maximum retail price after allowing for the set-off. However no relief was yet given to the small, single-owned manufacturer. CMAI continued to represent on behalf of this section of the industry.

while presenting his budget for the current year, the new FM withdrew the small scale industry exemption limit of Rs 1 crore turnover (applicable to all commodities) for all garments, excluding rainwear, undergarments and accessories which continued to enjoy this exemption. He also withdrew the deemed credit of 20 per cent earlier allowed.

Further, the FM had his own definition of small manufacturer. According to him, it was one with a turnover of up to Rs 30 lakhs (which was subsequently raised to Rs 40 lakhs). What was the basis for this, one will never know (For this, we will come to later). In response to the pleas of the industry, he announced an exemption from excise duty to a manufacturer manufacturing his own brand upto first clearance of Rs 25 lakhs, which was later increased to Rs 30 lakhs, from his own factory. If clearances exceed this figure Rs 30 lakhs. But up to Rs 40 lakhs, the manufacturer has to register with the excise department and pay excise duty on the excess over Rs 30 lakhs upto Rs 40 lakhs.

In case clearances exceeded Rs 40 lakhs, the excise duty had to be paid on the entire Rs 40 lakhs i.e. the exemption of Rs 30 lakhs was not applicable to such cases.

In case a manufacturer manufactures the brand of another manufacturers, the exemption of Rs 30 lakhs was also not applicable. The duty had to be paid on the entire clearance.

Excise duty was payable at 8 per cent for cotton hosiery and 10 per cent for all other garments including non-cotton hosiery. These percentage would be applicable on the transaction value (i.e. invoice showing selling price to the wholesalers) for all garments which do not bear the stamp of maximum retail price. In respect of all garments bearing such a stamp, the excise duty of 8 per cent or 10 per cent was payable on 60 per cent of the MRP values.

(To be continued)