Area Based exemptions – PLA : Cenvat ratio Vs Value addition.

By Vijay Kumar

Here is another view of the notifications.

The Notifications have been amended to prescribe the value addition for refund of duty paid in PLA . Instead of refunding the entire amount paid in PLA , the refund will now be made as per the value addition prescribed. In case where four fifth ( 80 %) of the actual value addition is more than the prescribed value addition, the individual manufacturers can claim for fixing the value addition in each case.

But, there seems to be some problem in the whole exercise. The rate prescribed in the table are not the value addition percentage per se, but the percentage of the total duty payable. The duty payable on value addition ( which will be refunded) has been defined as:

The duty payable on value addition shall be equivalent to the amount calculated as a percentage of the total duty payable on the said excisable goods of the description specified in column (3) of the Table below (hereinafter referred to as the said Table) and falling within the Chapter of the said First Schedule as are given in the corresponding entry in column (2) of the said Table, at the rates specified in the corresponding entry in column (4) of the said Table.

Now, let us see where the entire theory went wrong. Lets us assume the value of raw material as Rs 100/- and value addition is also 100%.

In the above example, we can see that at the rate of 100% value addition, the PLA percentage to the total duty is only 50%, but not 100% as presumed by the Board.

Let us also analyse for Value addition of 50%

From the above two examples, we can see that the percentage of value addition is not the same as the PLA percentage. But it is more than the PLA percentage. The rates fixed in the table in effect give more value addition than the normal industry rates and thus in most of the cases, there will not be any problem with the rates prescribed as the payment in PLA will be less than the ceiling fixed.

The percentage of value addition is in fact equal to the percentage of PLA in Cenvat, but not the total duty. In case 2 above, 50% (the value addition percentage) is the percentage of PLA to the Cenvat. (50% of Rs 16 = Rs 8).

The methodology adopted has one more problem. It is not necessary that all the raw materials and the consumables are cenvatable to fix the duty to be refunded based on the value addition. The raw materials may be non excisable or excisable but obtained from small units availing the exemptions. In such cases, the PLA payment will be more, though the value addition is normal as fixed in the Notifications. These manufacturers will be badly hit by the new amendments as they are going to lose the duty paid in PLA in excess of the amount fixed in the notifications. To put it simply, for the same percentage of value addition a manufacturer using cenvatable inputs will pay less in PLA than the one who uses the non cenvatable inputs, but both of them will get the same amount of refund.