Overstepping into the VAT regime

The concept of manufacture has been beefed up in this Budget, 2003-04, to overstep into the value added tax regime. The definition of manufacture has been expanded by an amendment in the Central Excise Act, which has so far gone unnoticed.

The amendment says that in relation to goods in the Third Schedule, that is, goods covered by the system of maximum retail price "manufacture includes any process which involves packing or repacking in unit containers, or labelling or relabelling of containers including the declaration or alteration of retail sale price on it … to render the goods marketable to the consumer.".

This will mean that even when the manufacturer changes the price or for that matter even when the dealer at the first stage or the retail stage changes the price, it will amount to manufacture.

As a result, the value added at the dealer's stage will have to be subject to duty. Relating manufacture to simply a change in price is not in the intrinsic character of manufacture but of VAT.

The revenue department thinks that the definition of manufacture has since undergone change due to some judgments, which have used 'expansive' or 'expanded' definitions. Some such argument has been placed on record in the Kelkar Report 2002. In order to appreciate this aspect of the issue, it is necessary to begin from the beginning.

Manufacture is the fundamental basis of Central Excise duty. The Constitution in Entry 84 of List 1 of Schedule VII authorises the Union Government to levy excise duty on "goods manufactured". Manufacture has been defined in the Central Excise Act, by an inclusive but not an exhaustive definition.

So the high courts and the Supreme Court stepped in to define it in several judgments: Tungabhadra Industries vs CTO, UOI vs DCM, South Bihar Sugar Mills vs UOI and several others. In all these judgments, the test commonly used was whether a new commodity has come into being.

With the idea of expanding the scope of the levy to net in more revenue, the definition of manufacture was amended in the 1986 Budget. It provided that manufacture includes any process, which is specified in relation to any goods in the Section or Chapter Notes of the Schedule to the Central Excise Tariff Act, 1985.

This led to the idea of the'expansive definition' of manufacture, which now goes in the name of the neo-classical concept which was first seriously challenged in the Empire Industries case. The Supreme Court mooted the idea of Entry 97 in this judgment by saying that even if Entry 84 did not cover the definition, Entry 97 did.

At the same time it says that the processes here are in fact to do with manufacture. I n the Ujagar Prints case, this issue was raised again. In this case the challenge was thrown by the appellants' lawyer, Soli Sorabjee on the grounds that the expanded definition couldn't be fitted into Entry 84.

Here again the Supreme Court brought in Entry 97 to supplement Entry 84. In the case of CCE Bombay vs S.D. Fine Chemicals, we get a further confirmation of the same point.

The Partho Shome Committee Report 2000 and the Kelkar Committee Report 2002 recommended that central excise should be progressively based on value addition, to be applied only to the processing stage of manufactured goods, while ensuring that the other areas of value addition not related to processing activity (such as sales tax), are not entered into and the possibility of double taxation avoided.

It is precisely this recommendation that has been exceeded in this amendment in the following two ways: (a) Alteration of retail price has been introduced which was not recommended and (b) It has gone beyond the processing stage, which was precisely prohibited in the Kelkar recommendations.

In the Kelkar Report it had been mentioned that the revenue department has an apprehension about manufacturers 'clearing goods in bulk, repacking in unit containers and then labelling with MRP, thus avoiding excise on the higher value'.

Some cases were booked against such supposed manufacturers. The cases were lost by the Revenue department in the Tribunal and in the Supreme Court. So the amendment has now been made by expanding the definition of manufacture.

The implication of this is so far-reaching that even relabelling of the MRP or changing the MRP tags by decreasing or increasing the retail price becomes manufacture now. The solution attempted here is far in excess of what can be constitutionally done. It is a clear case of over-reaction.

The amendment oversteps into VAT because at the dealers' stage, if there is an increase in the price (by putting a higher price tag) it can only be taxed as sales tax or VAT. Even in the manufacturer's stage if the increase in price by putting a new price tag higher than the MRP is resorted to, it is a valuation problem and not a problem of creating new manufactured goods.

Defining manufacture in terms of alteration of value is conceptually trying to impose tax on value addition. It is usurping into the realm of sales tax or VAT. The caution issued by the Kelkar Committee has been thrown to the winds.

Relating manufacture only to value is against even the expansive definition. Manufacture can have an expansive definition but the expansion has a limit. All the judgments of the Supreme Court mentioned above allow certain expansion of the definition of manufacture, but the expansion is invariably related to the physical processes of some kind or the other.

Any process that is not some kind of modification of the goods can never by permitted to amount to manufacture even under the expansive definition. Such a definition is against the constitutional provision of manufacture as defined by all the judgments of the Supreme Court. The definition of manufacture can be expansive but not expansionist.

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