The Indian Electrical & Electronics Manufacturers Association (IEEMA) is the apex representative body of manufacturers of electrical equipment,

professional electronics and allied equipment in India. Running in 65th year of service to this industry, IEEMA represents the entire value chain of the sector from power generation, transmission and distribution equipment. IEEMA members represent a combined annual turnover in excess of INR 1,20,000 crores and exports of INR 22,200 crores (approximately US$ 4.63 billion). IEEMA PRE-BUDGET MEMORANDUM 2013-14 Preamble: The Indian electrical equipment manufacturing industry comprises of two segmentsgeneration equipment (boilers, turbines, generators) and transmission & distribution (T&D) and allied equipment like transformers, cables, transmission lines, switchgears, capacitors, energy meters, instrument transformers, surge arrestors, stamping and lamination, insulators, insulating material, industrial electronics, indicating instruments, winding wires, etc. The industry is very heterogeneous, with a good mix of public sector enterprises, multinational companies, large companies and SME sector, including major foreign players either directly or through technical collaborations with domestic manufacturers. The generation equipment sector is 26% of the total industry and the T&D equipment sector comprises of 74% of the industry. Growth rate of electrical equipment sector decelerated to 6.9% in 2011-12 as compared to 11.3% and 13.7% in 2009-10 and 2010-11 respectively. For the first time in 10 years, the electrical equipment industry has seen a negative growth of 3.9% in the first five months of the current fiscal (2012-13). The industry has a diversified, matured, established and strong manufacturing base, with robust supply chain, fully equipped to meet the domestic demand and capacity additions. The prime customers / buyers of the electrical equipment industry are the power utilities, most of these are either owned by the Central Government or by different State Governments. The industry is 10.51% of the manufacturing sector is terms of value and 1.46% of the GDP. The industry provides direct employment to around 5 lakh persons and indirectly to over 10 lakh persons (50 lakhs across the entire value chain). Based on the projections of the government for capacity enhancement in power generation, transmission and distribution in the 10th, 11th and 12th Plans, the domestic electrical equipment manufacturing industry had made huge investments in doubling and, in some cases, even tripling its production capacities. However, this built-up capacity stands underutilised across several products, due to sluggish domestic demand and a surge in imports of electrical equipment in recent years, especially from China. Countrys inability to meet targets for generation capacity addition, due to multitude of problems, such as, unavailability of coal linkages for new projects, land acquisition issues, delays in environmental and other clearances, etc. is adversely impacting the downstream transmission and distribution sectors. Absence of a level playing field for the domestic electrical equipment manufacturing industry to compete with imported electrical equipment is a serious threat. This is significantly impacting commercial viability of the domestic industry and impacting both the top-line and bottom-line of manufacturers. Indias imports of electrical equipment were at INR 75,057 1

crores (US $ 15.67 billion) in 2011-12, which has increased at a CAGR of 30.30% during the last five years. Indias import duties on most of the products are low (BCD 7.5%) and are being further lowered under various FTAs signed by India. Chinas share in Indian imports of electrical equipment has dramatically increased in the last few years from 15.3% of the total in 2005-06 to 44.5% in 2011-12. Imports from China have grown at a CAGR of 57.5% in the last six years. The government needs to provide greater encouragement to indigenous manufacturing as done by several countries, including China. As for example, in telecom sector, the government of India has initiated a move to make it mandatory for all telecom companies to procure at least 30% of all electronic equipment domestically on security grounds. It is well known that GDP growth is directly co-related with the growth of the power sector. It is estimated that the elasticity of GDP vis--vis electricity generated in India is currently 0.9. That is for every 1% growth in GDP, there has to be 0.9% growth in electricity generated. To sustain the envisaged annual GDP growth rate of around 8-9% over the next 20 years, it is necessary that the power sector has to grow at a much faster pace and the country will require adding generation capacities more aggressively. This would require a matching upgradation and enhancement of the electricity transmission & distribution (T&D) segment. We need an investment ratio of 2:1:2 amongst generation, transmission and distribution segments in order to achieve a balanced growth in the power sector. The industry is facing a major problem in getting employable manpower which is technically competent, equipped with skills and ready to be deployed. This skill gap is widening every year and impacting critical functions like R&D, consultancy, design and detailed engineering work. Government should look at the skill development challenges of electrical equipment industry and facilitate the process of creating a pool of trained manpower to drive the growth of the industry with a special focus on developing domestic manufacturing. The domestic testing and calibrating facilities for electrical equipment, especially high voltage equipment, is inadequate and costly. Manufacturers have to either send their products abroad for testing or bear the long waiting period at CPRI, which results in high logistics cost and delay in project execution. The government needs to take urgent steps for up-gradation of testing and calibrating infrastructure in the country, especially for high voltage equipment. Since the capital required to set up such facilities is quite high, these will have to be financed by the government. The manufacturing sector continues to be burdened with inverted import duty structure and tax anomalies and this impacts the competitiveness of the domestic manufactures in an open market environment. Instances of inverted import duties and anomalies faced by electrical equipment manufacturing industry across several product groups are enclosed separately as annexure I. The industry seeks doing away with inverted duty structure by introduction of a customs-credit scheme. A note on customs-credit scheme, proposed by IEEMA, is also enclosed as annexure II. There are several critical inputs / raw materials used in the manufacture of electrical equipment that are not readily available domestically. Concerted action needs to be taken to secure supplies of these critical inputs / raw materials. CRGO steel is a prime example, which 2

is a critical raw material for transformers / large generators, manufactured by 12 companies (no Indian manufacturer) in the world, and totally imported. The ambitious power development projects of the government necessitate setting up of a domestic CRGO manufacturing facility. Most of power utilities in generation, transmission and distribution of power (prime customers /buyers of electrical equipment industry) have non-uniform procurement policies and qualifying criteria for vendors for similar products. They also have outdated tendering procedures and contract awarding based on L1 bidder and negotiations. Non-standard specifications being followed by utilities force manufacturers to spend time on design, approval for each contract, which adds to the cost. There is also an urgent need for standardization of rating and specifications used in the distribution sector. This will help the Indian industry and can also act as a non-tariff barrier for foreign companies. Buying practices of the utilities do not encourage investments in innovations and R&D. There is slow pace of absorption of new technology by domestic manufacturers of electrical equipment, and also user industries. According to estimates, less than 1% of the annual turnover of the industry is invested in R&D. As a result, main focus of the manufacturers of electrical equipment is on cutting costs and not on innovative technologies, on piecemeal short-term tactical measures rather than evolving any strategic action plan for their growth and development. Most micro, small and medium enterprises, in this field, neither have the resources, technical expertise or the inclination to invest in R&D. It is essential to foster a collaborative R&D having its application across the sector. This kind of collaborative R&D can only take place if it is driven or backed by the government or a government owned agency which is going to be the major user of the technology. Indias exports of electrical equipment were around INR 22,200 crores (US$ 4.63 billion) in 2011-12, but were less than 1% of the global trade in electrical equipment. With the electricity sector being a sunrise sector across the entire developing world, there exists significant potential for India to tap the export markets. India should target a 5% share of global trade in electrical equipment in the next ten years so that our exports reach a level of US$ 25 billion. To achieve this, there is a need to incentivise exports of electrical equipment. For a rapid development of the industry, a holistic view and action plan is required. All stakeholders need to proactively collaborate and take concerted and coordinated action, so that, the industry can further accelerate its growth process and contribute significantly to reducing the power demand-supply gap in the country. As the Union Budget is seen as a tactical and strategic direction setter, more focus should be given on encouraging domestic manufacturing and creation of a level playing field for the industry, in order to retain its competitiveness. It is, therefore, important that the government keeps on evolving policies that are conducive to the development of a vibrant domestic industry. The critical issues on Indirect Taxes- 1.Customs, Central Excise and Central Sales Tax(Policy and Procedural Issues) and 2. Service Tax (Policy and Procedural Issues) are given below. 3

IEEMA PRE-BUDGET MEMORANDUM 2013-14

CRITICAL ISSUES & SUGGESTIONS:

Page no.s

INDIRECT TAX:
Chapter 1: Customs, Central Excise and Central Sales Tax- Policy Issues Customs, Central Excise and Central Sales Tax - Procedural Issues Annexure I: Instances of inverted customs duties and anomalies 05-13 14-18 19-23 24

Annexure II: Note on customs-credit scheme, proposed by IEEMA

INDIRECT TAX: Chapter 1: (1) Customs, Central Excise and Central Sales Tax - Policy Issues

Import duty on Mega / Ultra Mega and expansion projects vide notification 49/2012-Customs dtd. 10th Sept. 2012 - Cost advantage of 4.7% only to domestic suppliers:

The Government of India, with an intention of providing legitimate support to the indigenous power plant equipment manufacturing industry, imposed 5% basic customs duty, 12% CVD and 4% SAD, on imports of equipment for Mega / Ultra Mega and expansion projects, with effect from 19th July 2012. The domestic industry is grateful to the government for this initiative. However, the 14% cost disadvantage suffered by the domestic industry (as estimated by the Committee under chairmanship of Member-Industry, Planning Commission) has not been completely addressed. The imposed duty structure would compensate the domestic suppliers only to the extent of 4.7%. IEEMA Suggestion: To bridge the gap, it is proposed that the excise duty paid by the domestic manufacturers be refunded by the government as deemed export benefits. (2) Interest on Excise Duty for Differential Price:

The buyers, mainly power utilities, insist on determination of final price of equipment based on variation in cost of raw materials, through a price variation formula that is based on price indices. The price indices are normally published after 2-3 months of the supply is made. Some prices are sourced from international sources like London Metal Exchange (LME); where availability is delayed by a month e.g. Copper prices. Buyers verify the supplementary claims and inform the suppliers about acceptance. Considering the above factor, when the prices are higher than what were billed earlier, the manufacturers raise supplementary invoices to their customers, demanding the differential prices. The manufacturers also promptly deposit the excise duty on differential price at the time when supplementary invoice is raised. However, excise commisionerates issue show cause notices demanding interest from the date of the original invoice, on the excise duty paid as per the supplementary invoice raised. Manufacturers are suffering due to Honble Supreme Court judgment in the civil appeal of M/s SKF India Ltd. vs. CESTAT, Pune; which has resulted in a huge financial burden to the industry. In this context, the Honble High Court of Karnataka had passed a favourable Order by distinguishing the SKF order of the Supreme Court. The excise department filed a special leave petition against the Karnataka High Court, which was dismissed by the Supreme Court. Therefore, the valuation rule should be amended, so that, no demand is raised for such cases.

IEEMA Suggestion: IEEMA requests to make suitable amendment to the sub rule 4 of Rule 7 of Central Excise Rules 2002, thereby replacing the month for which the duty is determined by the month in which the duty is determined; so that, interest is not made payable in case of provisional invoice due to delay in availability of price indices. (3) Merit Rate of Excise Duty for Power Generation, Transmission & Distribution Equipment:

The power sector is one of the most significant infrastructure sectors. However, the electrical equipment supplied for critical infrastructure development of the country attracts the same level of excise duty as also applicable to many FMCG and luxury products. IEEMA Suggestion: Till the time a uniform GST is implemented, a merit rate of 6% excise duty should be imposed on all products supplied to power generation, transmission & distribution projects. This would not lead to any revenue loss to the government, since lowering of excise duty would lead to reduction of project cost, thereby, enabling execution of more such projects within the available resources. Finally, this would also lead to lowering of the cost of electricity. (4) Excise Duty Exemption on Steel / Cement used in construction of Mega / Ultra Mega Power Projects:

Notification number 12/2012-CE, dated 17.03.2012, provides for exemption from payment of excise duty and is applicable to all goods falling under any chapter. This excise duty exemption is available only when there is a corresponding customs duty exemption. However, the customs notification number 12/2012 (serial number 507) is applicable only to chapter 9801. As the goods like structural steel / cement used in the construction, are not covered under the chapter 9801, the intended exemption is not available to such goods. IEEMA Suggestion: If duty exemption is made available to all goods supplied to a power project, cost of power would come down significantly. Hence, the sr. no. 507 appearing under chapter 9801 of the notification number 12/2012-Cus, be amended to read as any chapter. (5) Concessional Rate of Excise Duty for Motor Starters, Agricultural Capacitors and Submersible Flat cables:

Motor Starters, Agricultural Capacitors and Submersible Flat Cables, upto certain capacities, are mainly used in the agriculture sector and attract an excise duty of 12%. However, the following other products mainly used in agriculture sector are wholly or partially exempted from excise duty in the following manner: (a) Specific goods intended to be used for the installation of cold storage, cold room or refrigerated vehicle for the preservation, storage or transportation of agricultural produce Notification no. 12/2012 CE dtd. 17.3.12 (Sr. No 232) NIL excise duty. 6

(b) (c)

Tractors - Notification no. 12/2012-CE dtd. 17.3.12 (Sr. no. 277) NIL excise duty. Power driven pumps primarily designed for handling water Notification no. 12/2012CE dtd. 17.3.12 (Sr. No 235) 6% excise duty.

IEEMA Suggestion: The excise duty rate of following products, which are mostly used in agriculture sector, be reduced to 6%: 1. 2. 3. (6) Motor Starters for agricultural use / handling water (used for motor power rating up to 7.5 kW / 10 HP or up to Relay range 14-23A etc.) Agricultural Capacitors up to 6 kVAr Submersible Flat Cables up to 6 sq. mm. cross section area. Duty Exemption on CRGO Electrical Steel:

Cold Rolled Grain Oriented (CRGO) electrical steel is a critical and indispensable raw material for manufacturing of transformers. The consumption of CRGO electrical steel is estimated to be at 11.5 Lacs MT for the entire 12th Plan period and 13.5 Lacs MT for the entire 13th Plan period. However, as there is no indigenous manufacturing of CRGO electrical steel, the entire requirement has to be imported from 12 manufacturers globally. IEEMA is thankful to the Government for removing the Special Additional Duty (SAD) of 4% imposed on prime CRGO electrical steel. There is an urgent need for setting up of indigenous manufacturing capacity to meet the huge demand for transformation capacity. IEEMA Suggestion: Import of CRGO electrical steel be allowed at NIL duty till such time the country sets up indigenous manufacturing and achieves self-sufficiency in its production. (7) Central Sales Tax / Value Added Tax Exemption on Mega Power Projects:

Imports from foreign suppliers do not attract any CST/VAT, whereas, the domestic supplies attract CST at the rate of 2% and VAT at the rate from 4% to 14.5%. An office memorandum issued by the Ministry of Power under reference F. No. A-108/98-IPC-I dated 31.05.1999Clause 2, mentions that the State Governments have been advised to exempt supplies made to Mega Power Plants from levy of Sales Tax and any other local levies. Accordingly, the Sales Tax on domestically manufactured capital goods, the local levies and Octroi would not be considered for the purpose of evaluation of bids, irrespective of the fact whether the State Governments provide this exemption or not. However, some of the project authorities and customers do not accept this de-loading principle (regarding sales tax, local levies & Octroi) and evaluate bids taking these levies, including CST into account.

IEEMA Suggestion: Pending the imposition of SAD @ 4% as mentioned above, Mega / Ultra Mega Power Projects should be mandatorily exempted from the levy of CST/VAT and this should be provided in the CST Act itself. Alternately, CST/VAT component, if any, should be excluded for the purpose of bid evaluation as imports from foreign vendors do not attract these taxes. (8) Supply of Goods to SEZ Units/Developer/Co-Developer by Sub-Contractors/SubVendors:

As per Section 8(6) of the Central Sales Tax Act, 1956, no tax under CST Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, reengineering, packaging or for use as packing material or packing accessories in an unit located in any special economic zone by the developer of the special economic zone, if such registered dealer has been authorised to establish such unit to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf. Further as per Section 8(8), the above exemption from CST is allowed provided Form I is issued by such SEZ Unit/Developer to the dealer selling such goods to him. Further as per Section 26 of SEZ Act read with Rule 10 SEZ Rules, such exemption from CST shall also be allowed to sub-contractors. Though in principle such CST exemptions have been permitted to sub-contractors under SEZ law, however there is no corresponding provision in the CST Act to grant such exemption to sub-contractors/subvendors supplying goods to such SEZ unit/developer/co-developer. IEEMA Suggestion: The Central Sales Tax Act 1956 may be modified suitably and a provision similar to Section 5(3) be inserted in CST Act with provision to issue Form I to both the main contractor and the sub-contractor by such SEZ unit/developer/co-developer, so that, exemption from CST can be availed by sub-contractors/sub-vendors also. Further certificate 1 and 2 in Form I may also be modified suitably in line with modified provisions. (9) Denial of Excise Duty Exemption to Sub-Contractors under CE Notification 108/95-CE., dated 28.8.95:

Notification number 108/95-C.E dated 28.08.95 provides excise duty exemption to goods supplied to specified international organisations. However, this benefit is available only to the main contractor and not to the sub-contractor as per the Judgment of CESTAT in the case of Bird Machines. The same benefit is available to sub-contractor under 12/2012 CE dated 17.03.2012 based on CESTAT Rulings in the case of CST Limited. 8

The projects funded by such organisations are generally large in magnitude and cannot be executed by a single contractor without sub-contracting at least a part of the work. In some cases, it requires several sub-contractors to execute the main contract. Denial of benefits to the sub-contractor(s) takes away most of the benefits of the notification number 108/95-C.E, dated 28.08.95 and defeats the very purpose of the notification itself. IEEMA Suggestion: A clarification be issued on notification number 108/95-C.E dated 28.08.95 so that the subcontractors supplying to the projects covered under the said notification also get the benefit of excise duty exemption. (10) Amendment in Rule 14 of Cenvat Credit Rules 2004: The amendment in Rule 14 of Cenvat Credit Rules is a bold step in the right direction. However, the proposed amendment of charging interest only on the utilised portion of wrongly availed credit is effective from 1st April, 2012 only whereas it should be with retrospective effect as if it was there in the Cenvat Credit Rules since inception. IEEMA Suggestion: This amendment should be made with retrospective effect, so that the pending cases would automatically get resolved. (11) Exemption Notifications:

The exemption notifications issued by the government are of two kinds viz. conditional and unconditional. In case of conditional notifications, the manufacturer is required to pay an amount of 5% of sales price in lieu of central excise duty. There is no provision in law/rules to recover the said amount from the customer. Therefore, it becomes a straight financial loss to the manufacturer. IEEMA Suggestion: It is recommended that in case of all conditional notifications, the law/rules should be amended in such a way that the manufacturer is directed to pay the central excise duty at appropriate rates at the time of removal of the goods and the recipient of goods be allowed to claim refund of the said amount on the basis of Duplicate for Transporter copy of the invoice of the manufacturer. This is in line with the lodging of claim with DGFT for refund of terminal excise duty on supplies under deemed export. In short, since all the exemptions are for the benefit of the end user, the end user alone should claim refund and all such clearances by the manufacturer should be treated as normal clearances on payment of duty at appropriate rates. (12) Classification of Product coverage of definition:

The Central Excise Tariff does not contain any definition of Pump-set (Chapter Heading 8413). Particularly, in case of pump manufacturers, this creates lot of difficulties. As per the 9

established Law, a pump-set consists of (i) Mono Block Pump-Set and (ii) Bare Shaft Pump, Prime Mover (either Engine or Motor) and Coupling. Due to technological developments as well as because of the changing needs of the customers due to environments and usages, the manufacturers develop the product but are unable to classify the same appropriately because of the limitations of the definitions in the Tariff. For example, a pump can be run by Gas Turbine, Vacuum Turbine, Water Turbine, can have variable frequency drives to automate the on/off conditions of the pump, it requires piping, valves, software etc. to make it a complete set/system for the desired use by the customer. These developments substantially bring in reduction in consumption of energy, wastage of water, help the environment and increase the efficiency of the product as well as multiply the benefits of its usage. This becomes a national saving. IEEMA Suggestion: In view of this, the definition of the product should be enlarged to cover all such aspects which will eliminate litigation for a simple dispute on classification of the product. (13) Revised norms for execution of Bond and Bank Guarantee under Advance License and EPCG Schemes:

Clause (c) of serial no. 3.2 of customs circular no. 58/2004, dated 21.10.2004, stipulates that the license holder cannot be given exemption from submission of bank guarantee if he is penalized under the provisions of the Customs Act, 1962, the Central Excise Act, 1944, the Foreign Exchange Management Act (FEMA), 1999 or the Foreign Trade (Development and Regulation) Act, 1992 during the last three financial years. In view of this, the Customs Authorities insist upon a letter from jurisdictional Central Excise Department seeking details of pending cases and penalties levied. Industries normally have cases pending with CESTAT, appeals and courts at various levels. Almost every industry is bound to have cases which primarily and most importantly arise due to interpretation of law. It is popular knowledge that the issues related to interpretation of law are normally resolved by CESTAT or High Court or Supreme Court or CBEC which is a routine process of law and therefore, it is against the interest of the common public as well as against the principle of legislature if Customs Authorities insist upon submission of bank guarantee only because of this. Similarly, the deciding authorities levy token penalties because of procedural lapses. If the penalties are for willful mis-declaration of facts or for suppression of facts or for intentionally depriving the government of its legitimate dues, Customs Authorities have to disallow exemption for submission of bank guarantee. However, in case of token penalties which the deciding authority has to levy because of the provisions of law, exemption from submission of bank guarantee has to be granted. (14) CENVAT credit on High Speed Diesel (HSD) and Light Diesel Oil (LDO):

HSD and LDO should also be made as eligible inputs for the purpose of availing CENVAT credit. 10

(15)

CENVAT credit on endorsed Bill of Entry and Invoice:

CENVAT credit of the CVD paid was allowed earlier based on the endorsement on the Bill of Entry (B/E) in favour of the manufacturer. This provision was very useful in availing the CENVAT Credit by the manufacturer other than the importer. Commissioner of Customs (Imports) Mumbai, vide Public Notice No 16/2006-Customs, dated 22.03.2006, dispensed with the practice of endorsement of Bill of Entry by customs officer in favour of the manufacturer who is other than the importer. IEEMA Suggestion: Rule 9(1) (c) of the CENVAT Credit Rules may be suitably amended to include the endorsed Bill of Entry as a valid document for availing CENVAT Credit. Also the same should be incorporated under the EDI system. Simultaneously, Public Notice No 16/2006-Customs dated 22.03.2006 of the Mumbai Customs should be withdrawn. Computer generated invoices/other documents, without any signature should be included in the list of documents for availing credit. (16) Customs Duties Exemption to Goods imported for R&D:

To encourage the investment for the Research & Development, the government may consider exempting the whole of Customs Duty for imports. Currently, Countervailing Duty (CVD) and Special Additional Duty (SAD) are exempted as per the Notification No. 51/96. (17) OSPCA and EA 2000:

On-Site Post Clearance Audit should be done along-with EA 2000 itself. In fact the audit by the department should be done on the basis of risk assessment and annual routine audits should be avoided. Departmental Audit should cover all three i.e. service tax, excise and customs (OSPCA), once an assessee has been identified for audit. (18) Valuation of Excisable Goods:

Under rule 9 of Central Excise Valuation Rules, 2000, where the excisable goods are not sold by an assessee except through a person who is related person, the value shall be the normal transaction value at which these are sold by the related person to unrelated buyers. This leads to litigation as it is difficult to determine the price at which these goods are sold by related person to unrelated buyers. IEEMA Suggestion: The value of goods may be determined on the basis cost of production plus a specified percentage of the cost of production, in order to remove the complication in determining the value.

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(19)

Interest on Pre-Deposit of Duty Demanded, Penalty Levied etc. while filing Appeal:

There is no provision in Central Excise Act, 1944 which allows interest on pre-deposit if the matter is decided in favour of the appellant. If the matter is decided against the assessee the amount of pre-deposit is adjusted against the demand. In case demand is confirmed, assessee is liable for the interest under Section 11 AB for interest on duty demanded. IEEMA Suggestion: Amendment may be brought to provide for interest on pre-deposit, if the appeal is allowed fully. If the same is allowed partly the interest be paid on the amount of pre-deposit as in excess of confirmed demand. (20) Automatic expiry of stay order if appeal is not disposed of within the period of 180 days:

The Sub-Section 2(A) of Section 35C of Central Excise Act 1944 read with first provision, stipulates an appeal where a stay order has been made to be decided within a period of one hundred and eighty days. Second provision provides that if appeal is not disposed within this period the stay shall stand vacated. Since disposal of appeal is not within control of assessee as such the vacation of stay would result in the very undue hardship on account of which stay was granted. Supreme Court in CCE Vs. Kumar Cotton Mills 2005 (180) ELT -434 (S.C) have held that CESTAT being appellate authority is competent to extend the stay till disposal of appeal. From practical point of view the said provision is resulting in filing of an application for extension of stay which is normally granted. IEEMA Suggestion: Thus the provision, which is resulting in unnecessary routine formality, additional paper work and wastage of CESTAT time, may be repealed. (21) Modalities for Transfer of Cenvat Credit under rule 10 of Cenvat Credit Rules, 2004:

Central Excise Act/Cenvat Credit Rules does not contain any explicit provision for transfer of Cenvat credit, when a manufacturer or provider of output service shifts his factory or transfers his business on account of sale, merger, amalgamation, lease or transfer to joint venture, with a specific provision for transfer of liabilities of such business. The rule only requires that the inputs and / or capital goods transferred are duly accounted for at the new location to the satisfaction of the Deputy / Assistant Commissioner of Central Excise. However, Central Excise Range officers having jurisdiction over factory / premises of transferor unit insist that their approval be obtained before stock of inputs and / or capital goods is transferred to the new location / owner and also threaten to initiate legal action. Even if prior approval is requested by the transferor unit, there is delay in giving the same 12

and as a result of it; assessee has to pay duty in cash even if the transferred Cenvat credit is legitimately available for utilization. IEEMA Suggestion: A provision may be introduced to clarify and credit should automatically be treated as transferred. (22) Increase in Abatement Rate for MRP Based Excise Duty:

Abatement on electrical goods under chapter 8536 is 38% at present. Since the supply chain is long and some discount needs to be passed on to the buyers in view of stiff competition, the manufacturers of electrical switchgears are forced to bear the duty incidence. IEEMA suggestion: Abatement on electrical goods under chapter 8536 should be raised to 50%. (23) Amendment to CST Act - Statutory forms:

Amendment made to Rule 12 of the CST Act makes it mandatory to issue/collect single declaration form all transactions of sale for each quarter of the year. Due to the amendment, the dealer has to collect four forms for each year as against single form which was in vogue prior to 01.10.05. This amendment has created lot of hardship and increased the non value added work of all dealers. The dealers are also harassed for nonsubmission of forms, whereas, this is also a fact that many State Governments do not have sufficient stock of the forms viz., F forms/C forms, E1/EII forms etc. IEEMA suggestion: The amendment made to Rule 12 of the CST Act be withdrawn or the statutory forms be generated online in place of physical forms.

13

INDIRECT TAX: Chapter 1: (1) Customs, Central Excise and Central Sales Tax - Procedural Issues:

CENVAT Credit of Excise Duty / CVD paid on Capital Goods:

In terms of Rule 4(2) of the CENVAT Credit Rules, 2004, maximum 50% CENVAT credit is allowed in respect of capital goods in the first year and the balance there after. As a result, a lot of time and effort is spent in terms of year of entry, amount of credit available in each year etc. Apart from the cost involved in such tracking, this also leads to errors and consequently, long-drawn disputes/litigation with the Department. IEEMA Suggestion: For better cash flow management and to reduce the administrative process, full credit may be allowed in the first year itself for all types of assessees. This would be in line with the provisions on CENVAT credit in respect of inputs. (2) Use of EDI System for Clearance of Rebate Claim:

For claiming excise rebate, the Excise Department asks for signed copy of Shipping Bills and ARE 1 issued by the Customs Department. These documents are not promptly released by customs; as a result, the exporter's rebate claim is not filed immediately after sailing of vessel carrying the exported cargo. IEEMA Suggestions: Since EDI system is implemented, it is suggested that the Excise Department should view the Shipping Bills online and clear the rebate claims without insisting on receipt of a physical signed copy of Shipping Bills and ARE 1. This will considerably reduce the transaction cost and shall give competitive edge to the exporters in the global markets. (3) Removal of Excisable Goods for Export to Special Economic Zone (SEZ):

The removal of excisable goods for export to SEZ requires submission of proof of export along with ARE-1 / ARE-3 within 45 days. Section 25 of the SEZ Act provides that goods and services supplied from Domestic Tariff Area (DTA) will be exempt from all taxes and levies such as central excise, service tax etc. Further, these supplies are treated as export. For availing benefit of removal of goods without payment of duty, DTA unit requires to submit proof of export and endorsed copy of ARE-1 by Customs Officer at the SEZ to Jurisdictional Superintendent of Central Excise within 45 days from the removal of goods from the factory. The prescribed period of 45 days for submission of ARE-I / ARE-3 form is not sufficient when heavy equipment are being transported from one corner of the country to another, which normally takes time between 30 to 60 days.

14

IEEMA Suggestion: A prescribed period of 90 days should be allowed for submission of ARE-I / ARE-3 form and this should be reckoned from the date of receipt of goods at SEZ and not from the date of supply. (4) End-use based Exemptions:

The Government issues many end-use based exemptions like supplies to Water Treatment Projects, Non-Conventional Energy Devices, Defense, Navy etc. Manufacturers supply material against certificates as prescribed under the notification given by customers who are eligible for the exemption. Often duty is sought to be demanded from manufacturers for alleged non-compliance of the conditions of notification / non-applicability of exemption to goods supplied, although such usage is certified by customer / Excise Authorities etc. IEEMA Suggestion: Provision be made to recover duty involved in supplies against end use based notification from user / customer instead of manufacturers / suppliers in line with the provisions of condition 43 of notification 12/2012 CE dated 17.3.2012 (Sr. no 338). (5) CENVAT & Job Work:

Under rule 4(5)(a) of the CENVAT scheme, a manufacturer can send inputs / partially processed material to a job worker, if he is sending all the material required for the job as free issue; or Under rule 3(5), send the material by paying an amount equal to the credit claimed or applicable duties on his manufactured goods to a job worker to manufacture intermediate goods as per his specifications and return the intermediate goods back to him for their use in further production. The job worker has two options Return the processed material back to the supplier without paying excise duty in terms of notification 214/86 CE dated 1.3.1986; or Pay excise duty on intrinsic value of the processed goods including the value of material received, and the receiving factory claims CENVAT credit of the said duty paid by the job worker.

IEEMA Suggestion: In International Auto Ltd. Vs. CCE, Bihar [2005 (183) E.L.T. 239(S.C.)] the Honble Supreme Court has held that job worker is not liable to pay duty on inputs supplied by the final product manufacturer. In view of the above decision, the relevant rules / notification should be amended to

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I. ii. iii. iv.

Allow the main manufacturer to send material (inputs and partially processed) without payment of duty under rule 4(5) (a), Allow the job worker to avail CENVAT credit on inputs directly procured by him, Pay duty on final goods only to the extent of only the value addition by him, Not to add value of material / tools / design and engineering received free from the main manufacturer in terms of rule 6 of the Valuation Rules.

The above should be applicable in case the processed goods are returned to main manufacturer for use as inputs for further products. There is no loss of revenue, as the transaction is revenue neutral but this will help to avoid unnecessary documentation and litigation for notional amounts. (6) Issuing of Certificates by the Range Superintendents or Commissioner of Central Excise & Customs: Asst./Deputy

Customers claiming deemed export benefit of refund of terminal excise duty paid by the manufacturer insist for duty payment certificates issued by the Range Superintendent having jurisdiction over the manufactures factory or depot. DGFT insists for such certificates, and in absence of such certificates, refund of terminal excise duty is denied. Under Central Excise Rules, there is no provision for issuance of such certificates nor is there an executive instruction to the field officers to issue such certificates. CBEC has issued circular 620/2002 dated 20.2.2002 giving executive instructions to the field officers to issue such certificates to small scale industries as a matter of trade facilitation. The large scale industries also face same difficulties, as they also need such duty payment certificates from the field officers. The customers eligible for deemed export benefit of refund of terminal excise duty (power projects, holder of invalidation letter against EPCG / Advance Authorization etc.) from DGFT insist for such certificates and if the same is not provided within prescribed limit, the manufacturer does not get reimbursement of duty paid by them. IEEMA Suggestion: Circular 620/2002 dated 20.2.02 should be amended suitably so that all categories of industries can get such duty payment certificates from their concerned field officials. (7) Allowance of Inter-Unit Transfer of CENVAT Credit to all Manufacturers:

At present inter-unit transfer of CENVAT credit is permitted only for Large Taxpayers Units (LTUs). IEEMA Suggestions: Allow inter unit transfer of CENVAT credit to all units of other manufacturers also.

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(8)

Revision of Interest rate in case of refund under Custom, Excise and Service Tax:

With effect from 1st April 2011, the government has made upward revision of interest rate from 13% and 15% to 18% in case of a delay in payment of duty in Custom, Excise and Service Tax Act. However, no upward revision of Interest rate has been made in case of delay in payment of refund, which is still at 6%. IEEMA Suggestion: For the sake of justice and put more functional responsibility and efficiency to the department, the interest rate in case of delay in payment of refund be increased from 6% to 13%. (9) Project Import 1986 regarding Registration of Contracts Regulation 5:

Regulation 5 of Project Import 1986 regarding Registration of Contracts says that registration of contract/contracts of goods has to be carried out on or before their importation. IEEMA Suggestion: To utilise the facility of warehousing by the importer and which was allowed earlier, the word "importation" should be replaced by the word "clearance" in Regulation 5 i.e. Registration of Contracts under Project Import Regulations (PIR), 1986. The benefits of project imports should be extended to the consignments which are bonded but ex-bonded after the contract is registered. In addition, warehouse goods other than intended for Export Oriented Units (EOUs) should be allowed to be kept-in-bond for a period of at least 6 months without payment of interest out of 12 months as allowed to be kept in the warehouse (Reference Section 61 of Customs Act 1962). Project Import Registration clause says that all purchase orders on foreign vendors are to be submitted along with one recommendation letter for total C.I.F. value and one Continuity Bond for total C.I.F. value at the time of registration of project import. Moreover, the Customs Authorities insist that one purchase order will be registered for one project only. The purchase orders are placed from time to time during the long duration of the project and it is not possible to submit all purchase orders at one time. IEEMA Suggestion: The condition may be extended further and should include that in case of power project where Contract (Purchase Order) on foreign suppliers is placed in phased manner as per project requirement, importer can register the additional purchase orders as and when orders are placed on foreign supplier.

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(10)

Restoration of Exemption from Submission of Declaration Forms to States in the CST Act:

Central Sales Tax Act was amended in 2002 making the submission of central declaration form C compulsory. Prior to this amendment, many States in exercise of their power had granted exemption from submission of form C to big organisations mainly for supplies to the Government, Public Sector Undertakings etc. The States that had granted such exemption included Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Tamil Nadu etc. However, after the amendment to CST Act in 2002, States no longer have such powers to grant exemption. Since these big companies are multi-locational and multi-product engineering enterprises with customers and project locations spread all over the country, collection of declaration forms from widely distributed customer base is posing serious challenges, including significant administrative costs. Financial implications for non-collection of such forms is also high, ranging from 2% to 10.5% of turnover and 4% to 12.5% on bought-out-items, besides interest which at times could be more than the tax differential. IEEMA Suggestion: As most of the sales are to customers likes State Electricity Boards / Central Power Utilities / Government owned companies, the powers to grant exemption from submission of forms should be restored back to the States as earlier, at least for sales made by PSU companies to State Electricity Boards / Central Power Utilities / Government owned companies, as this saves differential tax liability on account of non-submission.

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Annexure I Instances of Inverted Customs Duties and Anomalies: (a) Inverted Duty Structure on Insulators: As per customs tariff, the basic customs duty on all Electrical Insulators, under Chapter 8546 and 8547, is 7.5% and the total duty works out to 25.85%. The major raw materials used for manufacturing of insulators are Clay, Alumina, Castings, Epoxy Resin, Hardener etc. The major imported components for manufacturing of electrical insulators viz. metal parts (MCI / SGI casting component), Ball pins and CC rings etc. used for manufacturing of insulators under chapter 7325, attract 10% basic custom duty and the total duty works out to 28.85%. The other raw materials like Ball Clays, China Clays and Calcined Alumina, Epoxy Resin, Hardener and other consumables attract a basic custom duty ranging from 5% to 10%. This is a clear case of inverted duty structure, where the import duty on inputs is higher than that of the finished product i.e. insulators. (b) Inverted Duty in Project Import of Insulators: Project imports of all goods pertaining to High Voltage Power Transmission Equipment attract only 5% basic custom duty. Porcelain Insulator, under Chapter 8546 and 8547, normally attracting 7.5% basic customs duty, is imported paying only 5% basic customs duty, under the project import category. Whereas, the basic customs duties on the raw materials used for manufacture of Porcelain Insulators varies from 5% to 10%. Since, these materials are critical inputs for manufacturing Porcelain Insulators; these may be permitted to be imported at a basic customs duty of 2.5%. (c) Inverted Duty on Insulated Cables and Wires: The finished product Insulated Cables, under HS Code 8544, attracts a basic customs duty of 7.5%. However, the raw materials used to manufacture this product attract a basic customs duty in the following manner: S.No. Item 1 2 3 4 5 6 7 Copper Wire Rod EC Grade Aluminium Wire Rod EC Grade G.I. Wire Copper Tape LDPE (Low Density Polyethylene) HDPE (High Density Polyethylene) XLPE (Cross Linkable Polyethylene HS Code 74071010 76041010 72179099 74101100 39019090 39019090 39019090 Basic Customs Duty (%) 5.00 5.00 5.00 5.00 7.50 7.50 7.50 19

8 9 10 11

EPDM (Ethylene Propylene Diene Monomer) Water Blocking Tape Glass Mica Tape PACKING MATERIAL WOODEN DRUMS FOR CABLES

40029990 39199090 68149090 44151000

10.00 10.00 10.00 10.00

Similarly the finished product Stainless Steel Wires of different grades, under HS Code 7223, attracts a basic customs duty of 5%. However, the raw materials used to manufacture this product attract a basic customs duty in the following manner: S.No. 1 2 3 4 Item Stainless Steel Wire Rod Lubricants Wire Drawing Dies PACKING MATERIAL Plastic Spools HS Code Basic Customs Duty (%) 72210090 5.00 27101980 10.00 82072000 10.00 39234000 10.00

(d) Anomaly in Customs Duty for Capacitors: The finished product Power Capacitor, under HS code 85321000, attracts 0% basic customs duty; 12% CVD and 4% SAD, as per customs notification no. 24/05-Cus., dated 1.3.05 However, the major raw materials used to manufacture this product viz. Polypropylene Film (HS code 39202090); Aluminium Foil (HS code 76071100) and Oil (HS code 38249090) etc. also attract the same level of duties i.e. 0% basic customs duty, 12% CVD and 4% SAD, under an exemption notification. This is a duty anomaly as the duty on finished goods and all its major raw materials is at the same level. Ideally, the duty on finished goods should be higher than its raw materials. (e) Anomaly in Customs Duty for Conductors: The finished product Aluminium Conductor, under tariff heading 76141000 and 76149000 with its description as Stranded wires, cables, plaited bands with steel core and the likes of Aluminium not electrically insulated, attract a basic customs duty of 10%. Similar kind of conductors under tariff heading 76042910; with its description as Hard drawn bare Aluminium conductors steel re-inforced (ACSR); attract a basic customs duty of 5%. On the other hand, the raw materials used for manufacture of these conductors, under tariff heading 76011010 and 76011040; with its description as Aluminium not alloyed ingots and wire rods; also attract a basic customs duty of 5%. This is an anomaly since the raw materials 20

required for manufacture of Aluminium conductors also attracts a basic customs duty at the same level. The tariff heading under 76042910 be removed in order to correct this anomaly. This will help protect the domestic Aluminium conductor manufacturing industry against massive import of Aluminium conductors from China under tariff heading 76042910 attracting at a basic customs duty of 5% only. (f) Inverted Duty in Project Imports of Power Generation Equipment: The finished power generation equipment such as Boilers (HS Codes 8402,8404,8481) and Turbines (HS Codes 8406,8410,8411), normally attracting 7.5% basic customs duty, can be imported under project import category paying only 5% basic customs duty, under Chapter 9801 (Sl.no. 506 of Custom Notification 12/2012 dated 17-3-12). However, the basic customs duty imposed on one of the raw materials for manufacturing the above finished products viz. Carbon Steel (HS Codes 7208 and 7209) is 7.5% (Sl.no. 334 of Custom Notification 12/2012 dated 17-3-12). (g) Inverted Duties on Basic Customs duty on Semi-conductor Devices and PV Modules: The Semi-Conductor Devices, under tariff heading 85411000 attracts a NIL basic customs duty. Whereas, its following raw materials attract a basic customs duty ranging from NIL to 10%.

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SL.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

ITEM DIFFUSED SILICON WAFER/chips MOLYBDENUM DISCS FUSED QUARTZWARE HOUSINGS OFHC COPPER PARTS ALUMINIUM WIRE OF PURITY MORE THAN 99% ALUMINIUM IN PALLET SHAPE>99% PURITY ALUMINIUM FOIL OF PURITY>99% LAPPING ABRASIVE POWDER-AL.OXIDE POWDER DOPING SOURCES IN ANY FORM(BORON NITRIDE BOAT) DOPANT-POCL3 PHOTO RESIST & DEVELOPER CERAMIC ITEMS OF SILICON CARBIDE RUBBER ITEMS LIKE O RING, GASKET etc. PLASTIC ITEMS DIFFERENT TYPE OF CHEMICALS (REF CHAPTER 2&29) ETHYL ALCOHOL-ETHANOL (DENATURED)

HS code 854190 810299 702000 854190 741999 760519 760429 760719 281820 285000 281290 370790 690320 401693 392690 220720

CD 0% 5% 10% 0% 10% 5% 5% 5% 5% 7.5% 7.5% 10% 5% 10% 10% 10% 7.5%

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Similarly, the basic customs duty on Photovoltaic and Solar Cells under HS code 85414011 is NIL. Whereas, the basic customs duties on its following raw materials are both NIL and 10%.
ITEM UNDIFFUSED SILICON WAFER EVA, MULTI-LAYERED SHEET WITH TEDLAR CRANE GLASS TOUGHENED GLASS TINNED COPPER INTERCONNECT SILVER POWDER SUSPENSION ALUMINIUM PASTE HS Code 381800 392190 701931 702000 741999 710610 760320 CD 0 10% 10% 10% 10% 10% 5%

1 2 3 4 5 6 7

(h) Inverted Duty on Electrical Transformer: The basic customs duty on Electrical Transformer, under HS code 8504, is 7.5%. Whereas, some of its raw materials, such as, Kraft paper (HS Codes 48041100, 48041900); Press Board (HS Code 48239090); and Transformer Oil (HS Code 27109090) etc. attract 10% basic customs duty. (i) Inverted Duty on Cable Terminals and Connectors: As per the exemption notification no. 25 dated 1st March, 2005, there is Nil customs duty on Cable Terminals and Connectors , falling under HS code 853690. Its following raw materials attract basic customs duty in the range of 5% to 10%. Sl. No. 1 2 3 4 5 6 7 8 Item Brass Strips & Coil Phosphor Bronze Strips & Coil Copper Strips & Coil Polymide Chips Polymide Chips Polypropylene & Polymer Polymer Resins Lubricating Oil HS Code 74092100 74093100 74091100 39081010 39081090 39021000 39042290 27101990 CD 5% 5% 5% 10% 10% 7.5% 7.5% 10%

(j) Duty anomaly in Optical Fibre Cables: A variety of Optical Fibre Cable (finished product), under HS Code 90011000, is manufactured using Optical Fibre as its raw material. Both the finished product and its raw material fall under the same HS Code and attract the same rate of basic customs duty i.e. 10%.

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Annexure II Note on customs-credit scheme, proposed by IEEMA, to resolve inverted duty structure on all products Logically, the import duties on finished products should always be higher than import duties on their intermediates and raw materials. Although the Government has rationalized the duty structure of electrical equipment to a large extent, anomalies still exist in case of some products where the import duty on finished Products is either lower or equal to that on intermediaries and raw materials. IEEMA proposes that the peak rate of Customs duty, which is now 10 %, be levied across the board. The manufacturers using such goods as raw materials or intermediates for further processing or to use such goods in the manufacturing of finished goods (with minimum value addition criteria), should be given 50% Custom Duty Credit from the peak rate. This would make the effective rate of duty on all the goods, which are going into the manufacturing of finished products as raw materials / inputs as 50% of that of the goods, which are not used in the manufacture of finished goods. This can be done by amending the present Cenvat Credit Rules, wherein specific provision is to be made for taking the credit of the Customs Duty to the extent of 50%, which is not available at present. This scheme can be termed as CUS-CREDIT Scheme. For example, if an importer imports a steel item, falling under tariff heading 7225 - flat rolled product of other alloy steels, costing say INR 10,00000/- (INR ten lakhs), he will pay customs duty of INR 1,00,000/-, (INR one lakh) @10% at the time of clearance. If the importer is a manufacturer of excisable products falling under say tariff heading 8501Electrical motors, he can take a Cus-credit of duty of 50% i.e. INR 50,000/- (INR fifty thousand), when the material is brought in his factory for using in production of excisable goods i.e. electric motors. On the other hand, if the importer is a builder, who wants to use the same as roofing, he will not be able to take the Cus-Credit. Thus, for an electric motor manufacturer the effective duty will be INR 50,000/- (INR fifty thousand only), while for a builder the effective duty will be INR 1,00,000/- (INR one lakh), though at the time of clearance both have paid the same duty.

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