Excise Tax

Introduction to Excise Tax

Excise tax is that obligation that is to be paid by the manufacturer at the time of manufacturing the goods. That is why excise taxes are included in the price of the goods purchased. Excise tax is popularly known as Excise duty because it is the duty of the manufacturer to pay the taxes to the government before they put their items on sale.

Explanation

Excise taxes are levied on the manufacturer initially, and then the liability of the taxes is shifted to the ultimate customers who consume the goods because the goods that are sold in the market include the excise tax in the Maximum Retail Price (MRP). It’s a fact that indirectly these taxes are borne by the government to the manufacturers but the customers will have to pay the taxes; that is why this tax is also known as Indirect Taxes. There are certain conditions that are prevailing in the market regarding excise taxes. Say, for example, if a manufacturing concern is merely improving or improvising certain goods, it will not be considered as manufacture. Therefore before posting any incidence of taxes, the definition and inclusion of the term manufacture should be clear. Hence the liability of the excise tax will again be a query that who is going to pay the excise tax to the government.

How Does it Work?

Excise Taxes are the indirect taxes it is generally included in the product prices. This tax is first levied on the customers, and then at a later stage, it is taken from the customers indirectly. This is a simple way of charging taxes on manufacturing. But sometimes conflicts arise because the term manufacture is not clear to most manufacturers. It has been seen that the incidence of taxes is questioned in the Supreme Court regarding excise taxes. Like, repair and maintenance cannot be considered as manufacture. Therefore now the conflict arises as to who is going to pay the excise duty or whether any excise duty is legible or not. So some famous verdict upon excise taxes is to be followed by both parties.

Example of Excise Tax

A manufacturing company is manufacturing some excisable goods the cost of direct material is INR 30,000 which includes 12.36% excise duty. Salary to staff INR 50,000, cost of repair and maintenance comes to INR 6000, R&D cost to the company comes to INR 2,700, Interest and other finance cost INR 3400, Cost of dismantling the machinery INR 1300, selling and distribution cost INR 4500, Scrap value INR 1600. Please compute the cost of production o the customers considering the effect of excise duty.

Solution:

Particulars	INR
Cost of direct material	30,000
Less: Excise duty	33
Material Consumed	29,967
Salary to staff	50,000
Cost of repair and maintenance	6,000
Research and development cost	2,700
Interest and other finance costs	3,400
Total cost	92,067
Less: Scrap Value	1,600
Cost of production	90,467

Note: The cost of dismantling the machinery and the selling and distribution cost is not included in the computation of cost of production since they don’t form part of the cost of production of the goods, and therefore, it is excluded.

Types of Excise Tax

Basic Excise Tax: Basic excise tax is 12.36% of the cost of materials consumed to prepare the goods. The tax is borne by the government to the manufacturers at the time of manufacturing the goods. Special Excise Duty: This tax is also a kind of excise duty that is levied on some special items; these items also qualify the requirement of the excisable goods which is being manufactured.

Education Cess on Excise duty: In some cases, excise duty is levied on education cess. The final computation of manufacturing costs includes this tax also. Excise duty in case of Export Units: In some export units the excise duty is levied and is termed as Excise duty on the export unit.

Who Pays Excise Tax?

In the first stage, the excise tax is paid to the government by the manufacturers of the excisable goods. Later in the second stage, the manufacturers compute the prices of the goods and it is set in such a way that the price includes the excise tax components, therefore, the ultimate liability to pay the excise tax lies with the consumer of that goods.

Advantages and Disadvantages

Below are some of the prominent advantages and disadvantages of excise tax.

Advantages

• Excise taxes are very convenient for the manufacturers to pay at the time of manufacture because this can be easily retained from the ultimate consumers at a later stage.
• In excise taxes, there are also some credit facilities available, therefore, the payer can get the credit of tax in the future.
• The collection process of excise taxes is very prompt. The shifting of liability can make the tax incidence for the manufacturer a bit easier and hence encourages them to make excisable goods.

Disadvantages

• Sometimes collection becomes difficult because there are some incidents where the true definition of manufacturing is not clear therefore it becomes a question mark that who and how this excise tax will be paid off.
• This tax regime can encourage the manufacturers to quote some extraordinary price for their goods which is ultimate to be paid by the consumers.
• Excise tax is also a very costly affair; it is to be levied at the time of manufacturing and therefore lots of administration cost is involved in it.

Conclusion

Excise taxes are now being replaced with the GST (Goods and Service Tax). In this new tax regime, indirect taxes are clubbed into one. This makes the tax pattern easy to understand and economical. Since there were certain taxes which are required to be collected in different stages and this was a problem with the manufacturers, distributors, and also for the consumers as to which tax is to be paid at which stage and therefore the government has come up with this scheme where it will be a single tax system with less confusion.

Recommended Articles

This is a guide to Excise Tax. Here we discuss the definition and how does excise tax work? along with advantages and disadvantages. You may also have a look at the following articles to learn more –

1. Tax Haven
2. Tax-Exempt
3. Indirect Taxes
4. Tax Fraud