Saturday, 19 November 2016

Demonetization Scheme


On 8th of November, 2016 (herein after referred to as ‘specified date’) at approximately 8pm, Hon’ble Prime Minister Mr. Narendra Modi has announced the demonetization scheme (Herein after referred to as ‘the scheme’) for the high denomination bank note of ` 500 and ` 1000 i.e. withdrawal of legal tender of the 500 and 1000 bank note (Herein after referred to as ‘Specified Bank Notes’).

We are intentionally publishing this article after some days of the announcement of the scheme because it would be pretty early to comment on the very next day when the things were still not clear and it would be like ‘whistling in the dark’.

Legality of this demonetization scheme (withdrawal of legal tender for specified notes) – Whether legal or not?:

Now, the first and foremost question which arise to the mind of any common man is that whether the Central Government (herein after referred to as C.G.) or the Reserve Bank of India (Herein after referred to as ‘RBI’) has the powers for such withdrawal of legal tender and if yes then from where it derives such power.

The answer to the question is definitely yes because such big move cannot be carried out in an unauthorized way. So the next question is which law empowers the C.G. / RBI for withdrawal of the legal tender. For that reference is made to Section 26 of the Reserve Bank of India Act, 1934 (Herein after referred to as the ‘said act’) which reads out as below:’

Section 26 of the Reserve Bank of India Act, 1934 which speaks about the Legal tender character of notes,

(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in  [India] in payment or on account for the amount expressed therein, and shall be guaranteed by the  [Central Government].

(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender [save at such office or agency of the Bank and to such extent as may be specified in the notification].

Therefore, it can be said that Section 26(1) of the said act gives the legality of the bank notes but the legality is limited to sub section 2 which empowers the CG to declare any series of bank notes of any denomination as not having legal tender.

Of course the CG has power to withdraw it with immediate effect, there is also no ban on it nor the law put responsibility on CG to provide specific time period notice before its implementation.

The next question is whether the CG has power to specify few places where the ceased specified notes will be valid?

Answer to the above question is again definitely in affirmative only. Sub Section 2 of Section 26 of the said act prescribes the phrase ‘save at such office or agency of the Bank and to such extent as may be specified in the notification’ at the end of the section. So, the withdrawal of legal tender will not have any impact at such office or agency of the bank and to the extent specified by the CG.

So, the CG is very well empowered for this demonetization scheme i.e. to say withdrawal of legal tender of the specified notes.

Objectives of the demonetization scheme:

The objectives of the scheme are as below as stated by the C.G.

1.    To counterfeit fake currency:

Apprx. 84-86% of our county’s currency is in ` 500 and ` 1000 denomination. So, it is very easy to mix the fake currency with the legal tender and the cost of making the fake currency in high denomination will be low as compared to making of fake currency of smaller denominations. The CG has directed to exchange / deposit the specified notes into the bank/post accounts only. The banks have very well effective system to check the fake currency and if the same is found, it will be cancelled immediately.

So, it will achieve the objective of counterfeiting the fake currency. However, after a reasonable period of time when the new currency will be sufficiently available in the market, RBI needs to check and update the security measures from time to time else it will not take much time for the devils to print the fake currency using the technology or to mix with the legal tender.

2.    To stop terror funding:

With immediate withdrawal of specified notes, it has specifically achieved this objective and that can be analyzed from the present situation of Jammu & Kashmir where peace is there today as compared to immediate earlier days.

3.    To stop black money:

When the CG has mandated to deposit the specified notes in the bank/post account only, so the quantum of depositing the same is required to be verified from the books of accounts. And the cash which is not reflecting in the books of accounts (except the accumulated saving out of taxed income) will be treated as black money and therefore, it will be difficult to deposit the same into the bank.

And thereby it will stop the black money circulation into the market.

4.    To curb corruption

The Govt., spokespersons are informing this as one of the objective, however the rationale behind the same is not known. Even in the scope of scheme, RBI has specified only first three objectives and not the fourth one.

How much to deposit in the bank:

Up to ` 2.50 Lacs household savings

Dr. Hasmukh Adhia, Revenue Secretary, Ministry of Finance has informed that we will not take the data of the deposits made up to ` 2.50 Lacs from the Banks.

The rationale of keeping the limit of ` 2.50 Lacs is very simple that there is basic exemption limit under the Income Tax Act, 1961 up to income of ` 2.50 Lacs. So, ministry has considered this limit for counting the household savings also.

And it will be very difficult for the Income Tax Department to serve notices to all the persons who has deposited the specified notes during the specified period with the possible answer that this is the current year income or it is from accumulated savings. So, there was a need from the Govt. side that a particular limit is being fixed because they do not have enough staff to serve the notice and hear the case of the entire country.

Above ` 2.50 Lacs housing savings:

There can be savings above this threshold limit but the same is required to be justified.

Up to
` 2.50 Lacs in a businessman’s account

As per my view, the limit of ` 2.50 Lacs is kept for household savings only (be it man or woman). It is not like you can deposit your undisclosed cash up to ` 2.50 Lacs to your bank account and there will be no inquiry or no tax.

Therefore, one has to verify that it represents the household savings or income.

Can there be income tax notice for cash deposit of specified notes:

Central Board of Direct Taxes (CBDT) has amended Rule 114B of the Income Tax Rules, 1962 directing the banks to submit AIR (Annual Information Report) for deposit of cash by a person above the threshold limit specified in it during the specified period.

So, high cash deposits during the specified period will be on radar of the Govt. and there might be inquiry for the cases where the cash deposit is unusual compared to previous comparable period.

Also, the RBI has directed banks to give the status of dormant / inactive accounts from much time and certainly being activated during the specified period. 

And I have also a doubt that the Income Tax officers may not ask for the justification of even ` 2.50 cash deposited in the specified notes at the time of assessment, if any except for those who do not have any income and it is only accumulated household savings.

How much specified notes can be deposited?

There is no bar prescribed by the Govt. or the RBI for depositing the quantum of specified notes. Even, they have no power to prescribe any limit for depositing the specified notes.

One has to complete the books of accounts till 8th November, 2016 midnight and verify the cash balance reflecting in the books of accounts. That cash balance can be deposited in the bank, be it be ` 2.50 Lacs or ` 25 Lacs.

Form how much times cash can be deposited?

Mr. Arjun Ram Meghwal, Union Minister of State for Finance and Corporate Affairs, Govt. of India has specified on twitter that there is no restriction on number of times a person can deposit specified notes in the bank.

However, one has to take care that suppose a person has deposited ` 5 Lacs in bank and again depositing ` 10 Lacs after 10-20 days, then he might be required to prove the source of the second time deposit of specified notes because the specified notes become invalid from the specified date.

Even a person cannot collect his outstanding dues in the specified notes after midnight of specified date.

Therefore, one has to take care for that.

What if a person wants to deposit his unaccounted cash?

A person can deposit his unaccounted cash by paying legitimate tax along with interest on it and declare that income in his return of income.

However, after that Income Tax, Sales Tax, Service Tax, Central Excise etc authorities might be there behind him.

The best thing in that is that the bureaucrats etc. cannot declare a single peny over and above their income else along with above authorities, anti corruption team will be behind them.

This is the only reason why Income Disclosure Scheme (IDS) was advantageous as compared to disclosing right now.

Depositing specified notes in the accounts of other family members / children etc.

As already specified above, the threshold limit is for depositing your savings and not for depositing the unaccounted income.

Therefore, only savings / earnings of children etc. can be deposited in bank account. A person cannot divert his unaccounted income into others’ bank account.

What will be best things to do during this period:

To my view, the best thing to be done is to maintain your routine way of business only. Don’t rush for unusual cash deposits or adjustment of cash balance of other persons.

For that just keep your books of accounts updated till 8th November, 2016 and ask your professional for the advice of how much cash can be deposited.

Just keep in mind that “The Benami Transactions (Prohibition) Amendment Bill, 2016” is already been passed and become effective from 1st Day of November, 2016. So before doing any adjustment, just take in mind that the Govt. is one step ahead from you.

Status of Public Interest Litigations (PIL) filed in the court of law:

Against the demonetization scheme, several PILs have been filed in various courts of law including the Hon’ble Supreme Court.

A PIL has been filed in the Madras High Court, Bombay High Court, Karnataka High Court etc, the status of which is as below:

- Hon’ble Madras High Court dismissed the PIL on the ground it cannot interfere in policies related to monetary system and stating that the action of the government is fit for the country's security and development. 

- Similarly Hon’ble Karnataka High Court has also dismissed the PIL.

- Hon’ble Bombay High Court has also dismissed the PIL stating that the PIL for the same matter is pending in the apex court. 

- A PIL has also been filed in the Hon’ble Gujarat Court for extension of date of validity for exchanging the specified notes. 

- The PIL filed in the Hon’ble Supreme Court has been admitted by it.

On behalf of CG, Attorney General of India has already filed a caveat in the Hon’ble Supreme Court that it should be heard before passing any order. Therefore, there cannot be immediate stay on the demonetization scheme.

As per my view, the apex court will not direct for abolition of demonetization scheme because such scheme is within the powers of the Govt. as mentioned above and the judiciary will not interfere into the powers vested with the Govt. regarding the monetary or the fiscal policy. 

Of course, the judiciary will take a note from the Center that no much hardship is being faced by the common public.

Briefs of the Effects of the scheme in the economy:

In the short term, there will be decline in the growth of economy, the business will be slow down, people will have less money to spent due to exchange and withdrawal limit, there will be fall in the FMCG sector etc. Real estate, jewellary, liquor industry in major will have high fall in their business.

If the scheme turns to be a successful then there will be boom in the economy in the long run. Due to cash crunch in the market, real estate sector prices will come down. There will be huge surplus in the banks and therefore, the lending rates for home loans will come down and the demand for real estate sector will increase. There will also be decrease in the commercial loans so the business people can afford loans at lower rate and thereby they can grow. 

A first step towards cashless economy !!

There has been a limit kept on cash withdrawal from the bank account. At present they might have kept the limit due to non availability of adequate new notes.

However, it seems that Govt. may continue to keep the threshold limit for cash withdrawal (of course, subject to periodically review) after demonization scheme also.

It seems that Govt. may keep the threshold limit and other measures will also be taken like restriction on cash transactions above a threshold limit as can be analyzed by the speech of Hon’ble PM after returning from Japan.

In case, the Govt. fails to keep the threshold limit for cash withdrawal then none of the objective as specified above will be achieved in the long run. It will have only short term durability. The above four objectives can be achieved fully in cash less economy only.

So, let’s move our economy towards a cashless economy …..

Disclaimer: This article should not be construed as any legal opinion.

Thursday, 14 April 2016

Central Excise Applicability on Jewellary Business


In the year 2005, the Union Govt. has introduced the Central Excise Duty @ 2% on branded Jewellery. However, there was mere collection of Rs. 16 Crores only till 2008 and therefore in the year 2009, it was withdrawn.

Again in the Union Budget 2011, the duty was re-introduced @1% on branded precious metal jewellary. With effect from 17.03.2012, it was further extended to all branded and unbranded jewellary. However, due to lots of agitation across the county, the same has been withdrawn.

Again Union Budget 2016-17 has proposed to levy Central Excise duty @ 1% on all the Jewellery articles except silver Jewellery not studded with studded with diamonds, ruby, emerald or sapphire.

This has led to widespread protests and strikes taking place in the entire country on account of the facts that procedures are cumbersome and it may not be possible to be judiciously followed by this largely un-organised sector.

Another reason might be the fact this is the industry which is working on a huge parallel in cash.

Various associations have made several representations to the Government regarding levying Excise Duty on Jewellery. In response to this, the Finance Minister has issued various press releases and circulars for ease of doing business specifically with respect to Excise Duty on Jewellery dated 04th March 2016, 18th March 2016 and 21st March 2016.

Also a high level committee under the chairmanship of Dr. Ashok Lahiri has also been formed to look into the nitty gritty of Excise on Jewellery.

Indian jewellers have been on an indefinite strike since the beginning of March 2016 protesting against the Budget proposal to levy 1 per cent excise duty on non-silver jewellery. After almost strike for a period of 43 days, finally it has been called off on 13th April 2016.

After this basic background and history, let’s understand the various provisions of the Central excise in the simplest manner.

Central Excise is applicable on manufacture of excisable goods. So, there should be manufacturing for levy of Central Excise.
(It means all the jewelers engaged only in trading activity are automatically out of purview of Central excise).


Excise duty is leviable on the taxable event of manufacture. So duty is levied at the time when the process of manufacturing is completed.

The term manufacture would mean “any process whereby the goods processed would change as to name, character or use as is known in the market”.

Deemed Manufacture:

Let’s first understand the meaning of this ‘Deemed fiction’. Deeming means a situation which does not exist in reality but need to assume as if it is there in reality. 

So, Deemed Manufacture is to be understood in a manner that the said activity is not a manufacturing activity at all, however it would be considered as manufacturing activity only. 

The effect would be nothing but all the relevant provisions of the Central Excise is applicable for deemed manufacturing also.

In the context of Jewellery sector in addition to normal understanding of manufacture, the processes of affixing or embossing trade name or brand name on articles of Jewellery or on articles of goldsmiths' or silversmiths' wares of precious metal or of metal clad with precious metal is deemed to be "manufacture".

Who is liable for Central Excise – Job Worker or the Owner

As a general rule in the Central Excise, a person who is doing the manufacturing activity is liable for excise irrespective of the ownership of the goods.

If the same rule is being applied for the Jeweler business then the procedure would be very complex and cumbersome.

Therefore, for the Jeweler sector, Special provision is being specified in Rule 12AA which is produced as below:

“the person who gets the article of jewellary falling under heading 7113 or 7114 produced or manufactured on his behalf on job work basis will be liable to pay duty. “

It means that the person who is doing the job work activity is not liable for obtaining the registration, maintenance of records, filing of records, payment of duty etc. but the person who is getting the jewellary manufactured is liable for the all the things mentioned above.

Applicable Laws:

1.    Central Excise Act, 1994
2.    Central Excise Tariff Act, 1985
3.    Central Excise Rules, 2002
4.    Cenvat Credit Rules, 2004
5.    Other notifications and circulars issued from time to time.

Applicability – Basic Exemption:

Central Excise on jewellary is applicable for the manufacturers. However, each and every manufacturer is not liable for the Central Excise Registration. Govt. has exempted small manufacturers called as SSI Exemption, details of which are as below:

If the domestic value of clearance has not crossed 12 (all goods manufactured including silver Jewellery) crores in the financial year 2015-16, for the financial year 2016-17, exemption upto 6 crores of value of clearances can be availed.
The benefit for March 2016 is 50 lakhs.

However, the said SSI exemption (i.e. exemption based on value of clearance) is not available if manufacturer affixes the brand name of another person.

Payment of Duty:

Excise duty is required to be paid only at the time of removal from the factory i.e. factory to mean all the premises where the manufacturing activity is being carried out.  (To be paid in aggregate on monthly / quarterly basis)

Therefore, invoice is required to be issued and duty is required to be paid at the time of removal of goods. It is to be understood that excise duty is required to be paid irrespective of the fact whether it is for sale or not i.e. central excise has nothing to do with sales.  

Once the goods are removed on payment of duty, subsequent transactions are free from Central Excise Duty. It is unlike Sales Tax (VAT) where the duty / tax is required to be charged at each stage of sales.

Periodicity of Payment of Excise Duty

-   Duty needs to be paid on monthly basis on or before 6th of the succeeding month.
       -  In case of month of March, duty needs to be paid by 31st March.
       -  SSI units are permitted to make payment on quarterly basis.

However, for the Jewellary sector Govt. has facilitated that duty for the month of March 2016 can be paid along with the payment for the month of April 2016.

Rate of Duty:

The rate of duty on the Jewellery are as follows:

(i) 1% on transaction value [without Cenvat credit on inputs and capital goods. However credit on input services is eligible] or

(ii) 12.5% with Cenvat credit of inputs, input services and capital goods

No duty is payable if goods are exported in terms of Central Excise Rules, 2002.

Which premises are required to be registered?

Assessment under central excise is factory based.

Any premise satisfying the definition of factory is required to get registration unless specifically exempted.

If the person has been operating from more than one factory, generally separate registration certificate shall be obtained for each of such factories.

However for Jewellery sector there is special provision wherein centralized registration is permitted.

When registration is required to be obtained

Registration needs to be obtained within 30 days from the date when liability to pay duty arises.

Along with this basic explanation, following points are also required to be taken care of while dealing with Central Excise on the Jeweler Industry:

-          Difference between the House mark against brand name / trade name.

-          Various exemption notifications for goods related to jewellary manufacturing.

-          Activity of job worker – principal manufacturer

-          Rate of Duty and Cenvat Credit.

-          Exemption to Silver Jewellary subject to condition.

-          Liability of duty at the time of change in purity.

-          Duty on silver products with gold plated.

-          Amount of duty when customer has given gold in exchange of new jewellary instead of money.

-          Affixing brand of own or of others.

-          Taxability of Stock as on 29.02.2016 as the excise duty is effective w.e.f 01st March 2016.

-          Manufacturing and selling of jewellary from the same location.

-          Export sales, sales to NRI.

-          Value at which excise duty is required to be paid.

-          Effect of wasting or making charges.

-          Duty liability when goods are received for repairs / reconditioning etc.

-          Gold supplied by the customer for making jewellary.

-          Excise duty applicability on Gold Bars etc.

-          Sale of scrap, powder generated out of manufacturing process.

-          Sales return issues or goods sent on approval basis.

-          Calculation of basic limit for clearances whether unit wise or factory wise.

-          Invoicing issues.

-          Record keeping

-          Filing of returns.

For any clarification or further information, you may contact us.