Budget implications for garment manufacturers

The finance minister in the Union Budget 2011-12 has proposed the levy of central excise duty at the rate of 10.30% on manufacture of garments,provided,the same bears a brand name. In the case of manufacturer of unbranded garments,a manufacturer may at his option,avail of exemption from payment of excise duty. The levy is imposed with effect from March 1,2011. Further,as per the Cenvat Credit Rules,2004,in the case of garments,excise duty is to be paid by the manufacturer or by a job worker on behalf of the manufacturer.

In case the manufacturer requires the job-worker to pay excise duty,the manufacturer must specifically authorise such job-worker to pay the duty and undertake necessary compliances. In your case,since you are engaged in the manufacture of branded garments,excise duty will be applicable. However,the primary responsibility to pay excise duty is on the principle manufacturer,unless,he has specifically authorised you to pay excise duty and undertake necessary compliances. Please note that excise duty will be payable on the maximum retail price of the garment less 40% abatement.

We are a dry-cleaning company and are registered in service tax under the taxable category of dry-cleaning services. We provide both dry cleaning and laundry services (wet-cleaning) to our clients. We also provide certain on-site laundry services,wherein,our representatives visit the client’s homes for cleaning sofa sets,carpet and car seat covers,which are also in the nature of wet cleaning. Please let us know whether wet cleaning services are also liable to service tax?

The terms ‘dry cleaning’ means cleaning done in a ‘dry’ manner,i.e.,without the use of water. ‘Wet cleaning’ is a process of cleaning garments in water and water soluble detergent. The department has clarified that service tax is not applicable on wet cleaning and washing services,provided that,the invoice or bill issued by the dry cleaner clearly mentions that the services are in the nature of wet cleaning services. The circular also stipulates that in case the details are not mentioned in the bill,it would normally be understood that the clothes have been dry cleaned and in such a situation service tax is liable to be paid. Given the above,in case wet cleaning services are provided by you and you have indicated the same in your bill,service tax should not be applicable.

We have entered into an agreement with our group company located outside India,wherein,we shall provide them with automobile product development services. We have obtained service tax registration under the taxable category of consulting engineer’s services. We shall be paid in foreign exchange for the same. However,we have received an information that our services may qualify as ‘exports’,and hence,should not be liable to service tax. Please let us know whether service tax is payable on the amount received from our group company?

In terms of applicable service tax laws,consulting engineer’s services are liable to service tax in India at the rate of 10.30%. However,where such services are provided to recipients located outside India and the amount is received in convertible foreign exchange,the same may qualify as ‘export of services’,not liable to service tax in India. In your case,since the recipient of service is located outside India,and the consideration is received in foreign exchange,the services provided by you should qualify as ‘exports’ and should not be liable to service tax in India.

The replies do not constitute professional advice. Neither E&Y nor FE is liable for any action taken on the basis of these replies