Guidance Note on Accounting Treatment for MODVAT/CENVAT (Revised)

INTRODUCTION

1. The Guidance Note on Accounting Treatment for MODVAT was first issued in March 1988. The
Guidance Note was revised in July, 1995 in view of extension of MODVAT Credit Scheme to
capital goods. The Guidance Note is revised again with the issuance of revised Accounting
Standard (AS) 2 on "Valuation of Inventories", which has come into effect in respect of accounting
periods commencing on or after 1.4.1999 and is mandatory in nature. This revised Guidance
Note is issued in supersession of the earlier Guidance Note issued in July, 1995, and is effective
in respect of accounting for MODVAT for accounting periods beginning on or after April 1, 1999.
With the substitution of the MODVAT Credit Scheme with CENVAT Credit Scheme w.e.f.
1.4.2000, this revised Guidance Note also deals with accounting treatment in respect of the latter
Scheme.

OBJECTIVE

2. The objective of this Guidance Note is to provide guidance in respect of accounting for
MODVAT/CENVAT credit. Salient features of MODVAT and CENVAT credit schemes are briefly
set out hereinafter. Reference may be made to Central Excise Act, 1944, Central Excise Rules,
1944, Notifications and Circulars issued from time to time for details of the provisions of
MODVAT/CENVAT Schemes. Guidance for accounting for excise duty is provided in the
Guidance Note on Accounting Treatment for Excise Duty, which has been revised and issued
separately.

MODVAT CREDIT SCHEME (Upto 31.3.2000) – SALIENT FEATURES

3. Modified Value Added Tax (MODVAT) Scheme allows instant credit of specified duties paid on
specified inputs used in or in relation to manufacture of specified final excisable goods to be
utilised for payment of excise duties in respect of such goods. The Scheme covers imported
goods as also those acquired indigenously. Specified duty in relation to imported goods is
countervailing duty and in case of indigenous goods is excise duty, additional excise duty under
Additional Duties of Excise (Textile and Textile Articles) Act, 1978 as also additional excise duty
under Additional Duties of Excise (Goods of Special Importance) Act, 1957.

4. MODVAT Scheme was introduced in 1986, effective from 1.3.86, with a view to reduce the
cascading effect of duties. Initially, the Scheme was restrictive in its application in that

(i) it applied only to limited categories of inputs and final goods; and

(ii) use of inputs in or in relation to manufacture of final goods was essential for utilisation
of duty credit for payment of excise duties on clearance of such final goods. In other
words, correlation of inputs and final goods was essential though one to one correlation
of inputs was not essential.

5. Significant amendments have since been made to the MODVAT Scheme and the scope of the
Scheme has been expanded considerably. Salient features of the Scheme are summarised
hereinafter.

6. The Scheme applies to inputs ("Input Duty Credit Scheme") and capital goods ("Capital Goods
Duty Credit Scheme").
Input Duty Credit Scheme

7.Provisions in relation to this Scheme are contained in Rules 57A to 57J of the Central Excise
Rules, 1944. The Scheme covers inputs and final products classifiable under any of the headings
of the Chapters of the Central Excise Tariff Act, 1985. The salient features of the Input Duty Credit
Scheme are as follows:

(i) The Scheme is operative only when excise duty is payable on final goods. Thus,
MODVAT credit cannot be availed of if the final goods are exempted from duty or are
chargeable to nil rate of duty. However, the Scheme is operative in case the final goods
enjoy partial exemption from duty.

(ii) Correlation between inputs and final goods is not required, i.e., duty credit in respect
of any input brought into the factory can be utilised for payment of duty on any final
product manufactured in that factory even if that input is not used in or in relation to
manufacture of that final product.

(iii) A manufacturer is required to debit RG 23A or account current with an amount equal
to 10% of the value of inputs or partially processed inputs removed from his factory for
jobwork. The said amount is available as credit on return of processed/final goods to his
factory from jobworkers' premises or on clearance of such processed/final goods from
jobworkers' premises, if so permitted by the Commissioner, within specified time period.
The debited amount is also available for adjustment against duty payable on such inputs
or partially processed inputs not received back within specified time.

(iv) If common inputs are used in manufacture of final products which do not attract duty
liability as also those which are chargeable to duty, manufacturer (except in specified
cases) is required to pay an amount equal to 8% of the price of products not chargeable
to duty at the time of clearance of such products.

8. Supreme Court in a recent judgement in the case of CCE, Pune vs. Dai Ichi Karkaria Ltd. [1999
(112) ELT 353; decided on 11.8.99] had occasion to summarise the Scheme. Relevant extract
from the decision is reproduced below:

"It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise
duty paid on raw material to be used by him in the production of an excisable product
immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is
entitled to use the credit at any time thereafter when making payment of excise duty on the
excisable product. There is no provision in the Rules which provides for a reversal of the credit by
the excise authorities except where it has been illegally or irregularly taken, in which event it
stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that
has been validly taken, and its benefit is available to the manufacturer without any limitation in
time or otherwise unless the manufacturer itself chooses not to use the raw material in its
excisable product. The credit is, therefore, indefeasible. It should also be noted there is no co-
relation of the raw material and the final product; that is to say, it is not as if credit can be taken
only on a final product that is manufactured out of the particular raw material to which the credit is
related. The credit may be taken against the excise duty on a final product manufactured on the
very day that it becomes available."

Capital Goods Duty Credit Scheme

9. Provisions in relation to this Scheme are contained in Rules 57Q to 57U of the Central Excise
Rules, 1944. The salient features of the Capital Goods Duty Credit Scheme are as follows:
 (i) The Scheme covers specified capital goods used in the factory of the manufacturer in
relation to the production of specified final products;

(ii) A manufacturer would not be entitled to the MODVAT credit on capital goods until the
capital goods are installed or, as the case may be, used for manufacture of excisable
goods, in the factory of the manufacturer;

(iii) A manufacturer has option to:

(a) avail MODVAT credit in respect of duty paid on capital goods as per the
Rules;

or

(b) claim depreciation on duty element under Section 32 of the Income-tax Act,
1961 or claim deduction of duty element by way of revenue expenditure under
any section of the Income-tax Act, 1961, as the case may be;

(iv) A manufacturer can claim MODVAT credit of the duty element of capital goods even if
capital goods are acquired on lease, hire-purchase or loan agreement if specified duty is
paid by manufacturer either directly to capital goods supplier or to the finance company
before payment of first lease/hire-purchase or loan installment, as the case may be.

General

10. The general salient features relevant to Input Duty Credit Scheme and Capital Goods Duty
Credit Scheme are as below:

(i) A manufacturer is required to comply with various procedural requirements, in

particular, filing of declaration, and maintenance of register of receipts, issues and
balance of inputs and capital goods in Form RG-23A Part I and RG-23C Part I,
respectively. It is also required to maintain registers related to MODVAT credit in respect
of inputs and capital goods in Form RG-23A Part II and RG-23C Part II, respectively.

(ii) There is no time limit for utilisation of MODVAT credit. Government is, however,
empowered to provide for lapsing of unutilised credit balances for specific products.

(iii) Cash refund of duty credit is not allowable except in case of export of goods if the
manufacturer is unable to utilise duty credit towards payment of excise duty on clearance
of final goods from his factory.

CENVAT SCHEME (EFFECTIVE FROM 1.4.2000) – SALIENT FEATURES

11. Modified Value Added Tax (MODVAT) scheme has been replaced by Central Value Added Tax
(CENVAT) Scheme with effect from 1.4.2000. The same is contained in newly inserted Rules
57AA to 57AK. CENVAT Scheme, in essence, is the same as MODVAT Scheme except that it is
simpler in that, the erstwhile separate schemes for inputs and capital goods are merged into one
under CENVAT Scheme. The scope of the Scheme is also expanded in that all inputs (except
High Speed Diesel Oil and Petrol) and specified capital goods (except equipments or appliances
used in office) are covered in the Scheme.

12. Procedural simplifications have been introduced and requirement of filing declarations has
been dispensed with.
13. The major difference between MODVAT and CENVAT Schemes is in relation to capital goods.
The CENVAT credit in respect of capital goods received in a factory at any point of time in a given
financial year is allowed to be taken only for an amount not exceeding fifty percent of the duty
paid on such capital goods in the same financial year. The balance of CENVAT credit can be
taken in any financial year(s) subsequent to the financial year in which the capital goods were
received in the factory of the manufacturer provided capital goods are still in the possession and
use of the manufacturer of final products in such subsequent year(s). The condition of possession
and use is not applicable to components, spares and accessories, refactories and refractory
materials and goods falling under Tariff Heading 68.02 and sub-heading 6801.10 of first Schedule
of the Central Excise Tariff Act, 1985, if they are not removed without use.

14. Outstanding balances in MODVAT Credit accounts are allowed to be transferred to the
CENVAT Credit accounts and utilized as per the CENVAT Scheme.

ACCOUNTING TREATMENT IN CASE OF INPUTS USED IN OR IN RELATION TO

MANUFACTURE OF FINAL PRODUCTS

15. In the light of the basic features of 'MODVAT/CENVAT' discussed above, it may be stated that
MODVAT/CENVAT is a procedure whereby the manufacturer can utilise credit for specified duty
on inputs against duty payable on final products. Duty credit taken on inputs is of the nature of
set-off available against the payment of excise duty on the final products.

16. Specified duty paid on inputs may be debited to a separate account, e.g., MODVAT/CENVAT
Credit Receivable (Inputs) Account. As and when MODVAT/CENVAT credit is actually utilised
against payment of excise duty on final products, appropriate accounting entries will be required
to adjust the excise duty paid out of MODVAT/CENVAT Credit Receivable (Inputs) Account to the
account maintained for payment/provision for excise duty on final product. In this case, the
purchase cost of the inputs would be net of the specified duty on inputs. Therefore, the inputs
consumed and the inventory of inputs would be valued on the basis of purchase cost net of the
specified duty on inputs. The debit balance in MODVAT/CENVAT Credit Receivable (Inputs)
Account should be shown on the assets side under the head `advances'.

An illustration of the above method is given in Annexure 'A'.

17. It may be appropriate to quote the following paragraphs nos. 6 and 7, dealing with 'cost of
inventories' and 'costs of purchase', of Accounting Standard (AS) 2 (Revised) on Valuation of
Inventories, issued by the Institute of Chartered Accountants of India.

"6. The cost of inventories should comprise all costs of purchases, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition."

"7. The costs of purchase consist of the purchase price including duties and taxes (other
than those subsequently recoverable by the enterprise from the taxing authorities), freight
inwards and other expenditure directly attributable to the acquisition. Trade discounts,
rebates, duty drawbacks and other similar items are deducted in determining the costs of
purchase."

Particular attention is invited to the paragraph related to 'costs of purchase', according to

which, only those duties have to be included as costs of purchase which are not
subsequently recoverable by the enterprise from the taxing authorities. Since the
specified duty on inputs is available for set-off against the excise duty on final products, it
is considered of the nature of duty recoverable from taxing authorities.
18. A question may arise as to when the 'MODVAT/CENVAT' credit should be taken if documents
evidencing payment of specified duty on inputs are received later than the physical receipt of the
goods. According to the accrual concept of accounting, one may account for such credit, provided
one is reasonably certain of getting the said documents at a later date.

Change in Accounting Policy

19. In cases, where enterprises were accounting for MODVAT credit on inputs in accordance with
the erstwhile inclusive method, i.e., the second alternative recommended in the earlier edition
(1995) of the Guidance Note on Accounting Treatment for MODVAT, they will have to change the
method of accounting in accordance with paragraph 16 of this Guidance Note. Accordingly, such
an enterprise will have to adjust the amount of opening stock in respect of the accounting periods
commencing on or after April 1, 1999, in such a way so that the opening stock should appear at
the amount which would have been arrived at had the method suggested in paragraph 16 of this
Guidance Note been followed. This could be done by adjusting the amount of opening stock in
respect of the accounting periods commencing on or after April 1, 1999, by the amount of the
balance lying in the MODVAT credit availed account. Further, an amount equal to the balance of
RG23A register, representing the MODVAT credit receivable in respect of the inputs purchased in
the earlier years should be transferred to MODVAT Credit Receivable Account with a
corresponding adjustment in the amount of opening stock. After the aforesaid adjustments, the
MODVAT Credit Receivable Account should also appear at the amount which would have been
arrived at had the method suggested in paragraph 16 of this Guidance Note been followed. An
example illustrating the change in accounting policy has been given as Annexure 'B'.

Appropriate disclosures as per Accounting Standard (AS) 5, Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies, are also required to be made in the
financial statements for change in accounting policy.

Accounting Treatment – Job-work

Accounting treatment in case of inputs and/or partially processed inputs sent outside the factory
to job-worker for further processing

20. In a case where an enterprise removes inputs as such or in a partially processed form to a
place outside the factory for the purpose of testing, repairing, refining, reconditioning or carrying
out any other operations necessary for manufacture of final products, the enterprise is required to
debit MODVAT Credit Register (RG 23A) or account current with an amount equal to 10% of the
value of inputs or partially processed inputs, as the case may be. The said debit is in the nature of
deposit and is available for credit at the time of return of duly processed goods to the factory
within the prescribed time. The said deposit is also available for adjustment against duty payment
if the goods are not received back in the factory within the prescribed time limit. If this amount is
debited to MODVAT Credit Register (RG 23A), the same should be accounted for as a deposit
and should be debited to a separate account with appropriate nomenclature say, "MODVAT at
Credit Deposit (Jobwork) Account" and credited to "MODVAT Credit Receivable Account". This
deposit amount should be credited and "MODVAT Credit Receivable Account" should be debited
at the time of receipt of duly processed goods in the factory within the prescribed time limit or for
adjustment of duty if the goods are not received back in the factory within the prescribed time
limit. This requirement of debit has been dispensed with under CENVAT Scheme.

Accounting treatment in case of inputs received by enterprise for further processing on job-work
basis

21. An enterprise may receive inputs from a principal for processing and/or converting to final
products on job work basis and may be required to avail MODVAT/CENVAT credit on such inputs
and discharge duty liability on clearance of final products on behalf of the principal; the ownership
of the inputs and final products continuing to be of the principal. In such cases, the enterprise
should, at the time of taking MOVDAT/CENVAT credit, debit an appropriate account say,
"MODVAT/CENVAT Credit Receivable Account" and the account to be credited would depend
upon the terms of jobwork with the principal. If the enterprise is required to bear excise duty
burden, "Excise Duty Account" should be credited. If, on the other hand, excise duty is to be paid
on the principal's account, "Principal Account" should be credited. Similarly, in former case, excise
duty paid on clearance of final products should be debited to "Excise Duty Account" and in latter
case to "Principal Account" and credited to "MODVAT/CENVAT Credit Receivable Account".

ACCOUNTING TREATMENT FOR MODVAT CREDIT IN CASE OF CAPITAL GOODS USED

FOR MANUFACTURE OF SPECIFIED GOODS

22. In case an enterprise does not avail MODVAT credit on capital goods obviously no accounting
treatment would be necessary. The following paragraphs apply only to those situations where an
enterprise avails of MODVAT credit on capital goods.

23. Accounting Standard (AS) 10 on `Accounting for Fixed Assets', issued by the Institute of
Chartered Accountants of India, states, inter-alia, in para 9.1, as follows:

"The cost of an item of fixed asset comprises its purchase price, including import duties
and other non-refundable taxes or levies and any directly attributable cost of bringing the
asset to its working condition for its intended use; any trade discounts and rebates are
deducted in arriving at the purchase price."

MODVAT credit can be considered is of the nature of a refundable tax. Therefore, MODVAT credit
should be reduced from the purchase cost of capital goods concerned.

24. In view of the above, the specified duty on capital goods should be debited to separate
account, e.g., MODVAT Credit Receivable (Capital Goods) Account. On actual utilisation, the
account will be adjusted against excise duty on final products. Accordingly, the purchase cost of
the capital goods would be net of the specified duty on capital goods. The unadjusted balance
standing in the MODVAT Credit Receivable (Capital Goods) Account, if any, should be shown on
the assets side under the head `advances'.

25. MODVAT credit in respect of capital goods should be recognised in the books of account
when the following conditions are satisfied: (i) The enterprise is entitled to the MODVAT credit as
per the Rules, and (ii) there is a reasonable certainty that the MODVAT credit would be utilised.

ACCOUNTING TREATEMNT FOR CENVAT CREDIT IN CASE OF CAPITAL GOODS

26. The nature of the CENVAT Credit in respect of capital goods is the same as that of MODVAT
Credit. However, the CENVAT Credit in respect of capital goods is allowed for an amount not
exceeding fifty percent of the duty paid on such capital goods in the financial year in which the
goods are received in factory and the balance will be allowed in the subsequent year(s). In case
the conditions specified in para 25 above are met and the enterprise decides to take CENVAT
credit, the entire amount of CENVAT Credit should be deducted from the cost of capital goods.
The amount of CENVAT credit taken in the financial year, in which goods are received, should be
debited to an appropriate account, say, "CENVAT Credit Receivable (Capital Goods) Account"
and balance may be debited to another appropriate account, say, "CENVAT Credit Deferred
Account". In the subsequent financial year(s), when balance CENVAT credit is availed of, the
appropriate adjustment for the same should be made, i.e., amount of CENVAT credit availed of
should be credited to "CENVAT Credit Deferred Account" with a corresponding debit to "CENVAT
Credit Receivable (Capital Goods) Account".

ACCOUNTING TREATMENT WHERE CAPITAL GOODS ARE ACQUIRED ON LEASE OR

HIRE PURCHASE

27. MODVAT/CENVAT credit is available to the lessee or hirer where the capital goods have been
acquired on lease or hire purchase. The accounting treatment in this regard is described
hereinafter.

28. In the books of the lessor, where the financing arrangement also covers the specified duty on
capital goods, the asset given on lease should be shown at purchase cost net of the specified
duty on the capital goods. The specified duty on capital goods, which would be availed of as
MODVAT/CENVAT credit by the lessee, should be recorded and disclosed separately as the duty
recoverable from the lessee. This will not form part of `Minimum Lease Payments' in view of the
definition of the aforesaid term reproduced below from the Guidance Note on Accounting for
Leases, issued by the Institute of Chartered Accountants of India:

"Minimum Lease Payments: The payments over the lease term that the lessee is or can
be required to make (excluding costs for services and taxes to be paid by and be
reimbursable to the lessor) together with the residual value."

Where the specified duty on capital goods does not form part of the financing
arrangement and the lessee pays the duty directly to the supplier, obviously the same
need not be recorded in the books of the lessor.

In the books of the lessee, MODVAT/CENVAT credit receivable on the capital assets
acquired on lease should be treated in the same manner as recommended in paras 24
and 26 above, except that the cost of the relevant leased capital asset and depreciation
is not accounted in the books of the lessee.

29. Capital asset acquired on hire purchase should be recorded and disclosed at net cash value,
i.e., cash value net of MODVAT/CENVAT credit receivable in the books of the hirer. The other
accounting treatment in relation to MODVAT/CENVAT in the books of the hirer should be the
same as if the asset has been acquired on outright purchase basis. The aforesaid accounting
treatment, in the books of the hirer, should be made whether or not the specified duty on the
capital goods forms part of the financing arrangement. In the books of the vendor, in case the
specified duty on capital goods forms part of the hire purchase arrangement and the benefit of
MODVAT/CENVAT credit is available to the hirer, the vendor should book the sale in the normal
course inclusive of the specified duty on the capital goods. However, where the specified duty on
the capital goods does not form part of the financing arrangement and the hirer directly assumes
the liability in respect thereof, the same need not be recorded in the books of the vendor.

REVIEW OF BALANCES IN MODVAT/CENVAT CREDIT RECEIVABLE ACCOUNTS

30. Balances in MODVAT/CENVAT Credit Receivable Accounts, pertaining to both inputs and
capital goods, should be reviewed at the end of the year and if it is found that the balances of the
MODVAT/CENVAT credit are not likely to be used in the normal course of business within a
reasonable time, then, notwithstanding the right to carry forward such excess credit in the Excise
Rules, the non-useable excess credit should be adjusted in the accounts. The consequence
would be that the balances of the MODVAT/CENVAT Credit Receivable Accounts in the financial
accounts may be lower than the credit available as per the MODVAT/CENVAT Credit registers. In
such a case, a reconciliation statement would have to be prepared indicating the amounts
adjusted so that a track is kept for the difference between the balances and the difference
between the financial accounts and the credit available as per the excise registers can be
explained in subsequent years also.

31. (a) The above adjustment related to input credit should be made to the raw material or input
purchase account. The effect of this would be to increase the cost of purchase and thereby to
increase the cost of inputs for the purpose of accounting for consumption and valuation of closing
stocks. Where it is not possible to debit or identify this excess credit to a particular lot or lots of
materials purchased, such excess credit may be apportioned over the entire purchases of raw
materials, components etc., entitled to MODVAT/CENVAT credit during the year on pro-rata basis.

(b) The adjustment of excess credit related to capital goods should be made to the concerned
Capital Goods Account. The excess MODVAT/CENVAT credit, either availed or deferred, which
relates to fixed assets acquired, should be added to the cost of the relevant fixed asset. For
accounting purposes, depreciation on the revised unamortised depreciable amount should be
provided prospectively over the residual useful life of the asset. In case the fixed asset no longer
exists, the relevant amount should be written-off in the profit and loss account. To facilitate
aforesaid treatment, MODVAT/CENVAT credit record should be maintained fixed asset-wise in the
relevant RG Register. In relation to capital goods other than fixed assets, the accounting
treatment for the excess MODVAT/CENVAT credit would be the same as stated in para 31(a)
above. It is, therefore, advisable that MODVAT/CENVAT Credit Receivable (Capital Goods)
Account is maintained separately for fixed assets and other capital goods.

(c) For capital goods acquired on lease, the amount of excess MODVAT/CENVAT credit should
be written-off on a pro-rata basis along with the lease rentals.

32. Where, at any time during the year, it is revealed that the terms and conditions subject to
which the benefit of MODVAT/CENVAT credit is available, have not been complied with or are not
being capable of compliance, e.g., where the inputs are destroyed prior to the manufacture of
final product or the relevant plant and machinery cannot be put to use for the manufacture of final
product, appropriate adjustments should be made in the accounts to reverse such credit which
cannot be availed of, as recommended in para 31 (a) for inputs and 31 (b) and (c) for capital
goods.

ACCOUNTING TREATMENT FOR DUTY DEMANDS PAID BY DEBIT TO MODVAT/CENVAT

CREDIT BALANCE – INPUTS AND/OR CAPITAL GOODS

33. An enterprise may choose to discharge excise duty demands made by Central Excise
Department from time to time by way of debit to MODVAT/CENVAT credit balance pertaining
either to inputs or to capital goods. In that case, the duty demand so paid out of the
MODVAT/CENVAT credit balance should be debited to appropriate account, depending upon the
nature of demand and credit should be given to MODVAT/CENVAT Credit Receivable Account.
For example, if the duty demand pertains to excise duty on finished goods, the same should be
debited to excise duty account. If, on the other hand, it pertains to disallowance of
MODVAT/CENVAT credit taken on purchase of raw materials during the year, the same should be
added to the cost of inputs. Appropriate adjustment in that case would have to be made while
valuing inventory of inputs. If the duty demand pertains to disallowance of MODVAT/CENVAT
credit in respect of purchases effected in earlier years, the accounting treatment would depend on
whether the said inputs are consumed or are available in stock. If they are consumed, the
disallowance should be debited to excise duty account and treated as expense of the current
year. If raw materials are still lying in stock, duty demand should be added to the cost of stock of
inputs.

VALUATION OF INVENTORIES OF INPUTS

34. The inventory of inputs should be valued at net of input duty. In other words, the specified
duty paid on inputs will not form part of the cost of inventories. Balance in MODVAT/CENVAT
Credit Receivable (Inputs) Account should be shown in the Balance Sheet under the head
`advances' on the assets side.

35. In some cases `inputs' may be exempted from excise duty in the hands of the supplier, e.g.,
job charges are exempt from excise duty provided the prescribed procedures are observed.
Small-scale suppliers who are in the exempted category may also supply the inputs free from the
levy of excise duty. In such circumstances normal valuation rules in determining the cost of
inventories are to be applied as these are not subject to the specified duty on inputs relief. Where
purchases are made from the dealers who are not eligible under the Central Excise Rules to pass
MODVAT/CENVAT credit and, therefore, cannot issue an invoice in accordance with the aforesaid
Rules, the valuation should be made at the actual cost inclusive of excise duty.

36. In some cases, the same item of input can be obtained from different sources, some of them
may be able to provide the required documents evidencing payment of duty while others may not
be able to provide the required documents. In such cases where it is not possible for the buyer to
take advantage of the MODVAT/CENVAT credit, the closing stock of inputs of such items should
be valued inclusive of the specified duty on inputs.

37. If any input is used for the production of more than one final product, some of which are
excisable while others are either not chargeable to excise duty or chargeable at nil rate of duty,
and separate inventory of the input is not maintained, the entire inventory of inputs should be
valued at net of input duty. However, if separate inventory is being maintained, the inventory of
inputs useable for final products chargeable to excise duty should be valued at net of input duty
and the inventory of inputs useable for final products not chargeable to duty should be valued at
the actual cost inclusive of excise duty.

38. While valuing inventories of final products, the value of inputs should be net of the duty on
inputs, that is, the purchase cost as reduced by the MODVAT/CENVAT credit.

VALUATION OF INVENTORY OF CAPITAL GOODS

39. Inventories of capital goods should be valued net of MODVAT/CENVAT credit taken on capital
goods. In other words, specified duties paid on such capital goods will not form part of their cost.

ANNEXURE 'A'

Illustration of Accounting for MODVAT/CENVAT Credit on Inputs

The illustration is based on the following assumptions:

(i) There is an opening stock of 10 units purchased at Rs. 10/- per unit (Excise duty paid
on these units was @ Rs. 2/- per unit).

(ii) 100 units of raw materials are purchased at Rs. 10/- per unit, plus Rs. 2/-for excise duty,
aggregating to Rs. 12/-.

(iii) 70 units of raw material are consumed in a process involving manufacture of a

 component. All the 70 units are sold in the year. The balance 40 units are manufactured and
sold in the subsequent year.

(iv) The manufactured components are sold at a price of Rs. 15/- per unit (including excise
duty Rs.3/- per unit).

(v) MODVAT/CENVAT credit is available on the raw material purchased and can be set-off
against the excise duty payable on the final product.

(vi) Conversion costs are ignored.

The accounting treatment as per para 16 will be as below:

Profit & Loss Account

Particulars Units Rate Amount Particulars Units Rate Amount

To Opening By Sales 70 15 1,050
Stock of
Raw 10 10 100
Materials
To 100 10 1,000
Purchases 110 10 1,100
of Raw
Materials
Less: Stock 40 10 400 700
of Raw
Materials
To Excise 70 3 210
Duty
To Gross 140
Profit
1,050 1,050

NOTE:

1. Opening balance of the MODVAT/CENVAT Credit Receivable Account is Rs. 20/-.

2. Besides showing stock of raw materials at Rs. 400, the Balance Sheet would also reflect,
"MODVAT/CENVAT Credit Receivable Account" at Rs. 10/-, arising out of the following entries:

(a) Purchase A/c Dr. 1,000

MODVAT/CENVAT Credit Receivable A/c Dr. 200
To Sundry Creditors 1,200

(Being the purchase of 100 units at Rs. 10/- plus Rs. 2/- for excise duty in respect of which the
company is eligible to claim MODVAT/CENVAT credit)

(b) Excise Duty A/c Dr. 210

To MODVAT/CENVAT Credit Receivable A/c 210
(Being the payment of excise duty out of MODVAT/CENVAT credit available to the company)

Balance Sheet

Liabilities Amount Assets Amount

Current Assets, Loans and Advances
(A)Current Assets 400
Inventory of raw materials
(B)Loans and Advances 10
MODVAT/CENVAT Receivable A/c

The opening balances of inventories of raw materials and MODVAT/CENVAT Receivable

Account, for the next year, would be Rs. 400 and Rs. 10, respectively.

Annexure 'B'

Illustration of Change in Accounting Policy

(See paragraph 19 of the Guidance Note)

Continuing the illustration given in Annexure 'A' and supposing that an enterprise followed the
erstwhile inclusive method for accounting for MODVAT credit, the accounting treatment as per
this method would be as follows:

Profit & Loss Account

Particulars Units Rate Amount Particulars Units Rate Amount

To Opening By Sales 70 15 1050
Stock
of Raw 10 12 120
Materials
To Purchase 100 12 1200
of 110 12 1320
Raw
Materials
Less: Stock 40 12 480
of Raw
Materials
Raw 70 12 840
Materials
consumed
Less: 70 2 140
MODVAT 70 10 700
Credit
To Excise 70 3 210
Duty
To Gross 140
Profit
1050 1050
Note:

(1) Opening Balance of MODVAT Credit Availed A/C was Nil.

(2) Besides showing stock of raw material at Rs.480, the balance of "MODVAT Credit
Availed Account" would be Rs.70, arising out of the following entries.

(a) At the time when credit is availed of and adjusted against the excise duty which becomes
payable:

Excise Duty A/c Dr. Rs. 210

To MODVAT Credit Availed A/c Rs. 210

(Being the payment of excise duty from the MODVAT Credit available to the company)

(b) At the year end, to the extent raw material items have been consumed in the production:

MODVAT Credit Availed A/c Dr. Rs. 140

To Material Consumed Rs. 140

(Being the set off the MODVAT credit availed against materials consumed)

Balance Sheet

Liabilities Amount Assets Amount

Current Assets, Loans and Advances
(A) Current Assets
Inventory of Raw Material 480
Less: MODVAT Credit Availed A/c 70 410

In the above example, the RG 23A register would show a balance of Rs.10 representing the
MODVAT credit receivable in respect of inputs purchased.

Now the enterprise changes the accounting policy to that recommended in para 16 the Guidance
Note. In that case, the following journal entries will be passed (See para 19):

I MODVAT Credit Availed A/c Dr. Rs. 70

To Opening Stock Rs. 70

(Being the opening stock adjusted by the balance of MODVAT Credit Availed Account).

II MODVAT Credit Receivable A/c Dr Rs. 10

To Opening Stock Rs. 10

(Being an amount equal to the balance of RG 23A register, representing the MODVAT credit
receivable in respect of inputs purchased transferred to MODVAT Credit Receivable Account)
As a result of above entries, the figures of opening stock and MODVAT Credit Receivable A/c
would appear at Rs. 400 (i.e. Rs.480-70-10) and Rs.10 respectively. It may be noted that these
figures are the same had the method suggested in para 16 of the Guidance Note been followed

(See note to the balance sheet in the illustration given in Annexure 'A' of the Guidance Note).

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