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August 2, 2012

Excise Duty in Closing Stock

Concept of Excise

According to Rule 4 of the Central Excise Rules, 2002
RULE 4. Duty payable on removal. — (1) Every person who produces or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in rule 8 or under any other law, and no excisable goods, on which any duty is payable, shall be removed without payment of duty from any place, where they are produced or manufactured, or from a warehouse, unless otherwise provided :

Payment of Excise

Taxable Event:
It is the event the happening of which attracts the liability to pay tax. In Central Excise Act it is production or manufacture of excisable goods.

Payment Liability:
The duty is payable at the time of removal of goods from the factory.

Accordingly, though the taxable event for excise duty is manufacture or production of excisable goods but a person shall be liable to pay excise duty at the time of clearance of excisable goods from the factory or warehouse. No sale or further utilization of excisable goods can take place unless the duty is paid hence the duty is a necessary expense to be incurred if the goods are to be put on the location and condition from where they can be sold or further used in the manufacturing process.

Where the liability for excise duty has been incurred but its collection is deferred, provision for unpaid liability should be made.

Calculation of Excise

Excise duty is always calculated on Cost of Manufacture and not on the selling price. Excise duty is payable not on the point of sale but on the point of production

General Guidelines on stock
Stock should be valued at cost or market value, whichever is lower, as it is a prudent business practice.

As per Accounting Standard of ICAI (AS-2), inventory cost should comprise of all cost of purchases, cost of conversion and other costs incurred in bringing the inventories to the present location and condition. Cost of purchases should be exclusive of duties which are recoverable from the taxing authorities. (e.g. Cenvat). Inventory should be valued at lower of cost or net realisable value.

Excise under Income Tax Act
As per section 145A of Income Tax Act, stock valuation should be inclusive of any tax, duty, cess or fee actually paid by assessee to bring the goods to the place of its location and condition as on date of valuation, even if such tax or duty is includible even if any right arises as a consequence to such payment. Thus, duty paid on inputs will have to be added while valuing stock, even if Cenvat credit availed of such duty paid. In respect of finished stock, excise duty payable should be added to the inventory valuation even if not paid as goods are still lying in the factory. Both opening as well as closing stock should be valued on same basis.

Harmonious Interpretation of various acts
Thus, for purposes of Income Tax, inventory is required to be valued inclusive of excise duty, even if assessee is entitled to get Cenvat credit of duty. However, for purposes of balance sheet as per Companies Act, inventory should be valued exclusive of excise duty, if assessee is entitled to get Cenvat credit of duty paid on inputs. In view of this conflict, Institute of Chartered Accountant of India has advised that in the company accounts, inventory of inputs should be valued without considering Cenvat (i.e. first method should be adopted). For purposes of income tax section 145A, computation should be made outside the books, as made in case of some other items like depreciation. [Chartered Accountant - November 1999 - page 83].

Accounting entries

1) When u purchase the raw material the entry would be:
Purchases A/c              Dr    920
CENVAT Input  A/c            Dr      80
  To Creditors A/c                             1000

2) a) For excise duty on the closing stock of finished goods remaining on the date of balance sheet. The entry would be:
 Excise duty (P&L A/c)              Dr
  To Prov for ED (Current Lianlity)

 b) For inclusion in Closing Stock as at 31st March
No separate entry. The usual closing stock entry value is increased by estimated ED
Closing Stock A/c Dr
       To Trading A/c

Net Result  In P&L A/c
Closing Stock stand increased, and an ED Expense also stands increased.
 In Balance Sheet
Stock on Asset includes ED. Current Liabilities includes ED on Closing Stock.

Though there is no impact in P&L account but management/auditor can’t escape their responsibility in case of non compliance as, the financial position of the company is getting affected since results in understatement of value of inventory as well as liabilities of the company by the same amount.

In Next FY Entry Would be
By bringing in Opening Stock, automatically, excise is debited to your trading account
c) Reversal Entry for Provision
Provision for ED A/c Dr (Current Liablity)   
      To ED A/c                    (P&L ) To knock of the excess expense booked in opening stock

3) Later when the FG is sold the entry would be:
Debtors A/c                  Dr    2000
  To Sales A/c                                 1840
  To ED payable A/c                          160

4) Payment entry:
ED A/c                            Dr    160
   To CENVAT Cr. A/c                        80
   To PLA (Bank/cash)                      80

Logic for Inclusion of Excise in cost

Closing stock to be values at cost and only profit element to be removed and excise duty form part of cost, as it is charged on manufacture. Then you will say all cost incurred are not our cost since will be recovered from customer 

Inventory Valuation and Auditor

Inventory valuation is responsibility of auditor also - A note in balance sheet of many companies states - 'Inventory - (As valued and certified by Management). This gives an impression that inventory valuation is not responsibility of auditor. Hence, ICAI has advised that these words should not be used in balance sheet, as auditor is required to perform audit procedures to check inventory. - Chartered Accountant - September, 1999 - page 66]. [Thus, auditor has responsibility of stock valuation also]


  1. thanks a lot sir for such a great presentation.

    Dear sir will you please clarify whether the excise duty provision made for closing stock is allowable in Income Tax Act,1961?

  2. No sir , Excise Duty PROVISION is not allowed under IT Act

  3. Dear sir,
    My name is naresh, i have a query as follows:

    I could not understand the second entry of inclusion of excise duty in closing stock. Could you please elaborate it. Trading account is just a statement and not books of account, hence i could not understand the entry from that angle.

    1. Dear Naresh,
      2nd entry is not an entry in real sense it is just recognition of closing stock in books.

  4. thanks sir it really helpful to me.............

  5. thanks sir its really helpful to me............

  6. sir can you tel me if there is closing stock of FG exists as on 31.3.2014 but no removal has been is there liabilty to pay excise duty on the same.

    1. The duty becomes due on manufacture of goods but the duty is payable at the time of removal of goods from the factory.