What is Union Excise Duty? How it differs from state excise duty?


If we divide taxes into direct and indirect taxes, the union excise duty is the largest indirect tax revenue for the central government. It was the largest tax revenue for the centre from 1947 to 2007; until it was pushed to the third spot by corporate income tax and personal income tax. Now it is the third largest tax and may be overtaken by service taxes in the near future.

What is excise duty?

Excise duty is basically a production tax. Tax on the production stage for most of the commodities is made by the centre in the form of union excise duties (UED). It is imposed on manufactured items in India that are meant for domestic consumption. The UED is not payable on the goods exported from India.

Manufacturers have to pay excise duties to the centre and tax is imposed and collected on a value addition base. Or in other words, the UED is implemented as a VAT and it is called as CENVAT (Central Value Added Tax) from 1999 onwards.

There are various types of excise duties: Basis Excise Duty, Special Excise Duty and Additional Duty of Excise. From 1999, the centre has adopted VAT format for its excise duties and hence it is also known as CENVAT (Central Value Added Tax).

The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985.

What is state excise duty?

But all excise duties are not levied by the centre. Excise duty on production few items including that on liquor is imposed by state governments. Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called “State Excise” duty. For most of the states, excise duty is the second largest tax revenue after sales taxes (state VAT).

Future reforms in UED

The GST Bill proposes to merge excise duty and service taxes of the centre in the name of Central Goods and Service Tax (CGST) under the proposed Goods and Service Tax (GST). Here, the rate for Union Excise duty or CENVAT may be set at 14% for most of the commodities.