Manufacturers of fabric and knitted fabric often send the product to outside process houses for finishing. After processing, the fabric is returned for final processing using polyurethane foam. The process is known as lamination. The mills have to pay excise duty on laminated fabric at the selling price at the rate of 16 per cent basic and 5 per cent additional excise duty.

Earlier, the mills were allowed to avail Modvat credit on the excise duty levied at the processing stage. However, with the issue of a notification in December 1998 imposing duty on machines, the equation has changed for the mills.

After the issue of the notification, the processing houses have to pay excise duty per month on chamber basis and thusthe original manufacturing mills are not entitled to avail Modvat credit on the final duty paid by them. Thus, manufacturers are now not compensated for the excise duty they pay on laminated fabric.

The association pointed out that this is an anomalous situation since it leads to cascading effect of taxation which is not the intention of the government. Manufacturers not only have to pay excise on the price of the final product, but they also have to pay excise during the processing stage leading to multiple taxation.

Speaking to The Financial Express, Nitma secretary KJS Ahluwalia said that the government's taxation policy has always tried to ensure that manufacturers should not be overburdened with tax. "The logic behind Modvat is that producers should be compensated for the excess tax they paid during manufacturing process. By denying the facility to manufacturers, the government is deviating from its policies."