Excise duty can be computed in three ways as per the Central Excise Act, 1944 and Central Excise Tariff act, 1985.
Specific basis i.e. on the basis of length, weight etc. It the easiest method. But the major drawback of this method is that if the price of goods increase, the duty still won't increase. For eg- duty payable on cigarettes is on basis of length
Fixed duty: This can be found in two cases :-
Compounded Levy Scheme - This scheme is to provide relief to small manufacturers who often find it difficult/ expensive maintain records. Under this scheme, the assessee has the option to pay a fixed amount of duty instead of maintaining records and calculating the amount due. For eg - some steel and aluminium goods are covered under this scheme. The rate of duty is Rs. 30000 p.m. per machine.
Duty based on production capacity - In this case, the govt. may notify some goods on which duty shall be calculated on such basis. This duty is mandatory and the producer cannot opt for any scheme of calculating duty payable. Goods are usually notified under this scheme after considering the extent of evasion possible on the good. Also, the production capacity is determined on the basis of rules made by CBEC (Central Board of Excise and Customs) especially for this purpose. Pan Masala, gutkha etc are notified under this scheme.
3. Ad valorem (On the basis of the value of goods) :- This is the most common/ preferred method for calculating excise duty. There are three methods for calculating value of goods -
Tarrif value - The government, by notification can fix tarrif values of articles on basis of their wholesale price or average price of various manufacturers. It happens very rarely. For eg - Central govt. has fixed tarrif value for jewellery (other than silver) at 30% of value declared in the invoice.
MRP (Maximum Retail Price) - If the tarrif value of the good is not notified, the MRP is considered as the value. But to consider MRP is basis for calculating excise, two conditions must also be satisfied - The goods must be notified by central govt. AND these goods must be covered under the Legal Metrology Act, 2009 (which requires that MRP must be declared on goods which are sold in pre packed form). If the above conditions are satisfied, then their value shall be deemed as the MRP less some deduction amount called abatement (which again, will be notified by the government) and excise will be calculated on such deemed value.
Transaction value - If the government has not fixed the tarrif value and these goods do not have any MRP mentioned as such, then value of such goods will be computed on basis of actual transaction value. Provided the transaction value is the sole consideration (payment) and the buyer is not related to you. Also in this case, excise duty will be calculated on each sale separately on the basis on value of each transaction.