CENVAT MODVAT provisions

CENVAT

CENVAT credit is a credit in respect of central excise on inputs purchased for the manufacture or duty paid in relation to the manufacture of the final product. CENVAT credit is also available in respect of duty paid on capital goods, which include machinery, plant, spare parts of machinery etc. in other words, instead of paying cash towards central excise on shipment of goods, the exporter can adjust the excise duty paid on the inputs and machinery. Virtually, CENVAT CREDIT is like a credit balance in bank account that can be adjusted towards the excise duty payable.

Let me explain how does CENVAT credit scheme work? . ABC Ltd is the manufacturer and exporter of toys and it purchases certain components from PQR Ltd for use in manufacture of toys. PQR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sale price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxation. ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd, at the time of export. This is how CENVAT CREDIT works.

Under CENVAT Credit scheme, the benefit of excise duty on inputs is available, instantaneously, when the inputs reach the factory. There is no need to establish any linkage between the inputs and goods manufactured . In case of capital goods, 50% benefit is available in the current year of purchase and balance in the next year. This balance can be adjusted against the duty payable but is not refunded. So, it is desirable to utilize this balance, at the earliest.

In other words under a CENVAT CREDIT scheme, exporter is totally freed from the burden of excise duty, at all the different stages, on inputs used, duty paid on final products and even duty paid on capital goods purchased. Under a CENVAT credit scheme, the intention of Government is to eliminate the burden of excise duty on exports totally, paid directly or indirectly, to make them globally competitive. 

MODVAT

MODVAT (modified value added tax) was introduced in India in 1986 (MODVAT was re-named as CENVAT w.e.f. 1-4-2000). The system was termed as MODVAT, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.

System of VAT was introduced to service tax w.e.f. 16-8-2002. VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.

Integration of goods and service tax – A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).