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MODVAT and CENVAT

Taxation of inputs, like raw materials, components and other intermediaries had a number of limitations. Inproduction process, raw material passes through various processes stages till a final product emerges. Thus,output of the first manufacturer becomes input for second manufacturer and so on. When the inputs areused in the manufacture of product `A', the cost of the final product increases not onl on account of thecost of the inputs, but also on account of the dut paid on such inputs. As the dut on the final product is onad valorem basis and the final cost of product `A' includes the cost of inputs, inclusive of the dut paid, dutcharged on product `A' meant doubl taxing raw materials. In other words, the tax burden goes onincreasing as raw material and final product passes from one stage to other because, each subse!uentpurchaser has to pa tax again and again on the material which has alread suffered tax. This is calledcascading effect or double taxation.

This ver often distorted the production structure and did not allow the correct assessment of the taxincidence. Therefore, the "overnment tried to remove these defects of the #entral $xcise %stem bprogressivel relieving inputs from excise and countervailing duties. An ideal sstem to reali&e this obectivewould have been to adopt value added taxation ()AT*. +owever, on account of some practical difficulties itwas not possible to full adopt the value added taxation.

+ence, "overnment evolved a new scheme, `-)AT' (odified )alue Added Tax*. -)AT %cheme whichessentiall follows )AT %cheme of taxation. i.e. if a manufacturer A purchases certain components(rawmaterials* from another manufacturer / for use in its product. / would have paid excise dut oncomponents manufactured b it and would have recovered that excise dut in its sales price from A. 0ow, Ahas to pa excise dut on product manufactured b it as well as bear the excise dut paid b the supplier of raw material /. 1nder the -)AT scheme, a manufacturer can take credit of excise dut paid on rawmaterials and components used b him in his manufacture. It amounts to excise dut onl on additions invalue b each manufacturer at each stage.

The modvat scheme is regulated b 2ules 34A to 341 of the #entral $xcise 2ules and the notifications issuedthere under (The Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002*.

odvat %cheme ensures the revenue of the same order and at same time the price of the final product could

be lower. Apart from reducing the costs through elimination of cascade effect, and bringing in greaterrationali&ation in tax structure and also bringing in certaint in the amount of tax leviable on the finalproduct, this scheme will help the consumer to understand precisel the impact of taxation on the cost of an product and will, therefore, enable consumer resistance to unethical attempts on the part of manufacturers to raise prices of final products, attributing the same to higher taxes.

%ubse!uentl, -)AT scheme was restructured into #$0)AT( #entral )alue Added Tax* scheme. A new setof rules 34AA to 34A5 , under The Cenvat Credit Rules, 2004, were framed and whatever restrictionsrestrictions were there in -)AT %cheme were put to an end and comparativel, a free hand was given tothe assesses.

1nder the #envat %cheme, a manufacturer of final product or provider of taxable service shall be allowed totake credit of dut of excise as well as of service tax paid on an input received in the factor or an inputservice received b manufacturer of final product.

The ter !"n#ut! eans6 7

8. All goods, except light diesel oil, high speed diesel oil and motor spirit, commonl known as petrol,used in or in relation to the manufacture of final products whether directl or indirectl and whethercontained in the final product or not and includes lubricating oils, greases, cutting oils, coolants,accessories of the final products cleared along with the final product, goods used as paint, or aspacking material, or as fuel, or for generation of electricit or steam used in or in relation to

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manufacture of final products or for an other purpose, within the factor of production

9. All goods, except light diesel oil, high speed diesel oil, motor spirit, commonl known as petrol andmotor vehicles, used for providing an output service:

Ex#lanation 1 6 The light diesel oil, high7speed diesel oil or motor spirit, commonl known as petrol, shallnot be treated as an input for an purpose whatsoever.

Ex#lanation 2 6 Inputs include goods used in the manufacture of capital goods which are further used inthe factor of the ;manufacturer

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A certificate issued b appraiser of customs

An invoice?bill?challan issued b providers of input service.

A challan evidencing pament of service tax.

Credit of dut$ is alloed onl$ if all the conditions 'iven +elo are et-

The basic criteria for availment of credit of dut paid on inputs or capital goods is that the goods

shall be used in manufacture of final products.

The goods shall be accompanied with proper prescribed documents.

The final products shall not be exempt from whole of dut or chargeable to nil rate of dut.