Taxes are an integral part of our lives, with almost every product we buy or every service we avail eligible for certain taxes. Understanding the tax system can be an arduous task, which is why the government has split it into a number of layers, ensuring that each layer is simple to comprehend and understand. Taxes are divided into direct and indirect taxes, ensuring that the onus of payment falls only on those who are eligible for it.
The Indian government primarily relies on taxes to fund its projects and provide amenities to its citizens, making each tax extremely critical to our overall development. VAT or Value Added Tax and CENVAT (Central Value Added Tax) are two main entities used by the government to ensure smooth functioning.
What are VAT and MODVAT/CENVAT?
VAT is an indirect tax levied at different stages of trade by the government. The primary purpose of VAT is to ensure that there is no duplication or repetition of tax, thereby ensuring that no single entity is overburdened by it. VAT is typically collected by the state government in which the final transaction takes place, putting the onus on respective state commercial tax departments to ensure that it is collected.
CENVAT is an adaptation of VAT, which came into force in the country in 1986 in the form of MODVAT (Modified Value Added Tax). This MODVAT was converted into CENVAT in the early 2000’s with no major changes in its implementation or execution. Today, MODVAT isn’t used as a term and CENVAT is the tax charged by the Central government on products or services at different levels of manufacture.
Differences between VAT and MODVAT/CENVAT:
The table below highlights some of the basic differences between VAT and MODVAT/CENVAT.
|Collecting Authority||Respective state government in which transaction occurs||Central government|
|Implementing Agency||State Commercial Tax Departments||Central Board of Excise and Customs|
|Credit Available||VAT credit||CENVAT credit|
|Nature of Tax||Sales (within a state)||Excise/Service|
|Purpose||Prevent duplication of tax||To prevent cascading taxing effect|
|Rates||Varies from state to state depending on the product||Varies according to the raw material|
|Applicability||To be paid on value added to a commodity or for a service provided||Applicable on the inputs (raw materials) used to produce a product|
|Example of Credit System||Mr. Guha runs a company manufacturing hockey sticks. The raw material used is wood, with the VAT being fixed at 5%. On purchase of raw wood costing Rs 1,000, Mr. Guha pays 5% VAT or Rs 50. This becomes his VAT credit in the future. On completing the product, Mr. Guha sells the hockey sticks for Rs 5,000, with a VAT of 5% on this final product. This final VAT is Rs 250, but since Mr. Guha has credits worth Rs 50, he is entitled to pay a final VAT of Rs 200 only.||Mr. Guha, who runs a hockey stick manufacturing unit is expected to pay excise on his products (assume the excise to be 14%). On purchase of raw wood worth Rs 1,000/-, he pays an excise of Rs 140/- to the wood supplier, with this amount added to his CENVAT credit. On selling the product for Rs 5,000/-, he has to charge an excise of 14% on the final amount, which comes to Rs 700. Now the amount he is liable to pay becomes Rs 700 minus Rs 140, or Rs 560.|