Each nation requires certain tax norms to ensure that things stay structured and simple, offering clarity and ensuring ease of use to its people. The government of India adopted the concept of Value Added Tax or Vat in 1986, through the introduction of Modified Value Added Tax or MODVAT. Typically, every product which is manufactured goes through a number of stages, each involving different components and raw materials. Before the introduction of MODVAT, it was hard for the government to keep a tab on taxes at multiple stages, thereby burdening the final consumer, which was been solved after a series of new ideas and suggestions were implemented.
Introduction to MODVAT:
MODVAT was incorporated into the Indian tax system in the year 1986, covering a few limited commodities initially. The implementation of MODVAT in our context helped simplify taxes, ensuring that dual taxation was avoided and proper mechanisms were in place to ensure ease of use. MODVAT used a modified version of VAT, wherein manufacturers of particular goods who relied on raw materials from other manufacturers were provided excise credit on the raw materials, eliminating double taxation.
For example, under the MODVAT system, a manufacturer (A) who procured raw materials from manufacturer B could claim excise credit on the raw material, since B adds an excise duty on his/her final product. This credit can be subtracted from the final excise due by a manufacturer, thereby helping him/her pay only that amount which he/she is liable to pay. Rules 57A to 57U of the Central Excise Rules contained provisions for MODVAT.
Current status of MODVAT:
After being in force for around 15 years, MODVAT was replaced by CENVAT (Central Value Added Tax). The government used the MODVAT platform to make certain small changes to VAT, restructuring it to CENVAT. CENVAT Credit Rules were framed in the year 2004 to offer clarity on its working and implementation. A number of people still use the terms MODVAT and CENVAT interchangeably, though MODVAT is no longer in force now.