INTRODUCTION

Govt. of India had set up "Indirect Taxation Enquiry Committee" in 1976 under chairmanship
of Shri. L.K. Jha. The Committee strongly recommended adoption of concept of VAT in
India. The Committee therefore recommended MANVAT i.e. VAT at manufacturing level.
Accordingly, the MODVAT scheme was introduced w.e.f. 1-3-1986. Initially, only selected
items in 37 chapters were covered under the scheme. Subsequently, the list of items covered
was slowly expanded and by 1994, products in 77 Chapters out of 91 Chapters in CETA were
covered under MODVAT scheme. Textile sector was also brought under MODVAT during
1996 and Tobacco sector was covered in 2000. Thus, MODVAT covers almost all
manufacturing sectors except few goods. MODVAT scheme was extended to Capital goods
w.e.f. 1st March, 1994.

Modvat re-christened as Cenvat - Modvat has been renamed as 'Cenvat' w.e.f. 1-4-2000.
Principally, there is no difference. However, procedures have been simplified under Cenvat.
It is called 'Cenvat' as it is restricted to VAT on Central Excise duty and CVD only.

Origin

Meaning

Concept

FEATURES AND PROVISIONS OF CENVAT

 No one-to-one correlation required between input/input services and final

 Excise duty and Additional duty of customs paid on Inputs and capital goods and
service tax paid on Input services used in or in relation to the manufacture of final
product or rendering output service are eligible for credit.

 No credit shall be allowed in respect of Basic Customs duty paid on inputs or

 No credit shall be allowed if the final product or out put service are wholly
exempted.

 CENVAT credit shall be allowed only on the basis of specified duty paying
documents.

 Credit of excise duty shall be allowed only on receipt of inputs and/or capital
goods in the premises of manufacturer or provider of output service irrespective of the
fact whether payment is made or not.

 Credit of service tax on input services shall be allowed only on making of

 Credit of duty paid on capital goods shall be allowed to the extent of 50% in the
year of receipt of capital goods and balance in subsequent years subject to the
availability of possession of said capital goods. However, 100% of the duty component
shall be allowed as credit in the first year if the capital goods are in the nature of tools,
dies, jigs, etc.

Provisions

Other Provisions
IMPLICATIONS OF CENVAT

Understanding Inputs

Input Goods

Input Services

Input Capital Goods

Cenvat on Capital Goods

Cenvat credit is available on inputs as well as capital goods. Some provisions are common
while there are some specific provisions in respect of Cenvat on capital goods. General
provisions applicable to both inputs and capital goods are discussed in earlier chapter. The
specific provisions in respect of capital goods are discussed here.

Capital Goods Eligible - Following are the ''capital goods'', if used within the factory of
manufacturer of final product, vide Rule 2(b) of Cenvat Credit Rules:

1. Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84
* Electrical machinery under chapter 85 * Measuring, checking and testing machines etc.
falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No
6801.10 * Abrasive powder or grain on a base of textile material, falling under 68.02
2. Pollution control equipment
 3. Components, spares and accessories of the goods specified above.
4. Moulds and dies
5. Refractories and refractory material
6. Tubes, pipes and fittings thereof, used in the factory
7. Storage Tank.

Spares, components etc. of Sr Nos. iii to vii - Item No (iii) covers only components, spares
and accessories of Sr Nos. (i) and (ii). In the opinion of author, components, spares etc. of Sr
Nos. (iv) to (vii) will be eligible as 'inputs', as these are obviously used 'in or in relation to
manufacture'.

Capital goods does not cover equipment or appliance used in office -- Rule 2(b) [Earlier
Explanation to rule 57AA(a)] clarifies that equipment or appliances used in an office will not
be eligible as 'capital goods'. What is 'office' is not defined, and hence the word has to be
understood in commercial parlance. Of course, some litigation seems possible. e.g. whether
air conditioner / computer used in cabin of production managers / officers are eligible if their
offices are within the factory itself? Whether computer used for maintaining production
records or cupboard / storage system to keep production records will be eligible? In the
opinion of author, as per commercial parlance, these are understood as office equipment /
appliance. However, note that ''office equipment and appliances'' and ''equipment or
appliances used in an office'' are not the same thing. As per section 2(f) of CE Act, ''factory''
means any premises, including the precincts thereof, wherein or in any part of which any
manufacturing process is carried out. Thus, office of factory manager or plant manager
located within the plant will be ''factory'' and not ''office''. Thus, any equipment or appliance
used within such ''office'', which is located within the plant, should be eligible if it falls within
the specified chapter headings.

It is clarified that air conditioners, refrigerating equipment and computers will be eligible for
Cenvat credit of capital goods if they are used in the manufacture of final product. Air
conditioner used in office premises or a computer used in the office premises of a factory
shall not be eligible to Cenvat credit. Chapter 5 Para 3.8 of CBE&C''s CE Manual, 2001.
[Rules only want that capital goods should be ''used'' in the factory'', while as per
department, it will be eligible only if ''use in manufacture of final product in the factory''. As
is well known, departmental circular cannot override provisions of Act or Rules].

Capital goods not covered in above definition - Any 'capital goods' not covered in above
definition will be covered as 'input' if it is used in or in relation to manufacture. For case law,
see previous chapter.

Distinction between accounting principles and excise definition - The definition of 'capital
goods' as per Rule 2(b) of Cenvat Credit Rules is entirely different from 'capital goods' as
understood in accounting principles or for income tax purposes. Items like spare parts, tools,
dies, tubes, fittings etc. are never capitalised in accounts or for income tax purposes but are
defined as 'capital goods' for Cenvat.

Capital goods should be used in the factory - The only requirement is that the eligible capital
goods should be 'used' in the factory for manufacture of eligible final products. Purpose for
which these capital goods are used is not relevant. - same view in Ghatampur Sugar v. CCE
1998(104) ELT 415 (CEGAT). Thus, capital goods will be eligible even if they are used for
processing, quality control, testing, material handling or any other purpose.
Use elsewhere is not permitted - Cenvat credit is available only if capital goods are installed
in the very factory of manufacturer of final products. Credit on capital goods is not available
if it is used in another factory - even if it is subsidiary - Sumangala Spinning Mills v. CCE
1999(113) ELT 84 (CEGAT). Capital goods used at job worker's premises for work on inputs
are not eligible. - Majestic Auto v. CCE 1999(107) ELT 133 (CEGAT).

The exception is moulds, dies, jigs and fixtures, which can be sent to a job worker for
production of goods on behalf of and according to specifications of the manufacturer sending
the moulds, dies, jigs and fixtures. -- Rule 4(5)(b) of Cenvat Credit Rules. However, these
cannot be sent directly to place of job worker. These have to be brought in factory (or
manufactured in factory) and then sent, as Rule 3(1) of Cenvat Credit Rules permits direct
despatch of only inputs to job worker.

Capital goods used outside factory premises not permitted - Capital goods used away from
factory (e.g. equipment in mines away from factory or pump house situated away from
factory) are not eligible for Cenvat credit. The same provision holds good for Cenvat on
inputs also, and hence case law discussed in earlier chapter is relevant for Cenvat on capital
goods also.

Capital goods received in initial stages - During initial set up of factory, machinery is
received but factory has not yet come into existence as production has yet to commence. The
credit will be available when factory is registered and production starts. - CBE&C Circular
No. 88/88/94 date 26-12-94. [The trade notice stated that the manufacturer should go on
filing declaration under rule 57Q even if the factory has not come into existence and is not
registered. Now, that provision in respect of Cenvat (that time Modvat) have been dropped,
declaration is not required. However, it is advisable to keep the department informed]

Exemptions

Documentation
CENVAT CREDIT RULES

CENVAT Credit Rules 2001

CENVAT Credit Rules 2002

CENVAT Credit Rules 2004

CONCLUSION
Cenvat (Central Value Added Tax) provisions are used in
Central Excise to implement concept of VAT at manufacturing
stage by giving credit of duty paid on inputs. Cenvat was known
as Modvat upto 31-3-2000.
CENVAT (Central Value Added Tax ) has its origin in the system
of VAT (Value Added Tax), which is common in West European
Countries. Generally, any tax is related to selling price of
product. In modern production technology, raw material passes
through various stages and processes till it reaches the
ultimate stage e.g., steel ingots are made in a steel mill. These
are rolled into plates by a re-rolling unit, while third
manufacturer makes furniture from these plates. Thus, output
of the first manufacturer becomes input for second
manufacturer, who carries out further processing and supply it
to third manufacturer. This process continues till a final product
emerges. This product then goes to distributor/wholesaler, who
sells it to retailer and then it reaches the ultimate consumer. If
a tax is based on selling price of a product, the tax burden goes
on increasing as raw material and final product passes from one
stage to other. For example, let us assume that tax on a
product is 10% of selling price. Manufacturer ''A'' supplies his
output to ''B'' at Rs. 100. Thus, ''B'' gets the material at Rs.
110, inclusive of tax @ 10%. He carries out further processing
and sells his output to ''C'' at Rs. 150. While calculating his
cost, ''B'' has considered his purchase cost of materials as Rs.
110 and added Rs. 40 as his conversion charges. While selling
product to C, B will charge tax again @ 10%. Thus C will get
the item at Rs. 165 (150+10% tax). In fact, ''value added'' by
B is only Rs. 40 (150-- 110), tax on which would have been
only Rs. 4, while the tax paid was Rs. 15. As stages of
production and/or sales continue, each subsequent purchaser
has to pay tax again and again on the material, which has
already suffered tax. This is called cascading effect .
Cascading effect of taxes - A tax purely based on selling
price of a product has cascading effect, which has the following
disadvantages:
Computation of exact tax content difficult - It becomes very
difficult to know the real tax content in the price of a product,
as a product passes through various stages and tax is levied at
each stage. This is particularly important for granting Export
incentives or for fixing regulatory prices.
Varying Tax Burden - Tax burden on any commodity will vary
widely depending on the number of stages through which it
passes in the chain from first producer to the ultimate
consumer.
Discourages Ancillarisation - Ancillarisation means getting
most of the parts/components manufactured from outside and
making final assembly. It is common for large manufacturers
(like automobile, machinery etc.) to get the parts manufactured
from outside and make final assembly in his plant. If a
component is purchased from outside, tax is payable. However,
if the same component is manufactured inside the factory, no
tax would be payable. Thus, manufacturers are tempted to
manufacture parts themselves instead of developing ancillary
units for supply of the same. This is against the national policy,
because it discourages growth of Small Scale Industry and
increases concentration of economic power.
Increases cost of production - If a manufacturer decides to
reduce ancillarisation, it increases cost of production and waste
of scarce national resources, as the large manufacturer may not
be in a position to fully utilise the production capacity of the
machinery.
Concessions on basis of use is not possible - Same article
may be used for various purposes e.g. Copper may be used for
utensils, electric cables or air conditioners. Government would
naturally like to vary tax burden depending on use. However,
this is not possible as when Copper is cleared from factory, its
final use cannot be known.
Exports cannot be made tax free -- Though final products
which are exported, are exempt from tax, there is no
mechanism to grant rebate of tax paid at the earlier stages on
the inputs.