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Modified Value Added Tax (MODVAT)

Modified Value Added Tax (MODVAT)

Introduction

  • Modified Value Added Tax or MODVAT is slightly modified version of the VAT.
  • Manufacturers of the goods who were dependent on the raw materials from the other manufacturers are given excise credit on all the raw materials to avoid double taxation.

What is Modified Value Added Tax (MODVAT)?

  • Modvat stands for “Modified Value Added Tax”.
  • It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them.
  • MODVAT (modified value added tax) was introduced in India in 1986.
  • Under this scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. Since it amounts to excise duty only on additions in value by each manufacturer at each stage, it is called value-added-tax (VAT)
  • The modvat credit can be utilized towards payment of excise duty on the final product.
  • Rules 57A to 57U of the Central Excise Rules contained provisions for MODVAT.

Advantages of MODVAT

  • It increases the tax base.
  • It reduces the effects of taxation at multiple stages of manufacture
  • It facilitates duty free exports.

Disadvantages of MODVAT

  • It increases paper work and leads to multiplicity of records.
  • It leads to litigation.
  • It leads to corruption.

MODVAT Credit Utilization

  • Towards payment of excise duty on the final product
  • Towards payment of excise duty on waste arising in the course of manufacture of final product
  • Towards payment of excise duty on inputs themselves where they are cleared for home consumption.

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  • A number of people still use the terms MODVAT and CENVAT interchangeably, though MODVAT is no longer in force now.

MODVAT vs CENVAT

  • MODVAT contained separate provisions for capital goods, while CENVAT rules combine provisions in respect of capital goods and inputs
  • MODVAT required submission of declarations in respect of details of inputs and capital goods. CENVAT does not require any such declaration.
  • MODVAT prescribed statutory registers RG23A and RG23C. Such statutory registers are not required under CENVAT, but records have to be maintained, which require all information as was required in those registers.
  • If inputs are cleared as such, MODVAT credit just had to be reversed, while in case of CENVAT, these have to be cleared at the rate and value applicable as on date of removal.
  • MODVAT contained separate provisions for waste and scrap. CENVAT rules consider waste and scrap as any other final product and make no separate provisions in respect thereof.

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