CENVAT for layman

Value added Tax:
This tax was brought in by States in order to avoid cascading effect of tax on the raw materials which suffered tax already earlier.
Generally in the production process, output of a manufacturer may become the input of another manufacturer. If X company purchases raw material from another company say Y for a total value of Rs.100 and the prevailing excise duty/tax rate is 10%, then the selling price of X will be Rs.110 and buying price of Y will be Rs.110/-. This raw material is value added one for Y and it will use it and when it sells in the normal course putting additional labour and material cost of Rs.90/-, the total cost including previous excise duty/tax will be Rs.200/-. When it sells , it has to include excise duty/ tax @10% i.e. Rs.20 and sell the finished product for Rs.220/-. Actual tax should be on Rs.90/- which is the raw material and labour cost additionally added and tax is only Rs.9. This is before VAT regime. In this case, the raw material of R.100 purchased from X suffered excise duty/tax at two points i.e. Rs.10+ Rs. 11. This artificially increases the end product cost and it involved no value addition . In order to avoid double taxation and to reduce the end cost to customer, VAT is brought in and Y will be given tax rebate of Rs.10 on the raw material purchased by it and used by it in value addition of end product. This is applicable only to capital goods to be sold. Proper accounts need to be kept to claim deduction under VAT. It was renamed as MODVAT (Modified value added tax) and was introduced in 1986. Later it was re-christened as CENVAT (Central value added tax) and came into force from April 2000.

Now in the above example, under CENVAT, Y can sell to ultimate buyer at the following rate.
Rs. 100 raw material cost of X+ VAT of Rs.10 on Material cost of x purchased+ Rs.90 valued added labour and material+ Rs.9 as VAT on additional labour and material= Rs.209/- instead of Rs.220/-. Y will get relief or rebate of Rs.11 on the VAT payable calculated on the total value added cost of Rs.220/- thus removing the double taxed elements from the end calculations.

As per CENVAT rules, CENVAT credit is available to all ‘final products’ and capital goods received in the factory. According to rule 3 (e) of the CENVAT Credit rules, ‘final product’ means excisable goods manufactured from input except match sticks. Input definition does not include High speed oil, Light Diesel Oil and Motor spirit.