Background of CENVAT

CENVAT (central value added tax)

Background of CENVAT

CENVAT (central value added tax) has its origin in the system of VAT, which is common in western European countries generally any tax related to selling price of product. In modern production technology, raw material passes through various stages and procedures till it reaches the ultimate stage. Thus the output of the first manufacturer becomes input for second manufacturer, who carries out the further processing and supplies it to third manufacturer. This process continues till a final product emerges. 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 e.g. let us assume that tax on a product is @10% of selling price. Now Manufacturer “A” supplies this product to manufacturer B at Rs 100. Thus B gets material at Rs 110. When B supplies this good to C at Rs 150 the tax will apply on it also. As stage 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.