Wrong to say that Cenvat is not VAT

There is a prevailing opinion amongst some analysts and economists that Cenvat is not VAT. This opinion further goes to say that it is a mistake on the part of the Central Board of Excise and Customs to consider Cenvat as VAT. I am writing to say that this opinion is incorrect. Cenvat is VAT. It is a kind of VAT.

Let us first see what VAT is. Value Added Tax (VAT) is a tax on the value added. Now the question is value added is on what. There are two alternatives; (a) it is value added on the raw materials which are used in manufacture of excisable goods in the case of Central Excise. (b) It is value added on sale in the case of VAT (state VAT). Thus, there are two types of value addition. One is on manufacture of goods and the other is on sale of goods. They are two different kinds of VAT.

VAT is just a mechanism for designing a tax. If the tax is on the full turnover for goods sold, it is a turnover tax. Once credit is given for the input tax paid it becomes VAT. Central Excise duty was a turnover tax till 1986. In that year the input credit system was introduced on some goods and every year the coverage was extended for some more goods and also capital goods. The taxable event is manufacture in respect of Central Excise duty because the Constitutional Entry 84 in List-1 permits the Centre to levy excise duty only on ‘production or manufacture’.

After 1994 all goods are covered by Cenvat system. This means that all the inputs will pay excise duty out of which once the input credit is debited, the reminder becomes Cenvat. For Cenvat the taxable event is value addition on raw materials and capital goods (inputs in general) which are used in manufacture. In simple terms, Cenvat is a tax on the value addition on inputs used in manufacture. An example will clarify.

A tyre factory, say, Dunlop, ys tax on all its inputs (rubber, resin, chemicals, machinery etc.) amounting to Rs 3 lakh in March. Dunlop has to pay Rs 5 lakh as Central Excise duty on tyres sold in March (manufactured either in March or earlier). So it pays just Rs 2 lakh since it gets an input credit of Rs 3 lakh. Thus Rs 2 lakh is the tax on the value added on rubber, resin, machinery, etc. which have been used in manufacture of tyre.

Similarly, sales tax was a turnover tax till April 2005 when it was converted into VAT. Now in the case of sales tax the value added is in relation to the goods which are purchased and sold thereafter. If in a paper shop if the paper purchased has paid Rs 2 lakh as sales tax and on the paper sold the sales tax paid is Rs 5 lakh in a month, the shop keeper will pay Rs 3 lakh as sales tax. For he takes the credit of Rs 2 lakh, which is a tax on his inputs. So VAT here is a tax on the value addition on paper purchased (inputs) when they are sold. The taxable event is the addition of value on inputs on being sold.

Thus, Cenvat is a VAT based on Central Excise duty on manufacture of goods. And State VAT is a VAT based on sales tax on sale of goods. Manufacture is an essential character in respect of Cenvat whereas sale is the essential character of State VAT. Both are VAT. It is wrong to say that Cenvat is not VAT.

Email: smukher2000@yahoo.com