Taxes are broadly classified into direct and indirect taxes, which ensure that the onus of their payment only falls to those who are eligible for them. During the pre-GST era, the indirect taxation system of India was split into a number of layers. Each of these layers, including VAT and CENVAT, ensured a methodical tax collection by the government at various stages of the production of goods and services.
VAT or Value Added Tax belongs under the umbrella of consumption tax levied on a product, upon addition of a value at different stages of its supply chain, starting from its production to the point of sale. The Government of India applies a VAT on each point’s gross margin in the manufacturing to the sales process of a given product.
So, suppliers, manufacturers, distributors, and retailers collect this VAT on taxable sales. As a result, tax jurisdictions collect tax revenue across the entire supply chain as opposed to at the sale to end consumers.
VAT was introduced into the Indian taxation system on April 1st, 2005. It replaced the pre-existing Sales Tax, with an intention to make India a single integrated market. On June 2nd, 2014, this tax was set in force in all the states and union territories of India, except Lakshadweep Islands and Andaman and the Nicobar Islands.
Through the imposition of VAT as a substitute for other taxes, the government of India aimed to close loopholes by avoiding the cascading effect of the tax.
Central Value Added Tax or CENVAT allows a manufacturer to utilise the credit of excise duty/additional duty paid for the procurement of input services to pay off the excise duty on his/her final product or output services. It was introduced as a modification to the previously functioning Modified Value Added Tax or MODVAT.
During the course of the manufacture of final products, the raw materials travel through various stages of production, wherein a duty is levied on every value-added at each stage. CENVAT, therefore, eliminates this double taxation, thereby simplifying taxation for manufacturers, and consumers at large.
In 2004, The government established ‘The CENVAT Credit Rules’ in order to implement CENVAT across the country and offer Indian manufacturers of final products certain tax credits on the excise duty payable by them.
CENVAT credit refers to the set-off available to manufacturers if they utilise some specific inputs for manufacturing their products. A manufacturer can claim CENVAT credit on the following cases:
VAT and CENVAT were both essential sources of revenue for the government, prior to the advent of the GST regime in 2017. The table below provides a rundown on the difference between VAT and CENVAT:
|Context of differentiation||CENVAT||VAT|
|Purpose of taxation||Prevent duplication of tax.||Elimination of the cascading taxing effect.|
|Authority of collection||Central Government of India||Respective State governments wherein the transaction take place.|
|Available credit||CENVAT credit||VAT credit|
|Implementing agency||Central Board of Excise and Customs||State Commercial Tax Departments|
|Nature of tax||Excise/Service||Sales|
|Tax rates||Varies based on the raw material used in the process of manufacture||Varies between states and products|
|Applicability||Applicable to the inputs/raw materials used in manufacturing a final product.||Applicable on every value addition to a commodity.|
The example discussed below elaborates on the difference between VAT and CENVAT, focusing on the variance in their practical application:
On July 1st, 2017, the Government of India ruled out the previous indirect taxation system in force by introducing a major reform for the country. An integrated Goods and Services Tax or GST replaced the pre-existing multiple tax structures of Centre and State taxes, including VAT and CENVAT.
Presently, it subsumes all indirect taxes with a single comprehensive tax levied on the production and distribution of goods and services. GST remains a single domestic indirect law for the entire country, thereby establishing transparency, neutrality, and parity within India’s taxation system.