Disadvantages of CENVAT

Disadvantages of CENVAT

• Computation of exact tax content difficult:

It became very difficult to know the real tax content in price of a product as product passes through various stages and tax is levied at each stage.

• Varying tax burden

Tax burden on any commodity will vary widely depending on the number of stages through which it passes in the chain from first producer to the ultimate consumer.

• Discourages Ancillarisation:

Ancillarisation means getting most of the parts / components manufactured from outside and making final assembly. Because of tax manufacturer are tempted to manufacture parts themselves instead of developing ancillary units for supply of the same this is against the national policy because it discourages the growth of small scale industries and increase concentration of economic power.

• Increased cost of production:

If manufacturer decides to reduce the ancillarisation than it increases the cost of production and waste of scares national recourses as large manufactures may not be able to fully utilize the production capacity of machinery.

• Concession on the basis of use is not possible:

Same article may be used for various purposed e.g. copper may be used for many purposes. Government may naturally like to vary tax burden depending on use. However this is not possible as when copper is cleared from factory its final use cannot be known.