MODVAT

MODVAT (modified value added tax)

Introduction                                                                         

MODVAT—modified value added tax is a concept in central excise law introduced with effect from 1-3-86 and has gained momentum with more and more industries beginning to avail this facility.

Even though the term MODVAT is not defined in central exercise act 1944 or rules made there under. It can be describe in following words:

“MODVAT  i.e. modified value added tax is a unique scheme under central excises which enables a manufacture to avail credit of duty paid on notified eligible and duty paid inputs used in or in relation to the manufacturer of the notified dutiable final products directly or indirectly and whether or not contained in final product and utilizes such credits towards payment of duty on any final products whether or not such inputs have been actually used in the manufacture of such other final product.”

MODVAT is nothing but MONEY and therefore every manufacturer of excisable goods is keen to avail this facility which reduces the liability of duty on the final products to the extend of duty already paid on notified eligible inputs used in or in relation to the manufacture of excisable goods referred as final products.

The purpose of MODVAT scheme is to avoid double taxation i.e. tax on inputs as well as tax on final products. MODAVT is therefore to avoid cascading effect of taxes paid on inputs which are used in the manufacture of final products which again attracts excise levy.

MODVAT      is not an altogether new concept but was existing under different schemes such as proforma credit under rule 56A/chapter X Procedure etc. MODVAT comes in existences as a result of report submitted by Technical Study Group appointed by government to study VAT prevailing in European countries and to suggest adopting of VAT in India and to mitigate the cascading effect of indirect taxes.

As is common with any new concept, MODVAT also faced many teaching troubles when implementing and even though certain loopholes are plugged and certain practical difficulties removed. Still there are some grey areas which need to be tackled.

Like the self removal procedure (SRP) permits an assessee to carry on with manufacturing, storing and removing excisable goods subject to following prescribed procedure and documentation, MODVAT scheme also operates with full freedom to manufacturers to opt  for the same after complying with the prescribe procedure and documentation. It can also be perhaps termed as SRP i.e. self receiving procedure since the entire scheme deals with receiving of notified and eligible inputs, with proper duty paying documents and utilizing the same in or in relation to the manufacture of final products and utilization of credit towards discharge of duty when such final products are removed.

In short MODVAT is unique concession granted to manufacture of excisable goods and in view of its simple rules for compliance, the concept has come to stay as a recognized part of excise law and it is not an exaggeration to state that knowledge of central excise law is incomplete without knowledge of MODVAT.

How it operates

Any new scheme will be unsuccessful if improper and unambiguous procedure is not spelt out to put the scheme into action. If there are contradictory provisions in implementing a new concept it will lead to premature end. MODVAT scheme is not affected by normal flows and hence it operates in a very smooth way.

The concept start no sooner an assessee decides to avail the benefit and the department enter the scheme on receipt of a prescribed declaration showing details of inputs. The schemes continue to operate as long as the manufacturer desires and as long as final product manufactured attracts duty.

The following example explains the scheme.

Final product:  ELECTRIC FAN

Value Rs. 800

Duty @ 10% =Rs 80

Rs 59 is permitted to be taken as credit and utilized by debating the same towards discharge of duty liability on final products.

To ensure smooth operation of scheme a new set of rules 57A to 57J have been introduce besides clarification on various related matters by Ministry of Finance. Notification is also issued to list out the chapters of inputs and chapters of final products eligible under the scheme.

The operation of the scheme since 1986 has also resulted in litigation between the assessee and the department and designs by various authority are cited while arguing on behalf of the assessee. This is so because of too narrow a view being taken by the department without taking into account the practical difficulties faced by the industry.

The spirit of MODVAT scheme and need to implement it as intended by legislation is well explained by Madras high court in the judgment of SRG Ltd. V. central Board of excise  and customs (1993-66-ELT-145- MAD). That benefit of MODVAT scheme can not be nullified or short circulated by means of clarification issued by revenue department in the form of circular.