Excise and Service tax are central taxes, expected to be consumption based taxes to the extent practicable. Till the goods or service is finally consumed, the burden of excise duty and service tax is passed on to next buyer, who gets credit of the tax and excise duty paid by the supplier/ service provider. Thus, effectively, tax is paid on value added at each stage, as illustrated in following example.

 

Transaction without VAT Transaction with VAT
Details A B A B
Purchase 0 110 0 100
Value Added 100 40 100 40
Sub-Total 100 150 100 140
Add 10% tax 10 15 10 14
Total 110 165 110 154

‘B’ is purchasing goods from ‘A’. In second case i.e. under Vat, his purchase price is Rs. 100/- as he is entitled to Cenvat credit of Rs. 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs. 14. However, since he has got credit of Rs. 10/-, effectively he is paying only Rs. 4/- as tax, which is 10% of Rs. 40/-, i.e. 10% of ‘value added’ by him.
Cenvat (Central Value Added Tax) scheme is used to achieve the aim of levying tax only on ‘value added’ at each stage.