MODVAT means Modified Value added tax.This was an excise duty scheme introduced in 1986 for allowing relief to final manufacturers on the excise duty borne by their suppliers of raw material.
This scheme has now been replaced by the CENVAT Scheme.This scheme works as follows:
MR A manufactures product X in his factory & the Assessable value of one X is as under:-
Assessable value of Product X Rs.100
Excise duty on RS.100 @ 12.36% Rs.12.36
However A has to use Product Y as Raw material to manufacture product X,which he buys from his suppiler Mr B.
Assessable value of Product Y Rs.50
Excise duty paid by Mr.B on Rs.50 @ 12.36% Rs.6.18
Now while making payment to Mr.B for Product Y,Mr.A has to pay him Rs.50 for Product Y along with the Rs.6.18 as reimb of excise duty borne by Mr B.
Since Product Y is being used to manufacture Product X,therefore one may say in the Assessable value of Rs.100 of product X,(Rs.50 of product Y) is included on which Mr.B has already paid the excise duty to the govt therefore if we tax Rs.100 once again there will be double taxation of excise.One may call it Cascading effect of duty.To avoid this MODVAT/CENVAT scheme is introduced.
Now final duty at the time of removal of Product X will be as under in MODVAT/CENVAT Scheme:
Excise Duty on product X Rs.12.36
Less:Cenvat of duty paid for raw material Y Rs.6.18
Net Excise Payable by Mr.A on product X Rs.6.18
Now there is no double taxation of duty by applying the MODVAT/CENVAT system.