CENVAT is an input duty credit scheme designed to reimburse manufacturers for duties paid on inputs. It prevents cascading of duties on final products. CENVAT covers most inputs and capital goods, and applies across India except Jammu and Kashmir. Under CENVAT, manufacturers can claim credit for eligible duties paid when clearing final products. The CENVAT Credit Rules outline provisions for availing, transferring, and recovering credit, as well as penalties for non-compliance.

1. By: Manisha Joshi

2. CENVAT
 An Input duty relief scheme.
 Designed to reimburse the user manufacturer with the duty paid on
the inputs .
 Prevents cascading effect of duty on final products.
 CENVAT scheme covers Capital goods and all inputs barring motor
spirit (petrol), and high speed diesel and LDO.
 It covers all final products except matches.
 For textiles, CENVAT scheme is optional.
 This scheme applies to whole of India except Jammu and Kashmir.

3. VAT
Value added tax is a tax payable only on value added to
commodities and on the services rendered.
A comprehensive form of VAT covers the value added at all
three levels, i.e.
1) manufacturing,
2) wholesaling and
3) retailing.

4. CASCADING EFFECT
A tax based on selling price of a product has a cascading effect
whereas VAT is a multi point tax i.e. no cascading effect.
Example:
Under Sales tax Law Under VAT Law
X ltd to Y ltd X ltd to Y ltd
Sale Price 1,00,000 Sale Price 1,00,000
ADD: Sales 10,000 ADD: VAT @ 10,000
tax @10% 10%
Total Sale 1,10,000 Total Sale Price 1,10,000
Price

5. Y ltd to customer Y ltd to customer
Cost for purchase 1,10,000 Cost for purchase 1,00,000
(excluding VAT)
ADD: expenditure 50,000 ADD: expenditure 50,000
incurred incurred
1,60,000 1,50,000
ADD: Profit @20% 32,000 30,000
1,92,000 1,80,000
Sales Tax @10% 19,200 VAT @10% 18,000
Total Sale price 2,11,200 1,98,000

6. Sales Tax/VAT to be paid to the
Government
By X ltd 10,000 By X ltd 10,000
By Y ltd 19,200 By Y ltd
VAT collected 18,000
Less: Input tax 10,000 8,000
credit
Total 29,200 Total 18,000

7. CENVAT CREDIT RULES, 2004
 Rule 2 – DEFINITIONS
 Rule 3 – Availment of CENVAT CREDIT
 Rule 4 – Conditions for allowing CENVAT CREDIT
 Rule 5 – Refund of CENVAT CREDIT
 Rule 6 – Obligation of manufacturer of dutiable & exempted goods
 Rule 9 – Documents and Accounts
 Rule 10 – Transfer of CENVAT CREDIT
 Rule 14 – Recovery of CENVAT CREDIT wrongly taken
 Rule 15 – General penalty

8. Rule 2 - Definitions
1) Capital goods; means the following goods
 all goods falling under chapter 82, 84, 85, 90.
 Components, spares and accessories.
 Moulds and dies.
 Refractories and refractory materials.
 Tubes, pipes and fittings thereof.
 Pollution control equipment.
 Storage tank.
above goods can be used ;
1) In the factory of the manufacturer of final products.
2) Outside factory for generation of electricity for captive consumption.

9. 2) Exempted goods; means goods exempted from whole of duty and
include goods which are chargeable to NIL rate of interested.
3) Exempted Services; means taxable services which are exempted from
the whole of the service tax.
4) Final product; means excisable goods manufactured or produced from
inputs or using input services.
5) First stage dealer; means a dealer who purchases goods directly from
oThe manufacturer or from depot or from premises of the consignment
agent or from any other premises.
oAn importer or from the depot of an importer or from premises of the
consignment agent of importer.

10. 6) Input; means
oAllgoods used in the factory by manufacturers for manufacturing final
products.
oAny goods including accessories the value of which is included in the value
of final product.
oAll goods used for generation of electricity for captive use.
oAllgoods used for providing output services excluding – LSD (Low Speed
Diesel), HSD (High Speed Diesel) etc.
7) Input Service; means any service
oUsed by a provider of taxable service for providing an output service
oUsed by a manufacturer , whether directly or indirectly, in relation to the
manufacturer of final products and clearance of final products upto the place of
removal,
and includes services like advertisement or sales promotion ,
market research, accounting etc.

11. Rule 3 – Availment of CENVAT CREDIT
A manufacturer / service provider can take CREDIT of
Basic Excise Duty.
Special Excise Duty.
Additional duty of excise on (Textile and Textile articles)
Additional duty of excise on (Goods of Special Importance)
National Calamity Contingent Duty (NCCD)
Education Cess on Excise duty.
Countervailing duty (of custom duty)
Service tax.

12. Rule 4 – Conditions for allowing CENVAT
CREDIT
 The cenvat credit in respect of inputs may be taken immediately on the
date of receipt of inputs.
 The cenvat credit in respect of capital goods to be availed within a period
of 2 years i.e.;
a) 50% immediately when capital goods are received and
b) balance 50% in the next financial year.
 Credit allowed to a manufacturer even if capital goods are acquired by him
on lease, hire purchase or loan agreement.
 Credit is allowed even if any inputs or capital goods are sent to job worker
place for further processing, but goods must be received back within 180
days.

13.  Cenvat credit is allowed even in respect of jigs, fixtures, moulds and
dies.
 Cenvat credit is not allowed on the goods used for office use.
 Cenvat credit will not be allowed on that part of capital goods that
represents depreciation.
 The commissioner of central excise having jurisdiction over the
factory of manufacturer, who has sent the input outside his factory
to a job worker, may by an order allow final products to be removed
from promises of job worker. So, a job worker can avail the cenvat
credit on behalf of manufacturer.

14. Rule 5 – Refund of CENVAT CREDIT
For goods to be exported under bond, credit on inputs or input
services can be used for the payment of duty on any final product
cleared for home consumption or for export.
Where for any reason, such adjustment is not possible, the
manufacturer shall be allowed refund of such amount subject to
conditions.

15. Rule 6 – Obligation of manufacturer of
dutiable and exempted goods
Cenvat credit is not allowed on quantity of inputs and input services
used exclusively in manufacture of exempted goods/services. For this
purpose the manufacturer or output service provider may follow either
of the following two methods :-
Maintain separate accounts for different goods.
If he does not maintain separate accounts and he avails cenvat credit
on inputs or input services, then 6% of total price (excluding all taxes)
shall be paid on clearance of final product from factory.

16. Rule 9 – Documents and Accounts
The Cenvat Credit shall be taken on the basis of any of following duty paying
documents :-
Invoice issued by :-
a) A manufacturer
b) By an importer
c) A first stage dealer
d) A consignment agent
A supplementary invoice issued by a manufacturer or importer.
A bill of entry.
A certificate issued by an appraiser of custom.
A Challan evidencing the payment of service tax.
An invoice, bill or Challan issued by a provider of input service.

17. CENVAT RETURNS
Manufacturer month By 10th of next month.
of final
products.
Provider of Half yearly return By the end of the
output service. month following the
particular half year.
First stage or quaterly By 15th of next month
second stage after the end of the
dealer, quarter.

18. Rule 10 – Transfer of cenvat credit
If a manufacturer shifts his factory to another site or factory is
transferred on account of charge in ownership due to sale, merger,
amalgamation, lease or joint venture, then, he shall be allowed to transfer
the cenvat credit lying unutilized in his account after taking approval of
assistant or deputy commissioner.
However transfer of cenvat credit shall be allowed only if stock of such
inputs too has been transferred to the new unit.

19. Rule 14 – Recovery of cenvat credit
wrongly taken
Where the cenvat credit has been taken or utilized wrongly, the same
along with interest shall be recovered from the manufacturer under
provisions of section 11A and 11B of Central Excise Act 1944.

20. Rule 15 – Confiscation and penalty
If a person, takes wrong cenvat credit in respect of input or capital
goods, or without ensuring that appropriate duty on such inputs or
capital goods has been fixed or contravenes any of the provisions of the
cenvat credit rules, then he shall be liable to penalty
not exceeding the duty on excisable goods or
Rs. 10,000 whichever is high
his goods shall also be liable to consification.

21. Rule 15A – General Penalty
A general penalty upto Rs. 5000 can be imposed in case of contravention
of any of the provision of CENVAT CREDIT RULES 2004, for which no
specific penal provision exists.

22. Difference between
MODVAT and CENVAT
Basis of MODVAT CENVAT
difference
1) Meaning It stands for Modified Value It stands for Central Value added
added tax. tax.
2) Existence It is an old scheme/ It is a new scheme/ successor
predecessor scheme and no scheme and has replaced
more in existence. MODVAT.
3) Provision for It has separate provisions for It contains combined rules for
Capital goods capital goods. capital goods and inputs.
4) Declarations It requires submission of CENVAT does not require any
declaration in respect of inputs such declaration.
and capital goods.

23. 5) Statutory registers It prescribe statutory Such registers are not
registers RG23A, 23B and required under CENVAT, but
RG23C, RG23D to be records have to be
maintained. maintained.
6) Provisions for Waste and It contains separate It does not contain separate
Scrap provisions for Waste and provisions for it.
Scrap.
7) Scope of Narrow definition of Capital Widened definition of
definition/Scope of scheme goods. Capital goods.
for Capital goods.
8) Credit on Capital goods Credit on capital goods can It has to be taken in two
be taken immediately . yearly installments of 50%
each.
9) Credit availability Credit can be availed only CENVAT can be availed on
on duplicate copy of any copy of Invoice.
invoice.
10) Installation of Capital With regard to capital No such condition exists in
goods goods, credit can be CENVAT.
availed only if the capital
goods are installed and
ready to put into use.