Cenvat is an acronym for Central Value Added Tax. It is similar in many respects to another type of tax system called Value Added Tax (VAT). Cenvat is used by a lot of European countries and other places such as India. This form of taxation is said to have many benefits over other types of tax systems — in particular it minimizes the cascading effect that occur with other types of tax systems and people feel that it is a lot fairer.
The Benefits of Cenvat
One of the reasons why Cenvat is chosen as a tax system is that it is said to stimulate the production of goods and services within a country. This is because under this system manufacturers get credits when they choose to buy their materials locally and these credits can be used against tax on the finished product. This is good for the local economy because it means that the manufacturer will be less tempted to buy materials abroad in countries where there is less tax to be paid.
The fact that the manufacturer pays less tax on their finished goods due to credits because they bought materials locally means that they can then sell their product for less. This encourages people to buy and so this will further stimulate the local economy. All in all this type of system is seen as a good way to keep a country prosperous and producing plenty of goods.
As well as stimulating local production there are also many other benefits to the Cenvat scheme. As we have already mentioned it is based on the same idea as value added tax and this has been shown to be a very successful form of taxation. This is because there tends to be a lot less tax evasion and thus increased compliance and more tax revenue for the government. The other notable benefit of this type of taxation is that it is a lot more transparent than other forms of taxation.
Cenvat in Action
One of the best examples of Cenvat is to be found in India. This country is viewed by many experts as a great economic success story and the use of Cenvat is seen as an important element in this prosperity. The scheme was originally called Modvat (modified VAT) and the purpose of this was to allow the manufacturer to take credit of excise duty paid on raw materials that they use to make their products. The Modvat scheme was later renamed Cenvat; it also changed slightly because Cenvat had less restrictions than Modvat. The use of Cenvat proved very successful in India because it provided manufacturers with a great incentive.
Those countries that have started using a Cenvat scheme tend to have very positive results. It means a more transparent form of tax where people are more willing to pay and the government ends up with more money because of less tax evasion — of course the fact that it boosts the economy is also very welcome.
