Cenvat, or the Central Value Added Tax, is a component of the tax structure employed by many

countries in the western section of Europe. The inspiration for Cenvat is derived from a tax
system that is generally referred to as VAT, or a Value Added Tax. Both Cenvat and VAT are
designed with the express purpose of minimizing a cascading effect when it comes to taxes on
income, goods and services, and other forms of tax revenue. The aim of Cenvat is to aid in
maintaining a tax structure that is considered equitable for both the citizens incurring the tax and
the government that is collecting the tax revenue.

One notable example of Cenvat can be found in India. Originally designated as a modified value
added tax, this approach placed some limits on the type of taxation that could occur on goods
used in the manufacturing process of finished consumer products. Modvat was later designated
as Cenvat, and continued to function as a means of promoting industry within the country while
still receiving some form of tax revenue from the effort.

It is helpful to think of Cenvat as an incentive that encourages the production of goods within the
country, rather than outsourcing the production to countries where the economic and tax climate
is more favorable. By providing a credit on the taxes associated with materials used in the
creation of finished goods, the government makes it more attractive for manufacturers to
maintain operations within the country. This of course leads to the creation of more jobs for the
citizens within the community and provides income for the purchase of products within the
country. By reducing the tax burden for the end user of the materials, Cenvat opens the door to a
more stable economy within the country, and a better standard of living for its citizens.

Under the best of circumstances, the application of Cenvat can accomplish three goals. First, the
structure for Cenvat requires a tax collection procedure that is fairly transparent and easy to
follow. Second, the benefits associated with Cenvat help to cut down on tax evasion and creative
bookkeeping. Last, the use of Cenvat ultimately leads to an overall increase in collected tax
revenues by keeping more citizens employed and thus able to pay taxes on salary and wages.

VAT

The value added tax, sometimes known popularly as a VAT tax or a goods and services tax, is a
form of consumption tax that is often levied on most consumer products. A tax of this type is
considered an indirect tax, in that the collection of the taxes occurs not with a single entity, but at
various points throughout the production and distribution process. The amount of the tax depends
on what is legally considered the value that is added at each state of the process.

It is important to note that many people, including financial professionals, will refer to this type
of indirect sales tax as a VAT tax. In reality, this is somewhat repetitive. However, the usage of
the term has become so common that questioning the linguistic integrity of the phrase is
extremely rare. For this reason, it is easy to find the term VAT tax used in a number of
professional documents, many online tax resources, and even in casual conversation.
Understanding how a VAT tax works involves recognizing that any product will pass through a
number of stages or phases during the manufacturing process, as well as during the course of
distribution. Taxation occurs at each of these stages, based on the theory that there is some value
added to the product as it moves through the process. Any taxes already assessed and paid are
deducted from the assigned value, which creates a cascading effect as the product continues to
move through the production process. Ultimately, the final residue of the value added tax is paid
by the consumer who purchases and uses the good or service.

The idea of VAT tax is common in the tax structures of many nations. With taxes assessed at
each phase of the production process, it is important for every supplier involved in the process to
properly calculate and pay the value added tax due. For example, a company that produces fruit
juice would pay a VAT tax that is lessened by the amount of taxes paid by the farm that
produced the raw fruit that composes the majority of ingredients in the juice. As a result, no one
entity ultimately pays all the taxes associated with the production cycle.

Some have questioned the impact of the use of the VAT tax scheme on the general economy.
While there is no doubt that the process generates revenue that can be put to good use by
governments, there is some concern that the imposition of the tax at each stage of production
creates a burden on suppliers and manufacturers that ultimately minimizes their ability to expand
operations, hire additional employees, and in general contribute directly to the health of the
economy. Supporters of the tax note that the cascading effect of the tax structure does just the
opposite, by making it possible to share the tax burden with everyone involved in the production
process, and not just the entity that owns and sells the final product.