CENVAT means Central Value Added Tax. CENVAT credit is a credit in respect of central excise on inputs purchased for the manufacture or duty paid in relation to the manufacture of the final product.
Before I am going to explain what is CENVAT, you have to understand the Central Excise Duty, It is called as Basic Excise Duty (BED). Every manufacturer is liable to pay the excise duty.
Just think of a product which is reached to an end user, how many manufacturing activities are done. So to reduce the tax burden of the end user, the Govt. of India introduce the MODVAT scheme which is now called as CENVAT scheme.
Based on this, if any manufacturer purchased a material, which is duty paid, and if it is used for his further manufacturing activity, he can avail this as a credit in his book based on the Central Excise Invoice. At the time of selling his manufactured goods, he is liable to pay the excise duty. He can adjust the credit which he has taken into his book and pay the rest.
CENVAT availed at the time of purchase of various goods: Rs. 20000/- (Excise Duty Alone)
CENVAT payable for his product at the time of sales: Rs. 25000/-
He will pay only Rs. 5000/-
ABC Ltd is the manufacturer and exporter of toys and it purchases certain components from PQR Ltd for use in the manufacture of toys. PQR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sale price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxations. ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd, at the time of export. This is how CENVAT CREDIT works.
In other words under a CENVAT CREDIT scheme, the exporter is totally freed from the burden of excise duty, at all the different stages, on inputs used, duty paid on final products and even duty paid on capital goods purchased. Under a CENVAT credit scheme, the intention of Government is to eliminate the burden of excise duty on exports totally, paid directly or indirectly, to make them globally competitive.