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Before the introduction of the Modified Value Added Tax (MODVAT) with effect from the 1st of April 1986, the Excise duty regime was marked by the phenomenon of cascading tax effect, where excise duty used to be collected on manufacture of goods at the invoice price at progressive stages, without regard for the excise duty already collected at the previous stage. Excise duty on excise duty (collected in prior stages) used to be the general phenomenon, thus increasing the eventual cost to the consumer.
The introduction of the MODVAT in the Excise Duty regime, with effect from 1.4.1986 marked the beginning of the reforms as far as centrally administered Tax is concerned. MODVAT applied only to Central Excise Duty and when it was introduced in 1986 covered only a limited number of goods. Further progress in the MODVAT system took place after 1991 when the economic reforms were initiated. MODVAT was extended to cover a number of other goods including excise paid on capital goods. By 1995-96 or thereabouts, MODVAT effectively covered most of the raw materials (with notable exception of textiles, petroleum products and tobacco). Thus under the MODVAT system, the cascading effect of excise duty was eliminated and excise duty paid on inputs in the preceding stage was granted credit against the excise payable on the output.
The system of MODVAT gave place to CENVAT or Central Value added tax from 1.4.2000, in which the distinguishing feature was the application of a single central rate of 16% for most commodities, with some variations for certain commodities.
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