Modvat stands for "Modified Value Added Tax". It is a scheme for
allowing relief to final manufacturers on the excise duty borne by
their suppliers in respect of goods manufactured by them. eg ABC
Ltd is a manufacturer and it purchases certain components from PQR
Ltd for use in manufacture. POR Ltd would have paid excise duty on
components manufactured by it and it would have recovered that
excise duty in its sales 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
taxation. Modvat is a scheme where ABC Ltd can take credit for
excise duty paid by PQR Ltd so that lower excise duty is payable by
ABC Ltd.