- CA Roopa Nayak

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The term audit is derived from the Latin term audire, which means to

hear.

It was in use in all ancient countries such as Mesopotamia, Greece, Egypt,

Rome, U.K. and India.

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What?

It involves:

Scrutiny of the records of assessee.

Verification of the actual payments and receipts

Check whether ST provisions are followed correctly.

Why?

Assesses can maintain records in any form, requiring verification by auditors.

Self-assessment era warrants departmental audit

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To check whether:

assessee is paying correct amount of service tax.

procedures are properly followed

to avoid revenue leakage for the Government

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Selection of Assessee

Desk Review Documenting Information

Visiting Premises

Audit Plan Verification Audit

Objection & Audit Para

Audit Report

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Departmental Perspective

As assessees follow the system of self-assessment

Government dues are recovered to its maximum

Assessee Perspective

errors committed whether knowingly or unknowingly are found out by the audit.

work of accounting always remains current and correct

proof of the books of accounts.

facilitates the provision of advice.

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Start

Audit Plan

Test/Assess the Control Risk

AAR/PDR

Substantive Test

Audit Report

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Service tax payment (Cash + CENVAT)

Above 50 Lakhs 25 50 Lakhs 10 25 Lakhs Upto 10 Lakhs

Every Year 2% of total no. of assessees every year

Once in 5 years Once in 2 years

Obligation to be honest fundamental requirement for

operation of tax system.

Obligation to be cooperative voluntary compliance

Obligation to provide accurate information and documents

on time

Obligation to keep adequate records to verify tax / credits

Obligation to pay taxes/ file returns on time

Shall not disclose any of the sensitive

information learned in his official capacity

Officers to issue SCN before imposing penalty,

demand & arrest

Officers to visit in business hours only

Search, seizure, prosecute and arrest under

commissioners instructions

Issue summons to authorized persons of the

company

Detain & give evidences as per CPC

Commissioner has power to appoint CA,CWA, CS

for conducting an audit

E-Mail Recognized in Information Tech. Act 2005. Only if official ID. Maybe used as additional mode or where time short

Telephone - Use this mode as additional as no trace or evidence of what transpired. Record by way of written communication what was discussed/ understood.

Letters /notices from dept. - Reply to letters within 15 -30 days under RPAD.

Letters to dept - Communicate at appropriate time at appropriate levels including giving voluntary initial declarations. Period of Limitation

Visits by dept. Official or Unofficial? Should be handled by a knowledgeable persons. Put on record what happened by way of written communication.

Visits to dept. - Record in register kept. Record by way of written communication with explanations & evidences provided.

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When insisted to make ST payment,

attach a written letter explaining the understanding of taxability

why ST is paid or not paid.

If discussions are finalized by Department, without consulting the

assessee, the same shall be communicated clearly.

Such communications provide for evidence for future

negotiations.

Rule making power under ST is conferred upon executive in Section

94 of the Finance Act.

In the past the - scrutiny and audit of records of the assessee is

Section 72A of the Finance Act, 1994.

A special audit could be undertaken if the circumstances outlined in

Section 72A are fulfilled.

As per Rule 5A(2) of STR, 1994 - every assessee was required to

make available on demand specified documents to the authorized

officer or audit party deputed by the Commissioner or to C&AG

within 15 days from date of demand.

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In ACL Education Centre Private Limited v. UOI - 2014-TIOL-120-HC-ALL-

ST-.The audit can only be undertaken by an authorized Chartered

Accountant or Cost Accountant, as provided in Section 72A

The Calcutta HC in SKP Securities Limited v. Deputy Director - 2013-TIOL-

38-HC-KOL-ST - no provision in Chapter V of the Finance Act, 1994 or the

CAG Act, 1971 empowers the CAG to undertake audit of accounts of a

non-governmental assessee

Travelite (India) Vs. UOI &Ors. 2014-TIOL-1304-HC-DEL-ST - Rule 5A(2) of

the Service tax Rules is ultra vires the provisions of the Finance Act and

the rule has been struck down. Rule 5A(2) must consequently be struck

down.

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The CBEC circular no.137/26/2007-CX 4 which sought to put

in place a mechanism for department of audit and scrutiny of

documents, was not only an attempt to widen the scope of

the law impermissibly but also contrary to the statute.

The said circular, to the extent it provides clarifications on a

Rule 5A(2) audit, was also quashed by the Delhi High Court in

the Travelite decision 2014-TIOL-1304-HC-DEL-ST.

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In the Service Tax Rules, 1994, in rule 5A, for sub-rule (2),

the following sub-rule shall be substituted, namely:-

(2) Every assessee, shall, on demand make available to

the officer empowered under sub-rule (1) or the audit

party deputed by the Commissioner or the Comptroller

and Auditor General of India, or a cost accountant or

chartered accountant nominated under section 72A of

the Finance Act, 1994,

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In Travelite (India) Vs. UOI &Ors. (2014-TIOL-1304-HC-DEL-ST)

on the Service Tax Audit issue, Rule 5A(2) of the ST Rules was

held ultra vires the provisions of the Finance Act and struck

down.

On 18-12-2014, a three judges bench of the Supreme Court

headed by Chief Justice has granted stay on HC judgment

in 2014-TIOL-101-SC-ST-LB. As of now, Service Tax Audit can

be conducted by the Service Tax Department.

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As of date there is no clarity as to the powers of conducting

audit of private parties under service tax law.

Notwithstanding the legality of audit, sufficient checks and

balances to be put in place to ensure that the mandate to the

CA/CMA to undertake audit is done by competent persons

with requisite knowledge of service tax provisions.

This is also a landmark opportunity for professionals to be

able to contribute to the country and uphold the high ethical

standards of the profession.

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Assessees are not aware of the fact that they are not complying with the

legal provisions till such time when they are called upon by the department

for an audit.

They should consider the uncertain nature of the law frequent amendments

by way of notification, clarifications.

Proper framework to train employees and seeking professional opinions.

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Thorough in his knowledge of the subject

Ascertaining scope of the assignment

Knowledge of the business and the activities performed

Obtaining relevant information for a preliminary review and risk analysis

Desk review of the information obtained and preliminary meeting

Devising the audit programme for carrying out compliance and substantive tests

Documentation and proper supervision of audit effort

Formulation of the draft report and discussions with the management

Finalising the draft and ensuring audit follow up

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Types of errors:

Conceptual Errors: Common errors, once committed, continued to be

practiced. If no issue arises, it gets accepted over a period of time.

Systems Errors: Errors due to improper systems or weakness in internal

control, not detected or corrected.

Compliance Procedures Omissions: Procedural deficiencies like failing to

file returns or delayed/ no communication to Department, etc.

Services that are not specified as per the definition of taxable

service not being liable but suffering the tax.

Service tax paid depending on whether the client/customer pays or

not.

Services provided and received outside India being considered as

taxable and provided in India.

Services provided from outside India received in India not further

examined for taxability based on location, performance.

Services provided in India considered as provided outside India

since the service provider is outside India.

.many more

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The system of double check on credits whether short/excess

availed.

Inquiry of instances of inordinate time gap between the bill date

and the credit date.

The registration number not mentioned on the invoices.

The system of raising of invoice much prior to or after the date of

service especially during year ends.

Lack of reconciliation system.

many more

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Failure to intimate the Department within 30 days of change in the constitution of the firm or company.

Failure to amend the registration certificate when any service is

imported on which service tax is payable.

The system of acting on departmental views/oral instructions,

which are not provided in writing.

Failure to obtain registration for the branches or place of providing

the service.

Failure to intimate the addition of new branches in case of

centralized registration

Failure to intimate the authorized signatories

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The available records are not complete in the sense that the service tax payable and input service credits cannot be arrived at from the

records.

The system of reconciliation of credit figures as per accounts and

the figures as per Service tax returns not done.

In case of gross method of accounting purchases where duty

portion is not shown separately, the method and accuracy of

making monthly entries for the credit.

The system of value based authorisation in place for various

transactions relating to service tax not being in place.

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CENVAT Credit missed out due to lack of knowledge on admissibility/ as per

clarification by revenue officials

Adequate updation and training to concerned personnel in the organization regarding

CENVAT rules is the need of the hour.

Credits reversed on oral instructions of departmental officers/audit parties

without validating the same with consultants

Taking legal backing for any issue is always advisable rather than following informal

or oral instructions from the department.

CENVAT Credit availed on the input services without making the payment to

the service provider within 3 months

Rule 7 of CCR 2004, CENVAT credit in respect of input service shall be allowed on

the receipt of tax invoice provided that the payment of the full value of input service

along with service tax is made within three months of the date of invoice.

CENVAT credit availed on inputs before the receipt of the material in the

premises

Rule 4(1) of CCR 2004 specifies the conditions for allowing CENVAT credit

wherein it requires the inputs/materials to be received in the factory of the

manufacturer so as to avail CENVAT credit.

Availing CENVAT credit of the branches without centralized registration or

Input service distributor invoice

Availing credit on the invoices raised on the branches which are not registered as

per STR 1994 tantamount to availing of wrong credit which may result in future

interest liability.

Input Credits not proportionately reduced for rejection of inputs/ short

payment for service provider

Proviso to Rule 4(7) to CCR provides that in case of any refund or raising of credit

notes, the assessee shall pay an amount equal to CENVAT credit availed in respect

of the amount so refunded or credited.

Credits availed for inputs not used for manufacture of excisable items and non

taxable services

As per Rule 6 of CCR 2004, the CENVAT credit shall not be allowed on input or

input services used in or in relation to the manufacture of exempted goods or for

provision of exempted services.

Claiming the CENVAT credit on inputs used for manufacture of goods cleared

for direct exports or EOU units or SEZ developers/units contended by

department

Goods cleared for direct export, EOU units or SEZ units are not considered as

exempt. (Rule 6 of CCR)

Utilization of SAD (Special additional duty charged under Customs

provisions) credit for payment of service tax on output services.

Credit on SAD is available only to manufacturers.

Utilization of CENVAT credit for payment of service tax on import of services,

which is not permissible under the service tax provisions.

Permitted till 01.07.2012

Credits on differential duty charged by the supplier by way of supplementary

invoice taken as the same is not accompanied by inward material movement

Rule 9(b) of CCR 2004 allows for the same

Whether the service receiver who has paid the service tax alone and not value of

services in respect of import of services received from outside India under

reverse charge mechanism can avail such credit?

No, the service receiver who has paid the service tax on import of services cannot

avail such credits of service tax paid. It has to be noted that the service tax has to be

paid along with value of services as well, in order to be eligible to avail such credits.

What is the document based on which the service receiver company which paid

service tax on security services received from an individual, can avail credit?

The Cenvat credit can be availed on the basis of payment challan by the service

receiver company

Whether Cenvat credit can be availed on the service tax paid by service receiver

on renting of vehicle for pick and drop of employees company under reverse

charge mechanism?

It is advisable not to avail such credits due to specific restriction on availing

employee related credits which is mainly intended for personal use or consumption of

employees in definition of input services under CCR, 2004

Short payment of Service Tax noticed upon scrutiny of S.T. 3 returns

Re-compute the ST liability. If short paid make the payment of the balance

amount. If correctly discharged, share the workings with reply to the audit notice

requesting for dropping the audit para.

Irregular availment of Cenvat credit

The Cenvat credits scheme is a beneficial scheme the benefit of which cannot be

denied based on technical grounds. Accordingly all the eligible credits cannot be

denied. If any ineligible credits were availed, then should reverse to that extent.

Non-reversal of proportionate cenvat credit amount under Rule 6(3A) of

Cenvat credit rules, 2004

Verify the calculations, and confirm the excess availment. Reverse the same and

pay interest if the excess availment has been utilized. Communicate the reversal

to the department.

Payment of Service tax made under the Category of Real Estate Agent

services, without registration of the said services with the Department

Take steps to obtain registration by making an application in ST 1 and

regularizing the lapse.

Irregular availment of Cenvat Credit on invoices addressed to some other

premises other than the registered premises

This is a procedural lapse. Cenvat credit can be availed but it should be ensured

that such premises should be included in the registration certificate.

Non-payment of service tax on web hosting charges paid to foreign customer

under reverse charge

If liability is confirmed make remittance of ST with interest and avail Cenvat

credit of tax thus paid.

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- roopa@hiregange.com