Audit under Indirect Tax Laws

-CA Sunil Gabhawalla

Audit : Key Challenges

• Wide Domain of Indirect Taxes– VAT/CST, Excise Duty, Service Tax, Customs Duty, etc.

• Dis-congruent & Overlapping Taxable Events• Need not be always transaction driven• Disconnect in Valuation Principles• Disconnect in Time of Recognition • Document Driven Regimes

• Reconciliation – NIGHTMARE !!!

Audit : Types

• Excise Duty/Service Tax– Generally, Department conducts Audit (EA-2000)– Special Audit can be ordered– No generic audit requirement by chartered accountants

• VAT / CST – Many State Legislations prescribe mandatory audit by

chartered accountants / tax practitioners– Department also conducts multitude of audit processes

• In all cases, there may be client requested audit/certification/review processes

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Special Audit? – Finance Act, 1994

• SECTION 72A. Special audit. — (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as “such person”),—

(i) has failed to declare or determine the value of a taxable service correctly; or(ii) has availed and utilised credit of duty or tax paid—

(a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or

(b) by means of fraud, collusion, or any wilful mis-statement or suppression of facts; or

(iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises failing under the jurisdiction of the said Commissioner,

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Special Audit? – Finance Act, 1994

› He may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner

“chartered accountant” shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949)

“cost accountant” shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959(23 of 1959)

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Insertion of Rule 5A of Service tax Rules, 1994

RULE 5A. Access to a registered premises. — (1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be, -• (i) the records as mentioned in sub-rule (2) of rule 5;• (ii) trial balance or its equivalent; and • (iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act,

1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.]

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Rule 5(2) of Service Tax Rules, 1994

› Rule 5 of Service Tax Rules, 1994

› What records to be maintained and declared?› List of records in duplicate to be furnished along with first return

› Providing any service, whether taxable or exempted

› Receipt or procurement and payment of input services

› Receipt, purchase and manufacture, storage, sale or delivery of inputs and capital goods

› Other activities like manufacture and sale of goods, if any

› Records including computerized data maintained in accordance with the

various laws

› All financial records

› All records to be maintained for a period of 5 years

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Criteria & Time Limit for EA- 2000 Audit

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Selection Criteria for Audit

› Audit Manual 2011 provides for the following criteria for selection of Audits

Individuals and Sole Proprietor below turnover of Rs. 60 lakhs not subjected to

Audit Vide para13.1 of JS(TRU-II)’s Do letter F.No.334/3/2011-TRU,dated 28.02.2011

Tax liability by Service Providers Frequency of Audit

Service Tax Payment above 3 crores (Cash + CENVAT) Every Year

Service Tax Payment between 1 crore to 3 crores Once in every 2 years

Service Tax Payment between 25 lakhs to 1 crore Once in every 5 years

Service Tax Payment below 25 lakhs 2% of taxpayers audited every year

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Duration of Audit

› Audit Manual 2011 provides for the following time limits for completion of Audits

Individuals and Sole Proprietor below turnover of Rs. 60 lakhs not subjected to Audit

Vide para13.1 of JS(TRU-II)’s Do letter F.No.334/3/2011-TRU,dated 28.02.2011

Tax liability by Service Providers Duration of Audit

Service Tax Payment above 3 crores (Cash + CENVAT) Max 10 days

Service Tax Payment between 1 crore to 3 crores Max 7 days

Service Tax Payment between 25 lakhs to 1 crore Max 5 days

Service Tax Payment below 25 lakhs Max 3 days

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Audit Process

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Process of Audit

› Selection of Assessee› Desk Review – This can be done without interacting with the Assessee

› Documenting Information

› Touring› Audit Plan› Verification

› Audit Objection and Audit Para› Audit Report

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Compliance to Audit and Annexures

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Contents of Notice

› Initiation of Audit

› Standard Notice seeking information

› Copy of Service Tax Registration Certificate› In case Centralized, then list of Branches

› List of all records maintained by the Assessee (Rule 5(2))› Copies of Form ST-3 (if returns are filed manually)› Copies of Annual Reports› Copies of Internal Audit Report› Copies of Tax Audit/Cost Audit Report

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Contents of Notice

› Details of any Registrations/Returns under other laws like VAT/Excise

› List of all Ledgers relevant from Service Tax point of view› List of all Input Services along with CENVAT Credit Register

and sample invoices› List of Bank Accounts maintained› Sample copies of Invoices/Debit Notes raised› Details of Billing Pattern and stages of Billing – Milestone

Billing› List of any pending matters or adjudication….etc.

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Submission of various Annexures

› Annexure 1 – Details of Assessee

› Annexure 2 – Reconciliation

› Annexure 3/4 – Master Assesse File and Total Revenue Summary

› Annexure 5 – Financial Data Summary Sheet (FDSS)

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Annexure – 1

› Basic Details of the assessee are called for

› Constitution of the Assessee

› Registration details

› Nature of Business / Whether exempted services are provided

› Invoicing Pattern

› Method of Accounting

› Basis of preparing ST-3

› Exports/Exempted/MIS

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Annexure – 2

› Reconciliation of amounts as per Financials Records i.e. Annual

Reports and Form ST-3

› Income/Receipt

› Cash Vs Mercantile System of Accounting

› Work in Progress/Unbilled Revenue

› Inclusive Taxes

› Other Incomes – Sale of Goods/Interest

› Impact of TDS

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Annexure – 2

› Import of Services

› Place of Provision is outside India

› CBEC rate vs Accounting Rate

› Impact of TDS

› Reverse Charge Mechanism

› Point of Taxation – provision entries

› Specific Exemptions – GTA or others

› PRCM – constitution of service provider

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Annexure – 3, 4 & 5

› Master Assessee File

› Service wise Revenue and Tax Due

› Revenue Summary

› Tax paid during the year in Cash as well as CENVAT

› Financial Data Summary Sheet (FDSS)

› Bird’s eye view of the entire client

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Some Concerns

• Point of Taxation• Reverse Charge Mechanism• Transition from 01.07.2012• Cross Matching with Financials and TDS

Information

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MVAT Audit

MVAT Audit : LawProvision Section 61 of MVAT Act, 2002

Applicable to Dealers having turnover of sales or purchases above Rs. 1 crore

Form 704, to be uploaded electronically

Part 1 : Calculation of Liability and Recommendations

Part 2 : General Information

Part 3 : Schedules I to VI – dependent on returnsAnnexures A to K – additional information

Due Date 15th January

Conducted by Chartered / Cost Accountant

Penalty 0.1% of the turnover of sales

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MVAT Audit : Key Assertions• All information obtained• Includes all sales and purchases concluded during the period• No Issue mentioned on the website, where Department has filed a reference in the

Court• Adjustment based on entries and documents• Classification is correct• Set off is correct• Quantitative records maintained• Tax Invoices issued• Bank Statements reflected in accounts• Visited principal POB• Deals in commodities mentioned• Reflects the volume of business• Purchases of SEZ Unit used in the unit

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MVAT Liability : Broad Approach

• Determination of Turnover – (Financials + Reconciliation)

• Working of VAT Liability

• Comparison with Consolidated Returns• Recommendations

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Determination : Key Concerns

• Multiple States / Countries

• Searching the Accounts– Adjustments to Sales– Other Income– Asset Disposals– Reduction in Expenses– Anywhere else !

• Outside the Accounts– Concluded Sales– Branch Transfers and Consignment Sales

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VAT Liability

• Claims made– Local Act (G/R, Labour, Deductions under Rule 58)– CST Act (G/R, Sale in Transit, High Seas, Export, Penultimate

Export, Branch Transfer)

• Classification of Goods & Rate Applicable• Input Tax Credit – Eligibility (Rules 52-54)– Documentation – Compliance (Non Genuine, Non Filers/Short Filers)

• Tax Paid

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Generic Client Requested Audit/

Review

Objectives:

• Review the Past to rectify aggressive positions if any

• Reorient Business & Transaction Models for future• Improve Systems & Processes• Quantify Risks for unrectified positions

Approach:

• Understand Business Model • Understand various transaction structures• Analyse Revenue and Expense Streams • Review Stock and Asset Movements• Review Financial Records• Review Tax Filings • Review Pending Litigation• Prepare Final Report

Business Model & Transaction Structures

• Describe the business in as much detail as possible• Ask as many questions as possible• Understand the “why” of the business and

transactions• See if some part of the business is unlikely to be

reflected in summarised financial records• Collect Contracts and Sample Invoice Documents• Look out for pointers• Create an initial ‘sketchy’ understanding

Revenue & Expense Streams

• Analyse each Revenue Stream for – Applicability of VAT– Applicability of Service Tax– Applicability of Both– Applicability of Neither– Impact of this position on Credit to be claimed

• Analyse each Expense Stream for– Applicability of Withholding Provisions – Applicability of Reverse Charge Mechanism– Availability of Credits– Systems to ensure correctness of credits

• Expense Recoveries to be analysed in detail• Income Reversals also to be reviewed for tax compliance

Stock and Asset Movements

• VAT is a State Subject, factor in the impact of this aspect in stock and asset movements

• Review impact on credit

Financial Records

• Sample Tax Workings• Reconciliation of Figures for a particular period• Flow of Tax Control Accounts in the ERP• Integrate Financial Records with Tax Positions– Nomenclature is not conclusive of tax positions but is

the root cause of litigation

Review Tax Filings

• Registration Record, whether updated?• Payment Challans, whether correctly done?• Returns, whether filed and in time?• Any other declarations/documents, whether done

correctly?• Responses to Pre-SCN, whether adequate, true

and correct?• Cross-Checks, whether could be harmful?

Review Pending Litigation

• SCN – Responses• Appeals – Predeposit Waivers, Final Disposals

• Correspondence with Specialists• Opinion from Specialists

THANK YOU !