value added tax s.7r.t.i.jammu 1 audit of value added tax

Value Added Tax S.7 R.T.I.Jammu1

AUDIT OF

VALUE ADDED TAX


Session Overview

In the previous session we discussed, the general guidelines, auditing standards

and instructions issued by the Comptroller and Auditor General of India on the audit of receipts.

in this session we will discuss the specific issues involved in audit of Value Added Tax.


Learning Objective

At the end of this session the trainee will be able to state the steps involved in the audit of Value Added Tax Receipts.


The Audit of VAT by IAAD

CAG’s (DPC) Act 1971 (Section 16) enjoins upon the CAG the duty of auditing all receipts (including VAT) which are payable into the Consolidated Fund of each State. It also requires him to satisfy himself that rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make, for this purpose, such examination of the accounts as he may think proper and report upon.



In the audit of VAT, IAAD will have access to the accounts , records and documents that are required to be maintained by the Tax Administration and that are required to be obtained (including Tax Returns, and other documents) by Tax Administration from the taxpayers. The Auditor deputed by IAAD for audit of VAT may not have access to the records of the taxpayer.



The audit will have a look at the organizational structure of the Tax Administration, duties and responsibilities assigned to each organ of the Tax Administration and systems and procedures in place to secure implantation of the VAT Act.


Organizational Structure of Tax Administration

Generally Tax Administrations are organized along four functional lines. These are:

Taxpayer information and Registration; Tax collection including pursuing stop filers; Tax accounting and data processing; and Audit, inspection and control.


Audit of the function ‘Taxpayer information and Registration’

During audit it has to be examined that Tax Administration has taken action to ensure that:

those who are required to be registered under VAT Act are registered;

full information required for registration has been obtained before a registration certificate has been issued;



particulars of registered dealers are correctly and completely entered in the registration control registers maintained by Tax Administration;

that security and surety has been obtained from those dealers where this has been insisted upon as a condition for registration;



where registration has been cancelled, either by the Tax Administration suo-moto or at the behest of a registered dealer, arrears of tax, penalty and interest, if any has been recovered from the dealer or from the security, as the case may be;

where registration has been cancelled for any reason, it has to be ensured that ‘Input tax Credit’ availed by the dealer is reversed and tax due on this account is collected from the dealer;



systems are in place to ensure that Tax Administration has complete information on traders and dealers to ensure that potential registrants are not outside the tax net;

there is adequate coordination between a Commercial Tax Officer (for VAT) and other Tax Officers (like Income Tax Officer, Excise Officer, Customs Officer, etc.) to detect potential taxpayers who are still outside the tax net.


Audit of the function ‘Tax collection including pursuing stop filers’

This is the vital function of Tax Administration. The collection division is mainly connected with:

The payment of tax and filing of returns by registered persons; and

Identification of non-filers and delinquent taxpayers.



In audit it has to be seen that that returns are filed by taxpayers at the designated intervals, full details and required documents are enclosed with the tax returns, output tax, input tax, reverse tax, etc has been correctly assessed and actual tax payable has been correctly worked out and paid into the public exchequer.



Audit has to see if Tax Administration has applied the arithmetical checks and rate checks on the returns filed and whether the information in the returns has been entered into database to verify that ‘input tax’ claimed by a dealer tallies with the ‘output tax’ in the selling dealers return.



Audit has also to check the classification of goods and commodities and ensure that correct applicable rate of value Added tax has been applied and that VAT free goods or zero rated goods are actually the goods which are either VAT rate free or which attract zero rate of tax.



Audit will have to check if tax stop filers are detected promptly and if compliance with tax laws, including relating to payment of tax and interest on belated payment of tax is enforced. Delayed filing of returns and delayed payment of tax to the public exchequer may invite penalties, audit will have to check if a system is in place to impose and realize penalties for delayed filing of returns or for delayed payment of tax.



In audit, it will have to se seen if tax returns are promptly checked by the Assessing Officers for calculations, classification of goods, application of correct rate of tax and correct working out of tax payable.


Audit of the function ‘Tax Accounting and Data Processing’

Output tax calculated by a dealer in his return can be input tax of another dealer or a number of dealers. Similarly, input tax of a dealer calculated in a tax return can be the output tax of another dealer or a group of dealers. A system has to be in place in the Tax Administration to cross check the input tax claimed by a dealer with the output tax of another dealer or dealers, even on a selective basis, to ensure correctness of ‘Input Tax Claims’ in tax returns. Audit has to check if such a system has been introduced by Tax Administration and if it is effectively monitored.


Audit of the function ‘Audit, Inspection and Control’


The Audit of VAT

Ineffective VAT auditing either by the tax administration or by the Statutory Audit will result in ineffective and weak tax administration.

A weak tax administration in turn will result in noncompliance of rules and evasion of tax by the tax payers.


The Audit of VAT

To minimize the gap between the taxes reported and statutory tax (tax payable) an adequate tax plan should be in place.

The tax plan should provide for; Broad audit coverage of taxpayers, Appropriate coverage of different economic

activities, Classification of taxpayers according to their

sales.


The Audit of VAT

Procedures to prevent or detect and fight each form of noncompliance

• The most typical forms of non compliance are tax frauds such as altering or counterfeiting the documents go beyond tax violations and fall into the realms of crime.


The Audit of VAT

To combat fraud, Special programmes to audit a small number

of cases should be carried out. Cases of the taxpayer’s where the

preliminary checks reveal the possibility of fraud should be checked.


Audit steps

Frauds can be detected by, cross referencing of documents,

Auditor should look for; Corrections, erasures in VAT returns, and

cross reference the current VAT return with previous year’s returns,

Any wide variation in sales, amount of Input Tax Credit, Amount of VAT payable or in profit margins on sales


Audit steps

It should be seen if internal control mechanisms to prevent, detect and bring to light cases of fraud perpetuated by taxpayers are in place and are operating efficiently in Tax Administration Department


Under reporting

A different strategy is used to deal with taxpayers who underreport the tax due who should be persuaded to change his behavior and not repeat the offence.


Audit steps

Whenever a case of underreporting is detected, Auditor should immediately focus his attention on the reasons responsible for failure of internal control mechanisms to detect the case.

Any weakness or failure in internal control mechanism should be reported along with audit recommendations for improvements.


Tax avoidance

Audit should specially focus on tax avoidance.

Whenever a case of tax avoidance due to loopholes in tax statute or in tax rules is detected ,

the matter should be examined internally at the an appropriately high level, and

taken up with the Government and the tax administration for remedial measures.


Role of tax administration in preventive measures

Tax administration should draw regular audit programmes to let tax payers know about the information available with the tax administration

Audit should see if a detailed audit programme has been drawn up by the tax administration

Any weakness in such a system should be highlighted and reported.


Main features of a VAT Audit

A risk analysis needs to be conducted in audit so that sample is selected from the area with the highest probability of tax evasion.

Subject to instructions from Headquarters Office on the percentage selection of Vat returns during audit, the frequency of a VAT audit should be greater than is customary for income tax audit.



The scope of VAT audit is also different from that of an income tax audit.

In VAT audit the auditor has only to see if all sales and purchases have been correctly exhibited in the return and if the tax liability has been correctly worked out.



The chart on the previous slide traces the main steps in a VAT audit. It illustrates the flow of enquiry that an effective audit could take which includes cross matching of data in the returns against invoices, working papers, bank statements etc.



Similar matching will be required in relation to credits claimed for inputs.

For this, the comparison will be between the invoices held for a specific period, the worksheet summaries, bank statements, records like debit credit memos, refund/adjustment orders etc.



In audit, collection of sample invoices from customers and suppliers tax returns could also be undertaken.


Audit methodology

Basic procedures and checks made during VAT audit are likely to involve the following

Check if the return has been filed on the prescribed date

Check the selected tax returns to see if all the documents required to be enclosed are available with the tax return.


Audit methodology

Check deductions made from gross turnover included in the return and claimed as reduction from turnover on which tax liability is calculated;

Check if the sales included in the return have been correctly classified for application of VAT rates.

Any return of goods included in the return on which tax is not paid should be checked with goods return sheets;


Audit methodology

Check details of goods included in the return as purchases on which tax credit is worked out with reference to the purchase invoices

Check if the Input Tax Credit/ tax liability has been worked out correctly

Check if tax administration has third party data culled from other audits, income tax or other documents, import data etc. in the office under the taxpayers name against his accounting records. Use the available data .


Audit methodology

Confirm the arithmetical accuracy of input and output tax calculations from the sample check of source documents supporting both input and output tax calculations

check of invoices for input credits claimed on private purchases, goods gifted, lost etc.


Audit methodology

Verify that exempt and zero rated goods have been correctly accounted for,

Production records (like packing/repacking) should be reviewed as an aid to assessing the validity of raw material input credit and output tax liability;

it should be kept in mind that multiple rates and widespread exemptions increase the opportunity for tax evasion


Other areas for audit scrutiny

Compliance to provisions of the Act /Rules framed there under as regards the maintenance of prescribed accounts/records

Compliance to various procedures prescribed by the Act/Rules.

Compliance to notices issued on account of reassessment of cases, under assessment, incorrect records/returns etc.

Accuracy of returns, assessment of tax, penalty, interest.


Audit checks to be exercised at the office of the Assessing Authority

Registration Records Applications complete in all respects, are accompanied by

treasury receipt for the prescribed fee of Rs 100/- and security/additional security (wherever called for under Section 15)

Registration certificate bears conspicuously the status of the dealer-viz a VAT-Registration or General Registration, the date from which the certificate is valid and the Taxpayer’s

Identification Number (TIN) (in the case of VAT-registration)



Check that additional attested copies of the certificate of registration for every additional place of business have been issued on payment of Rs fifty per copy. Duplicate copies of certificate of registration, if the originals are lost, destroyed, defaced or mutilated can also be obtained on payment of Rs 50/-



Link issue of duplicate certificates ,additional and other particulars with the details in the register of dealers maintained in prescribed forms.

Link/trace orders of amendments or cancellations of certificates of registration, as the case may, Rule 10 in the register of dealers.

Check that amendments have been carried out on payment of fee of rupees one hundred.



In case of cancellation of registration of a dealer registered under Section 14), it shall be seen that the gross turnover of the dealer (has not exceeded the taxable quantum, for three successive years, and the certificate of registration.

It has to be seen that cancelled certificate have been surrendered within fifteen days of the date of service of notice issued in this behalf.


Returns/Turnover

It has to be seen that, the returns were filed

monthly/quarterly/Annually as required under the Act/rules framed there under.

the tax calculated on self assessment had been remitted in to treasury before submission of the return

Turnover of all branches has been included in turnover of the business.


Returns/Turnover

Penalties/interest have been imposed on submission of belated ,incorrect, or incomplete returns


Input Tax Credit

It has to be seen that, all conditions prescribed for Input Tax credit

have been met (Rule 20). Input Tax Credit has been allowed in the

case of the goods covered under sub-section (3) of Section 11 and to the permissible extent only


Input Tax Credit

Reverse Input Tax has been adjusted along with interest at the time of arriving at Net Input Tax claim.

Input Tax Credit has not been allowed on items not covered under the Act.

the adjustment of excess or short Input Tax Credit worked on account of credit/ debit notes has been made as specified under the Act.


Input Tax Credit

Action under the Act was taken and benefit of Input Tax credit denied to dealers issuing/ accepting a tax invoice without entering into transaction of sale.


Input Tax Credit on stocks held on 1-04-2005

Check that the, registered dealer submitted statement of

goods within four months of the commencement of the Act, i.e.(1-04-2005)

proper certificates providing specifically the amount of tax paid, have been furnished.


Input Tax Credit on stocks held on 1-04-2005

in case of goods transferred on consignment or branch transfer, Input Tax Credit in excess to 4% only has been claimed and allowed.

In the case Input Tax Credit availed on duplicate tax invoice, in lieu of lost, destroyed or militated original tax invoice, a Bond in the prescribed form equal to the amount of Input Tax claimed has been obtained and is on record.


Miscellaneous

Check cases of forfeiture of Security under the Act.

In the case of payment of tax through crossed cheques/bank drafts it should be seen that the said cheques/ drafts, were deposited ten days clear before the expiry of the prescribed due date for filing the return.


Miscellaneous

Failure to file a revised return if there is an error/ omission in return filed earlier, without any sufficient reason attracts penalty @ Rs 25/- per day up to ten days and there after @ Rs 50/- per day till the default. The maximum amount of penalty is Rs 3000/- (where tax is leviable) and Rs 500/- (where no tax is leviable). This has to be seen.


Miscellaneous

Failure to comply with the provisions of the Act (payment of tax into treasury before filing a return and furnishing a receipt thereof) attracts penalty @ ten percent and the penalty has not to exceed one and a half times of the amount of tax assessed. This may be checked.


Miscellaneous

In addition audit of the records/registers maintained in the offices of the Assessing Authorities within the jurisdiction of the mandate and objectives defined in Auditing Standards has to be conducted.

value added tax s.7r.t.i.jammu 1 audit of value added tax

Documents

tax receipts

arrears of tax

tax returns

jammuthe audit of vat

audit of value

audit of receipts

iaadthe audit

registrationduring audit