1. Exit Conference Information Systems Audit of Online Systems in Commercial Taxes Department Office of the Principal Accountant General (E&RSA) Karnataka

2. Audit Objectives To ensure that the system has achieved the intended objectives, supports the business processes, ensures compliance with applicable rules and regulations and maintains data integrity. To ensure that the necessary organizational controls are in place for effective and efficient management of the system To ensure that the necessary controls are in place for ensuring the security of information system assets To ensure that the necessary controls are in place to guarantee continuity of operations 2 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

3. Scope of Audit Data generated by the online systems from the time of such implementation upto October 2012 Documentation pertaining to implementation of the systems was also reviewed. 3 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

4. Audit criteria The Karnataka Value Added Tax Act, 2003 and Rules made thereunder The Central Sales Tax Act, 1956 and Rules made thereunder Information Technology Audit Manual of SAI India 4 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

5. Audit Methodology Analysis of database using computer assisted audit tools and techniques (IDEA, SQL) Review of documents Survey using questionnaire to assess effectiveness of service delivery 5 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

6. 3.1 Excess Representation of Tax Paid in Original Returns 6 Adjustment of Interest – 1.98 crore Adjustment of other payments – 93.43 crore IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

7. 3.2 Inadequate Input Controls to Prevent Excess Brought Forward 27,459 monthly and 5,387 quarterly returns (out of 72,12,639) showed excess brought forward than carry forward of previous period. In 3,668 monthly and 145 quarterly returns, this excess was immediately adjusted This amounts to a revenue loss of Rs.5.29 crore and Rs.8.03 lakh respectively. 7 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

8. 3.3 Penalty for Understatement of Tax Liability in Original Return 38,682 out of 3,12,205 revised returns showed increased liability of more than 5% Application of Section 72(2) would yield a penalty of Rs.30.12 crore. Absence of this control affects efficiency of tax administration. 8 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

9. 3.4 Inadequate Input Controls Leading to Material Inaccuracies 57,407 out of 72,12,639 VAT 100 returns analysed, showed higher amounts of tax collected than was reflected in the liability. 9 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

10. 3.5 Adjustment of Tax against Purchase or Sales Returns in 4,894 returns, the dealers have declared purchase returns within the previous six months but failed to reverse the input tax credit 24,394 returns, the dealers have reversed output tax paid on sales returns within the previous six months without declaring the turnover related to the sales return 10 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

11. 3.6 Negative Taxable Turnover in KTEG Returns 5,943 out of 6,12,154 KTEG returns filed online, taxable turnover and tax payable values are negative In 4,423 cases (out of the above), the dealers have carried forward the same to the tax returns of the subsequent periods and to that extent reduced the amount of tax payable. 11 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

12. 3.7Dealers Opting for Composition Composition facility for ordinary dealers is subject to total turnover limit of 15 lakh per year. 3,921 returns showed that the turnover had exceeded the threshold for the year and yet the dealers had continued to avail the benefit of composition of tax by filing composition returns instead of regular VAT returns. Indicates that the system does not have the control to detect and ensure this automatically 12 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

13. 3.8 Hoteliers Opting for Composition 194 hoteliers registered as ‘COT-D’ and paid 1% tax in 1,447 returns – SL of Rs. 49.16 lakh. 260 ‘COT-H’ registered hoteliers (529 returns) paid 1% tax – SL of Rs.19,90,817/- Indicates – Improper verification of registration – lack of correlating controls between registration and returns modules 13 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

14. 3.9 Inability of the System to Validate Exceptions on Subcontract Turnover 6,556 cases (out of 10,538 cases of exemption) subcontractors declared lower amounts in their respective returns Lack of integration between information readily available in the database, the CTD has failed to take advantage of the potential system efficiencies offered by computerization 14 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

15. 3.10 Submission of Nil Returns by Mechanized Crushing Units The system does not have a database of the number, size and type of machines employed by the mechanized crushing unit. Hence it is incapable of validating the information furnished by the dealers in the monthly returns. Since the amount of tax is determined not on the turnover or employment made out of machines, but on their number only, the question of nil returns do not arise. However, out of 25,455 composition returns filed by mechanised crushing units, 5,154 were nil returns 15 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

16. 3.11 Inability of the System to Ensure Continuity in the Filing of Tax Returns EFS does not have controls to prevent dealers from defaulting in the filing of returns. About 18,118 instances of non-filing ranging from one to eleven months in the database Returns of subsequent periods by such dealers were accepted. In these cases, the system does not prompt for best judgment assessments or invoking of penal clauses as provided under the Act. 16 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

17. 3.13Inadequacy of Controls to Prevent ITC on Purchases from Composition Dealers Dealers who have opted for composition of tax (except works contractors) are not eligible to collect tax on their sales Purchase invoice module permits entry of invoices issued by COT dealers including tax Irregular ITC of about 1,17,58,920/- in 2027 VAT 100 returns 17 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

18. 3.14Refund approved in excess of request The refund module of the online system does not have controls to restrict the approved amount of refund to the amount requested. 36 cases where amount equal to or more than Rs. 1000/- in excess of the requests were approved. 18 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

19. 4.1Inability of the System to Compute Interest on Belated Payment of Taxes 26,126 cases of belated payments with no interest paid Loss of revenue by way of interest Rs.1,65,45,297/- 19 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

20. 4.2 Deemed Acknowledgment for Returns even when Entire Liability is not satisfied by e-Payment 5 cases of part payment of taxes through e- payment; returns were deemed acknowledged. 20 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

21. 4.4Under payment of tax 1,264 cases in which the amount of tax paid as per data base does not match declared net tax liability Total effect of Rs.21,23,30,521/- 21 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

22. 5.1 Online Issue of Statutory Forms The system lacks controls to ensure that Filing of forms corresponds to the CST sales turnovers declared in the returns. CST Invoices adequately cover the value of individual forms Invoices are not repeated for different forms. 22 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

23. 5.2Lack of Integration between KTEG and CST Modules Online issue of C forms include 12,987 invoices for ‘machinery’ for which the dealers have not even filed KTEG returns for those periods Integration of issue of C form with KTEG module can deliver better administrative efficiency. 23 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

24. 6.1Inadequacy of Controls to Enforce Validity Period of e-sugam To prevent misuse of delivery notes, the CTD has established limitations on validity period based on distance between origin and destination The dealer, while requesting for a delivery note, has to specify his date of delivery. The validity period limitation is not mapped into the system to limit the delivery date 53,251 notes had a validity beyond 7 days 2,350 notes for within state transactions with validity beyond 4 days 21,872 cases - the notes have been inspected and cleared even after the expiry of 7 days 24 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

25. 6.2Lack of Validation Controls PAN details are not available for 2,24,764 delivery notes Invalid PAN in 3709 cases Goods Vehicle number, LR number and LR date are not available for 39,02,653 cases out of 97,56,182. Invoice number is missing in 7,799 transactions and the Invoice date is missing for 78,167 transactions. The values of goods are less than zero for 25. 25 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

26. 6.3m-Sugam The following important details are not captured 1.Number and particulars of the Goods Vehicle including vehicle number 2.Quantity of individual commodities 3.Value of individual commodities 4.Date of dispatch 26 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

27. 7.1Inadequacy of Output Controls - Reliability of MIS Reports Certain payments in daily summary of payments for offices are not reflected in the payment summaries of the corresponding dealers Number of submitted/acknowledged returns displayed in the MIS menu and LVO dash board are dissimilar ‘e-sugam summary report’ of delivery note particulars show dissimilar information in the MIS menu and LVO dash board The total of office wise, commodity wise, tin wise and transaction wise summaries are different A specific instance of actual payment by cheque (available from the EFS module) is nevertheless reported in the ‘short payment report’ of MIS. 27 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

28. 8.1Underutilization of e-Grahak due to Inadequate Publicity Measures Lack of continuous effort through repeated advertisements. Absence of website optimization efforts – the facility does not present itself to related web searches Unless a citizen knows the exact term ‘e-grahak’ and what the service provides, it is unlikely to be used to its full pontential. The facility is underutilized by the public - only 435 requests from the citizens during the period CTD attended to 112 cases after a delay of more than a month, and 63 cases after two months 28 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

29. Failure to deactivate accounts of dealers after de-registration E-Sugam generated by deregistered dealers - 765 cases VAT 100 returns filed by de-registered dealers – 65,536 cases 29 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

30. 9. Achievement of Objectives of Computerization The broad objectives of MMPs under CTDs – reducing interface between dealers and the departmental staff, – providing services at minimum cost, and – bringing in greater transparency and efficiency. To assess this, we conducted a survey using a questionnaire of 22 questions dealer responses relating to quality of services, ease of use and inviting specific suggestions for improvement. We received responses from 166 dealers. 30 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

31. Survey… Quality of services – high level of satisfaction – 85 to 90 % satisfaction with respect to reduction in transaction costs, reduction in need to approach departmental staff and improvement in transparency and accountability Promptness of sevice delivery – waiting period reduced to – 7 days (e-registration) – 6 days (statutory form issue) – 1 day (delivery note issue) Delay in some service delivery – Processing of refunds by 6 months 35.07 per cent of the respondents stated that features in the website have made them apprehensive about the security of their transactions 31 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

32. Survey… >80 % satisfaction about ‘ease of use’, prompt processing etc However, respondents complain about specific problems – Slow response due to excess load – 49.28% – Inability to complete transactions – 37.31 % – Error messages without any apparent error – 34.56 % – Problems with quoting payment reference number – 23.08% 32 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

33. Survey… Specific needs – Online tracking of status of appeals, refund requests etc – More banks to be added to e-payment facility – 67.03% of dealers felt the need for an online dealer ledger that accounts their liabilities and payments – Proper training of field office staff is necessary 33 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

34. Recommendations Online tracking mechanism for status of appeals, refund requests etc. and online ledger account for individual dealers More extensive training to departmental staff Establishment of a protocol for user account management and automatic deactivation of accounts of deregistered dealers Output controls should be strengthened to ensure reliability of MIS reports Greater publicity should be given to e-Grahak to effect more active participation by the public. 34 IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013

35. Contd … Application level controls to be introduced to ensure – Correctness of brought forward amounts – Correctness of credit in KTEG returns – Automatic conversion of COT dealers to regular stream on exceeding turnover limit – Integration of return and registration modules to ensure correctness of cot hotelier payments – validation of tax exemption on subcontractor payments – Prevention of filing of nil returns by metal crushing units – automatic computation of interest on belated payment of taxes – Adequacy and accuracy of statutory forms – Validity of delivery notes IS AUDIT OF ONLINE SYSTEMS IN CTD 15-10-2013 35

36. Thank you!