1. Audit under Indirect Tax Laws -CA Sunil Gabhawalla

2. 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 !!!

3. Audit : Types Excise Duty/Service Tax VAT / CST
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

4. 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—
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
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,

5. 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)

6. 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.]

7. Rule 5(2) 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

8. Criteria & Time Limit for EA- 2000 Audit

9. 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
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

10. Tax liability by Service Providers
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
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

11. Audit Process

12. 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

13. Compliance to Audit and Annexures

14. 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

15. 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.

16. 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)

17. 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

18. Annexure – 2 Income/Receipt
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

19. Annexure – 2 Import of Services Reverse Charge Mechanism
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

20. Annexure – 3, 4 & 5 Master Assessee File Revenue Summary
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

21. Some Concerns Point of Taxation Reverse Charge Mechanism
Transition from
Cross Matching with Financials and TDS Information

22. MVAT Audit

23. MVAT Audit : Law Provision 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 returns
Annexures A to K – additional information
Due Date
15th January
Conducted by
Chartered / Cost Accountant
Penalty
0.1% of the turnover of sales

24. 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

25. MVAT Liability : Broad Approach
Determination of Turnover
(Financials + Reconciliation)
Working of VAT Liability
Comparison with Consolidated Returns
Recommendations

26. 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

27. VAT Liability Claims made Classification of Goods & Rate Applicable
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

28. Generic Client Requested Audit/ Review

29. Objectives: Review the Past to rectify aggressive positions if any
Reorient Business & Transaction Models for future
Improve Systems & Processes
Quantify Risks for unrectified positions

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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?

36. Review Pending Litigation
SCN – Responses
Appeals – Predeposit Waivers, Final Disposals
Correspondence with Specialists
Opinion from Specialists

37. THANK YOU !