Audit in Service Tax “Auditing is a systematic and independent examination of data, statements, records, operations and performances(financials or otherwise) of an enterprise for a stated purpose.” ---- ICAI Dr Shobhit Jain
Today’s Scope • Service Tax Audit: Audit process • Department’s processes and pysche: insider story • A professional’s role
Department’s Side: Players • DG Audit- New Delhi: • Zonal Units at Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata and Mumbai • Local Commissionerate (ST&Ex) • Six Metro: additionally Excise Commissionerate if a manufacturing concern • Professionals themselves: Cost Accountant (Dept) or Sec 14A (CWA or CA)
Department’s Side: Final Team • Stationary Group: Assessee Master Profile; notice & collection of data before audit, tracking after audit objection • Audit Team: Superintendent , Inspector: ultimate auditors; first level of discussions • Cost Accountant: expert guidance • Dy Commr/ Asstt Commr: daily monitoring, second level of discussions • Addl Commr/ Jt Commr: approval of audit plan, scheduling of audit, second and final level of discussion • Commr: approves the objection • Range: Inspector, Superintendent, AC/DC: objection goes to Range for recovery or proceeding after approval ‘Auditor’ means a Central Excise/ Service Tax officer entrusted with the duty of conducting audit.
Power and provisions 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
Rule 5(2) of the Service Tax Rules, 1994 requires every taxpayer to furnish to the Superintendent of Central Excise, at the time of filing his return for the first time or the 31st day of January 2008, whichever is later, a list of all accounts maintained by the taxpayer in relation to Service Tax including memoranda received from his branch offices. Rule 6(6) Where the assessee submits a memorandum in Form ST-3A under sub-rule (5), it shall be lawful of the [Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be] to complete the assessment, wherever he deems it necessary, after calling such further documents or records as he may consider necessary and proper in the circumstances of the case. Sec 14 of Central Excise Act 1944: Summons
Who is audited? • LTU and Taxpayers with Service Tax payment above Rs.3 Crores (Cash + CENVAT) (mandatory units) – to be audited every year. • Taxpayers with Service Tax payment between Rs.1 Crore and Rs.3 Crores (Cash + CENVAT) – to be audited once every two years. • Taxpayers with Service Tax payment between Rs.25 Lakhs and Rs.1 Crore (Cash + CENVAT) – to be audited once every five years. • Taxpayers with Service Tax payment upto Rs.25 lakhs (Cash + CENVAT) – 2% of taxpayers to be audited every year. OTHERS: • ‘risk parameter’: Rupee risk • Overlap of scrutiny and audit • Referrals and intelligence • Board instructions
How long……………………………… • Taxpayers with Service Tax payment above Rs.3 Crores (Cash + CENVAT) (mandatory units) – uptomaximum 10 working days. • Taxpayers with Service Tax payment between Rs.1 Crore and Rs.3 Crores (Cash + CENVAT) – uptomaximum7 working days. • Taxpayers with Service Tax payment between Rs.25 Lakhs and Rs.1 Crore (Cash + CENVAT) – uptomaximum 5 working days. • Taxpayers with Service Tax payment upto Rs.25 lakhs (Cash + CENVAT) – uptomaximum 3 working days.
Audit Flow • Notice (Sevottam: 15 days) • Submission of documents • Consultation • Visit- verification • Consultation and written submissions • Yes/No acceptance and compliance option • Profiling and selection • Receipt of documents • Desk Review • Approval of Audit Plan • Post visit analysis, Queries • Finalisation of department’s views (MCM) and communication • Showcause or closure
Documents needed • LONG LIST • Period: retrospective period up to the previous audit by the Departmental Audit Party or the last 5 years ( generally limited to the commencement of levy on a particular service) whichever is less and should extend up to the last completed Financial Year preceding the date of commencement of the audit.
Basic processes Desk Review Visit • Walk Through • ABC Analysis Verification: • Audit Plan • Documents and Data submitted • Cenvat Verification • Sample checks Consultation
Characteristics • Gross, risk based • Less accurate • Less intrusive • Quicker/ less manpower intensive • Non digitalised environment • Eg service value audit • Transaction based • More accurate • More intrusive • Slower/ more manpower intensive • Digitalised environment • Eg Cenvat audit Top to Down Audit Down to Top Audit
Principles of Audit • The audit should be conducted in a systematic and penetrative manner. • Emphasis should be on the identified risk areas and on scrutiny of records maintained in the normal course of business. • Audit efforts should be based on materiality i.e. degree of scrutiny will depend on the nature of risk factors identified. • Recording of all checks and findings. • Audit should be normally distinct from anti-evasion operation in as much as it can detect irregularities only to the extent of their reflection in the books of accounts. • Consultative approach • Opportunity for guiding the assessee
Role of Professionals • Compliance Issues: submission of documents and data • Coordination Issues: convenient dates, interact with officers • Consultancy role: Sec 73(3) option, acceptance of objection, discussions • Preaudit compliance exercise • Do’s & Don’ts for professionals
THANK YOU….. Any questions please? Service Tax Audit Manual 2010