“Scrutiny Assessment, Third Party Information Notices and Internal Audit under Service Tax”

BY : CA KRISHAN GARG

M.COM, F.C.A., C.S., D.T.M.P.

BACKGROUND

1. As a measure of simplification , the Government, in the year 2000, dispensed off all statutory records under the central excise law. Now, the assessee is not required to record the receipt of raw material, production and clearance/sale of finished goods etc in registers/documents prescribed by the central excise department. These records can be maintained in any form, provided, the essential information required for calculation of central excise duty/Service Tax liability can be obtained from such records. Similarly, these records can be maintained either in a physical form or in an electronic form.

2. A major change was made in assessment procedure by doing away the system of assessment by departmental officers. Now the assessee is required at their own to assess their liability and to file the periodic returns. Self assessment procedure was adopted under service w.e.f. 16-07-2001 and later on w.e.f. 10-09-2004, section 71 relating to verification of the self assessed return has been omitted.

“SCRUTINY ASSESSMENT.”

NEED FOR SCRUTINY ASSESSMENT

Looking into the self assessment procedure under service tax, the government introduced scrutiny assessment procedure in the year 2009. The basic purpose it caters to is to ensure the correctness of :

Duty assessed. Taxable value declared. Cenvat credit availed. Abatement/ Exemption claimed. Classification of service.

GUIDELINES FOR SCRUTINY ASSESSMENT

1. In the year 2009, the CBEC had laid down the procedure for carrying out detailed scrutiny of returns

2. Later on, due to introduction of Negative List, POT Rules 2011, and the widening the scope of RCM, guidelines for detailed scrutiny also had to be revised.

3. Ministry of Finance has recently vide circular no. 185/4/2015- Service tax dated 30-06-2015 (F.No. 137/314/2012 –Service Tax issued the directions to be followed for detailed scrutiny of service tax returns w.e.f. 01-08-2015.

THE TWO LEVELS OF SCRUTINY:

There are two levels of scrutiny of service tax returns, namely:

Preliminary Scrutiny Detailed Manual Scrutiny

PRELIMINARY SCRUTINY

The preliminary scrutiny of all the returns is done online in ACES.

The purpose of the preliminary scrutiny of returns is:-

To ensure the completeness of the information furnished in the return,

To verify the arithmetical accuracy of the amount computed as tax and its timely payment,

For verification of timely submission of the return and identification of non-filers and stop-filers.

After scrutiny if returns having certain errors are marked for review and correction. These are accordingly processed by Range Officers.

DETAILED MANUAL SCRUTINY

Detailed manual scrutiny of selected returns is required to be carried out based on specified parameters.

CRITERIA OF SELECTION FOR SCRUTINY ASSESSMENT

The main focus of the detailed manual scrutiny of the returns (of Service Tax) is on those assessees which are not being audited.

The detailed return scrutiny would be conducted in respect of such assessees whose total tax paid (Cash+Cenvat) for Financial Year 2014-15 is below Rs 50 lakh.

The selection of the assessees for the purpose of manual scrutiny, would be made under three bands:-

I II III0 to 10 lakhs 10 to 25 lakhs 25 to 50 lakhs

CRITERIA OF SELECTION FOR SCRUTINY ASSESSMENT (contd..)

The assessees who have been selected for audit, or have been audited recently (in the past three years) should not be taken up for detailed scrutiny. In no event should an assessee be subjected to both audit and detailed manual scrutiny.

Detailed manual scrutiny covers only those units which are paying tax upto Rs. 50 lakhs. However, the chief commissioner may direct detailed manual scrutiny of an assessee’s return who has paid service tax (Cash + Cenvat) of more than Rs. 50 lakhs.

DOCUMENTS REQUIRED FOR SCRUTINY ASSESSMENT

1. Copy of an audited Balance Sheet.

2. Copy of ITR

3. Form 26AS

4. Copy of Bank Statement

5. Copy of Bills

6. Reconciliation Statement

7. Cenvat Documents

8. Any other documents, as the officer deems fit

PROCEDURE OF SCRUTINY ASSESMENT

1. At least 15 days prior intimation is required before initiating a return scrutiny exercise.

2. Returns scrutiny must be done for a complete financial year by looking at two Half yearly returns.

3. For validation of information given in self assessed ST-3 returns, this is reconciled with ITR, 26AS and any third party information available with department.

4. Time limit : The Scrutiny process should be completed in a period not exceeding 3 months.

FINDING OF ASSESSMENT

• In order to ensure transparency of the scrutiny process, it is important to document the findings flowing from the scrutiny effort.

• For this purpose, an Observation Sheet should be prepared.

• The scrutiny officer must record his findings under each of the subject of the checklist namely, reconciliation, taxability, classification, valuation and CENVAT credit.

• Under each of these heads, the officer should record any action that needs to be taken by the Range.

• The findings should clearly outline the process of scrutiny that led to the outcome.

DEMAND ARISING FROM SCRUTINY ASSESSMENT

During the course of scrutiny, if the concerned officer raises a demand, and the assessee also agrees with the same, he should deposit the amount of tax along with the interest and penalty(if any).

If the assessee does not agree with the contention of the concerned officer, then he can file a written submission stating reasons for his disagreement and can also submit additional documents.

After such submission by the assessee, if the department still wants to raise a demand, then it may issue a show cause notice to the assessee.

NON COMPLIANCE WITH NOTICE

In case of non-compliance with the notice issued by the department for scrutiny assessment, the officer can assess the return according to the information available with him, or he can forward the case to preventive or any other investigating authority.

“THIRD PARTY INFORMATION NOTICES.”

Major Source of Third Party Information

1. Information from other department like, Income Tax And Sales Tax.

2. Inputs from inter-revenue departmental meeting

3. Information of the assessee gathered at the time of audit/search of another assessee.

In case of third party information, department may issue a notice to the assessee for explaining and reconciling the transaction with their books of accounts and returns.

“Internal Audit By The Department.”

TYPES OF AUDIT

Books of accounts of an assessee are mainly audited by Government department in the following four forms:-

Excise Audit 2000 (Commonly known as EA 2000)

Computer Assisted Audit Programme (CAAP)

Special Audit u/s 14A and 14AA of the CEA, 1944

AGMP

“Audit Under Excise Audit 2000 (EA 2000).”

1. Purpose Of Audit

Scrutiny of the records of assessee.

Ascertaining the actual liability and verifying the payments.

Cross verification of records with the returns filed by the assessee.

Recovery of amount if there is any short payment.

2. Selection criteria of a unit under audit.

Annual Service Tax Liability (Cash + Cenvat)

Frequency of Audit

Tax payer with payment Above Rs. 3 crore

Every Year

Tax payer with payment between Rs. 1 crore to 3 crore

Once in every two years

Tax payer with payment between Rs. 25 lakhs to Rs. 1 crore

Once in every five years

Tax payer with payment up to 25 lakhs

2% of tax payer to be audited every year

3. Relief for Individual & Prop. Firms

 

Vide para 13.1 of JS(TRU-II)’s letter D.O. letter F.No. 334/3//2011-TRU, dated 28.02.2011, the Hon’ble Finance Minister has announced in his Budget Speech (2011) in respect of service tax that individual and sole proprietor assessee with a turnover up to Rs. 60 lacs shall not be subject to service tax.

4. Procedure of Audit

1. Selection of unit –By taking account the risk factor

2. Desk review- Gather information from departmental records

3. Obtaining documents from the assessee- Balance Sheet etc.

4. Preparation of Audit Plan & Approval

5. Visit to the Auditee Unit

6. Audit Objection, Audit Para & Spot Memo

7. Audit Report

8. Submission of report

5. Time limit for completion & Period of audit

Normally an audit is completed within 3 to 7 days depending upon the volume of the assessee. This period may be extended in exceptional cases.

 

Normally audit is done for the period from the last period of audit already done and if no audit is done then from the date of registration to last completed financial year. Looking to the time barring limit of 5 years, audit is normally done for a maximum period of 5 years.

6. Authorities & Their Role

Name of the Authority Role of the authority

Superintendent Audit Planning, Execution

Deputy/Assistant Commissioner (Audit) Supervision, Preparation of audit schedules, scrutinizing the DAR

Additional/Joint Commissioner (Audit) Approving desk review and audit plan

Commissioner Taking final decision on audit objection and reviewing performance of sub ordinates relating to audit

7. Effect of non submission of documents

If an assessee do not provide any documents as required then auditor can directly start the audit after getting approval from the higher authorities.

Non co-operation of the assessee can be reported and higher authorities can either issue direction to the auditor to start audit without obtaining documents or this case can be referred to STTF/Preventive team for investigation.

 

8. Assessee having more than one registration at various locations

If assessee is running its activities from more than one premises then audit can be done only for the transactions done under the registration for which audit letter has been issued. In case of centralized registration auditor will verify the transactions relating to every location which are covered under centralized registration.

9. Difference in Audit and Anti- Evasion Wing

Like anti evasion wing, auditor cannot search the premises or seize the documents of the assessee. Though audit is done at the premises of the assessee however they have not been given any power of initiating search and seizure proceedings.

10. Basic Preparations after receiving letter for auditAfter receiving the letter from department for audit we should proceed for :-

Collection of information/documents as required by the auditor in their letter.

Verification of Cenvat Documents

Scrutiny of Income Accounts

The most important work would be reconciliation of income shown in Balance Sheet with the service tax return filed with the department.

Name of Service Income as Per Profit & Loss A/c

Amount as per S.Tax Return

10.1 Basic knowledge of Service Tax Provisions

For smooth completion of audit we should have knowledge of:-

Negative List of Services

Mega Notifications For Exemption Of Services

Declared Services

Partially / Fully Reverse Charge Mechanism

Place Of Provision Of Services

Amended CENVAT Credit

abatements etc

11 How to handle Audit/ Precautions in an Audit One can handle the audit case properly by taking care of the

following points:-

Documents as required should be submitted timely.

Only required documents should be submitted.

Before submission of documents all the income heads should be checked.

Special attention should be given to Misc. Income.

At the time of start of audit we should understand the level of knowledge of concerned officer to plan out strategy.

Original copies of challan/Returns/cenvat documents should be available in record

  11.1 How to handle Audit/ Precautions in an Audit

Keep a copy of all the notifications, circulars in hand on the basis of which exemption/abatement is claimed.

In case of any spot memo- if agreed, then pay duty. Otherwise it should be replied properly.

Precautions:-

Documentary proof of audit done should be kept in file for future use like acknowledgement of submission of documents/spot memo.

Follow up with the authority till the audit para is settled.

Every time while filling the returns, we should ask for Trial Balance for reconciliation.

Client should be asked to show the Balance Sheet before finalization for proper presentation as per service tax perspective.

In case of any problem we should not hesitate to meet with higher authorities

“Computer Assisted Audit Programme (CAAP).”

What is CAAP AuditLarge number of companies have started maintaining their records in

electronic format [some companies are even paperless. For these type of assessee government has introduced CAAP audit.

Thus, for assessees using a computer to record their business transactions/activities and keeping the data in electronic form, the government has introduced CAAP audit. Under CAAP all, or a part of audit could be completed using electronic records.

By using CAAP, the auditor analyses the :

business system of the assessee,

understands the systems flow chart,

computer programming flow chart,

the layout of the files and

finally determine the data transfer mechanism.

CAAP AUDIT: Basic Information

(a) Hardware and Peripherals 

(b) Operating System used by the assessee’s computer system 

(c) Accounting Software used by the assessee 

(d) Accounting Information – like chart of accounts 

(e) Details of information in the assessee’s electronic records 

(f) Back-up and Data retention methods used by assessee 

(g) Data export options supported by the assessee’s system

(h) Conversion of the assessee’s data to a format readable by departmental computers.

CAAP AUDIT: Obtaining files/Records and analysis thereof

CAAP Auditor would identify specific computer files and records required for the audit and ask the assessee to provide a copy of those records on a disk or a Compact Disk (CD)

May also ask the assessee to convert the data to a format that is not proprietary and readable by departmental computers

The auditor would next copy these records to a secure departmental computer and analyze/verify them using a combination of commercial and custom software.

Auditor validates that all of the records are included in the data, summarizes them, and extracts a copy of selected records of interest to a number of reports.

After downloading the assessee’s data files the auditor prepares these files so as to make them readable for the audit software.

CAAP Audit: Data Integrity & Sampling

Data Integrity

A data integrity check is performed to verify that the electronic data provided by the taxpayer to the Department is both complete and accurate. This is accomplished by reconciling the electronic data with the taxpayer's books and records.

Data Sampling

A sampling approach is typically used only when the entire data cannot be efficiently reviewed. The Department employs various sampling approaches when using electronic data as a source. As with any audit, following the completion of the sampling process, but prior to projecting the results, the auditor will share the preliminary results with the taxpayer. The taxpayer may be requested to obtain additional documentation or indicate agreement/disagreement with potentially taxable transactions identified by the auditor.

Thereafter, the steps are the same as those in EA 2000 audits.

Security and Confidentiality

The assessee’s records are handled with extreme care and are encrypted during transfer and storage. Such records obtained from the assessee are accessible by only the authorized Central Excise Officers.

Upon completion of an audit or upon conclusion of any appeal or judicial review, the records provided are securely erased and CDs destroyed.

The assessee may advise the CAAP auditors in case he (the assessee) wishes to have his CD returned back.

The Computer Assisted Audit in no way causes any risk to the assessee’s computer or electronic records. The CAAP auditor would only ask the assessee to make a copy of the assessee records.

EA 2000 and CAAP: can audit be done under both schemes?

There is nothing in law to prohibit two type of audit of a single assessee for the same period however the basic purpose of audit is to verify the transactions of an assessee.

Once an audit is completed, the very purpose of auditing the transactions is served. Thus whenever a letter is received for audit under CAAP after completion of audit under EA 2000 or vice versa, the same may be informed to the concerned officer alongwith documentary proof.

“Special Audit u/s 14A and 14AA of the CEA, 1944.”

Special Audit

Audit under service tax is covered by section 14AA of Central Excise Act, 1944 as applicable to service tax and section 72A inserted by the Finance Act, 2012 w.e.f. 28-5-2012.

The Central Board of Excise and Customs (CBEC) have issued guidelines for audit of account of service Tax assessee.

Special Audit

Chartered Accountants are authorized for audit

The Finance Act, 2009 added ‘chartered accountant’ to the cost accountants in section 14A and 14AA of the Central Excise Act, 1944 so as to empower the Chief Commissioner of Central Excise to nominate a chartered accountant or cost account for conducting special audit under the provisions.

An explanation was inserted to explain that chartered accountant would mean a chartered accountant as defined in section 2(1)(b) of the Chartered Accountants Act, 1949. Thus, .e.f. 19.8.2009, a chartered accountant can also be appointed for conducting special audit for the purpose CENVAT credit under service tax. Section 14AA of Central Excise Act, 944 deals with special audit in cases where credit of duty availed or utilized is not within normal limit etc.

Special Audit: Section 72A

Finance Act, 2012 w.e.f. 28-5-2012 has amended section 83 of the Finance Act, 1994 by omitting section 14AA of Central Excise Act, 1944, while inserting certain other sections in section 83.

Section 14AA of Central Excise Act, 1944 deals with special audit in cases where the credit of duty availed or utilized is not within the normal limits etc.

However, a new section 72A has also been inserted by the Finance Act, 2012 w.e.f. 28-5-2012 in Chapter V of the finance Act, 1994.`

Special Audit: Section 72AAccording to Notes on Clauses on Finance Bill, 2012, the objective of inserting section 72A is as follows :-

“The special audit shall be ordered where

A) the service tax assessee has failed to declare or determine the value of taxable service or

B) has availed and utilized credit of duty or tax beyond the normal limit or by means of, collusion or willful misstatement or he is having operations spread out in multiple locations.

Chartered accountant or as the case may be, the cost accountant shall submit a report to the Commissioner on completion of the audit and such audit may be ordered even though such accounts had been audited under any other law for the time being in force. Before initiating proceedings on the basis of the report, a reasonable opportunity of being heard shall be given to the Service Tax assessee so audited.

“Audit by Accountants General , Madhya Pradesh

(AGMP).”

AGMP Audit

Normally high tax payers covered under AGMP Audit.

They directly start the audit without asking for submission papers. Information of audit is given through range office.

Normally three year period is covered.

Method and area of audit is same as given in EA2000 or CAAP.

Some Important discussions Sometimes these audits becomes harassment to an assessee and

leading to increase in corruption.

Even after scrutiny assessment, assessee can be selected for a routine audit.

Sometimes, more than one authority issues a letter for verification.

Like Income Tax, Instead of going to the auditee premises, this verification process should be done in the excise office.

We should charge extra fees for attending the audit case.

Difference of duty paid can be claimed by issuing supplementary invoice and that is also cenvatable for the receiver of service.

Assessee having registration both under excise and service tax: Whether excise auditor is authorised to verify the payment of service tax?

Some Important discussions

Auditor cannot go beyond the period of audit for which he/she is authorised.

No fees is payable for the audit done by department.

If tax is actually payable and assessee is also ready to pay the same then it should be paid immediately to escape from penal provisions.