general procedure of business audit under maharashtra vat act
DESCRIPTION
Business Audit under M VatTRANSCRIPT
General Procedure of Business Audit under Maharashtra VAT Act, 2002 Every dealer/manufacturer registered under Maharashtra Value Added Tax Act, 2002 have to face the Business Audit. Sales Tax Department has recently vide their Circular No. 25T of 2008, dated. 23.07.2008 clarified the general procedure for Business audit as below:
01. Objects of Business Audit: The primary object of business audit is to promote compliance with law. At a practical level, the object of audit is to ascertain the correctness of returns and to identify inadequacies in returns, if any when checked against the books of account and the circumstances of the business. If the returns are not filed then, the audit officer is expected to quantify the liability of the dealer and enforce recovery.
02 Procedure of Audit: The audit is carried out at the place of the dealer by the officers working in the Business Audit Divisions. The cases for audit are selected by the Business Audit Criteria Committee on the basis of certain criteria. Normally, the audit is carried out with prior information of the date to the dealer, unless there is deliberate decision to conduct surprise audit.
03 Scope of Audit: i) The audit officer will ascertain the correctness of returns filed by the dealer, both under MVAT Act and CST Act. Obviously, the audit officer will verify the books of accounts maintained by the dealer along with sale bills, purchase bills, sales journals, purchase journals, ledger, cash book, delivery challans, dispatch proofs, bank statements, etc. to ascertain the correctness of turnover returned and also the correctness of claims made through returns. The audit officer may also ask for agreements, purchase orders, work orders, tender documents etc.
ii) The audit officer is expressly authorised to make enquiry as to whether the dealer has filed returns and made payments under other allied laws, such as Profession Tax Act, Luxury Tax Act., Income Tax / Excise laws.
iii) It will be the dealers’ responsibility to give correct and complete information during the course of an interview conducted by the auditing officer and he shall ensure that all persons concerned with the accounts, filing of returns, payment of taxes, sales, purchase, production and other business activities are available with information sought by the audit officer.
iv) In discharging the function of audit, wherever required, the audit officer can use all the powers of a Civil Court for the purposes of proof of facts by affidavit, summoning and enforcing the attendance of any person and examining on oath of affirmation, compelling production of documents etc. These powers would be utilized by the audit officer only in circumstances where use of such powers becomes necessary for achieving the purpose of audit.
v) The audit officer is also authorised to take physical stock of goods and ask for clarification if there is any variation.In addition, the audit officer is also authorised to count cash and bank balance and to ask for reconciliation thereof.The dealer shall furnish self-certified copies of documents and statements as required by the audit
officer.
vi) Even if the audit is on a particular issue or for a shorter period, the audit officer can make enquires as regards other periods or other issues.
04 Powers of the Audit Officer: If any discrepancy is noticed in the process of audit, he has to communicate his observations to the dealer. The communication to dealer is expected to be unambiguous and clear in its import. If the audit observations / objections are acceptable to the dealer then after compliance by the dealer the process of audit would stand concluded. The corrective action could be filing of revised returns and making payment of differential dues, if any, including interest.
05 Duties of Dealer: As expressly mentioned in Section 22 read with section 2 (18), 63 (4), 64, the dealer under audit has to afford necessary facility to auditor to inspect books of accounts. The dealer shall give unhindered access to his books of accounts and / or to computerized books of accounts. The audit process can be hastened only if the dealer keeps his books of accounts, bills and all relevant documents at the place of business. The queries raised by audit officer are expected to be clarified with requisite evidence/documents then and there only so that the issues are immediately resolved and the resolution of issues is not kept pending. Legal issues having financial implications, of course, could be resolved on a later date. The dealer shall also furnish the E-mail addresses and contact numbers of his vendors/ vendees.
06 Rights of the Dealer: The dealer under audit has a right to ask for valid authorization of audit officer for carrying out audit. He can also ask for Identity proof of audit-team. The dealer can continue his business during audit. He can also take help of sales tax consultant / practitioner, if so required by him.
It is a new concept introduced in VAT regime. It is introduced on the western lines so that
there should be check on the assessee and the result expected to be is proper tax
compliance by the dealers. The random audit of few assessees is considered essential for
the success of the VAT system.
Section 22 as per MVAT Act, 2002 is reproduced below for discussion –
1. With a view to promote compliance with the provisions of this Act, the Commissioner
may arrange for Audit of the Business of any Registered Dealer, for the purpose of this
section. The selection of the dealer for audit shall be made amongst the dealers –
a. Who have not filed returns by the prescribed date or
b. Who have claimed refund of tax or
c. Where the Commissioner is not prima facie satisfied with the correctness of any return
filed by a dealer or is not satisfied with any claim made, deduction claimed or Dnyanesh
V. Retharekar, Advocate, Ex-Dy. Commissioner of Sales Tax Maharashtra Value Added Tax
Act, 2002 Business Audit - An Analysis
turnover disclosed in any return filed by the dealer or
d. Who are selected by the Commissioner on the basis of the application of any criteria or
on a random selection basis or
e. Where the Commissioner has reason to believe that detailed scrutiny of the case is
necessary
2) Deleted
3) On or after the appointed day any officer to whom the powers and duties under this
section have been delegated by the Commissioner in writing may
conduct audit of the business. (deleted w.e.f. 15-8-2007)
4) Deleted
5) (a) During the course of the audit, the officer may require the dealer
(i) to afford him the necessary facility to inspect such books of account or other
documents as he may require and which may be available at such place.
(ii) To afford him the necessary facility to check or verify the cash or stock which may be
found therein
(iii) To furnish such information as he may require as to any matter which may be useful
for or relevant to any proceedings under this Act.
(b) The officer conducting the audit shall on no account remove or cause to be removed
any books of account, other documents or any cash or stock.
6) Deleted
7) Deleted.
8) Deleted.
The beginning words of the section itself speak the volume of authority and power
conferred by the Act on the Commissioner.
With a view to promoting compliance of this Act ...
What is the meaning of Promoting compliance with the provisions of this Act?
It means doing everything as prescribed by the Act. Complying everything as prescribed
in the MVAT Act, 2002. Not only Act, but Rules, Notifications issued by the Government
from time to time and compliances with it, and further circulars issued by the
Commissioner of Sales Tax for the purpose of the Act or rules and notifications and its
implementation by the Sales Tax authorities.
The minimum compliances as required by the MVAT Act, 2002 and MVAT Rules 2005 can
be summarized are as under:
1. To obtain the Registration Certificate by the dealers who are exceeding the minimum
threshold limit as prescribed by the Act; i.e., say Rs.1 lakh for the importer or Rs. 5 lakh
for others. Those prospective dealers who wish to do business can even obtain
Registration Certificate under voluntary registration scheme, which recognizes a business
entity/person as a dealer even though the minimum threshold limit is not achieved.
2. To file correct, complete and selfconsistent returns -
The return should not only be correct and arithmetically accurate but they are expected
to be self-consistent; Self-consistent means they are expected to be self-explanatory/self-
speaking and easily readable and understandable by the concerned authority or the
department.
3. To intimate important changes in the business in the business e.g. change in
ownership, conversion of partnership into private limited, shifting of place of usiness,
change in name and style of business, change in activity etc. These types and other
changes as described in the Act are required to be intimated to the department within 30
or 60 days or within such time as may be prescribed, within occurrence of such event/
incidence. If time to intimate such change in the business is not prescribed in the Act or
any Rule then compliance has to be done within reasonable time.
4. To pay due taxes in time in the proper forms of return; i.e., 231, 232, ..., if taxes are
paid late after the due date prescribed for the same by the Government then interest is
automatically attracted which is required to be admitted in the returns filed for the said
period and paid by the dealer. If not paid with returns or thereafter before initiation of
assessment proceeding or business audit proceedings then interest will be recoverable
from the dealer under section 30 of The MVAT Act, 2002.
5. Correct disclosure of GTO (S) and GTO (P) with set-off claim and any other deductions,
discounts, etc. as per law. The turnover of sales and purchases should be correctly
reported as per books of account and records. The various deductions such as goods
returns, trade discounts, rate variations, any other special discount or deduction which is
likely to change the GTO of Sales/GTO of purchases should be properly and timely
disclosed in the returns filed for the respective periods. The set off or input tax credit is
linked to purchases hence they should be carefully reported with due precaution.
6. Proper filing of return under The CST Act, 1956, compatible to M.V.A.T. returns, etc.
7. Timely response to every notice or any other communication from the departmental
authority. The departmental authorities may issue various notices or queries related to
dealer’s business activity or issues related to that under MVAT Act or Rules made
thereunder, they should be replied with or should be complied with
within the prescribed time.
8. Keeping all books of account and records at place of business, which should be
available for verification at any time by the departmental authority. This includes not only
sales, purchase ledger and sales, purchase invoices but also includes all relevant records
directly linked or indirectly linked to the business activity of the dealer. The concerned
officer may call for such records for verification which he may feel to be necessary and
relevant for the purpose of the business.
9. Records and books should be legible and easily understandable by the authorities so
that Turnover of Sales/ Purchases, tax levy, its collection, payments, set-off can be
properly ascertained at the time of inspection or audit by the department. If books of
account are not legible or properly maintained by the dealer the concerned
assessing/audit officer can direct the dealer to maintain the records in a particular style or
manner which he may deem fit.
10 Audit Report u/s.61 of MVAT Act, 2002 – whether submitted by the dealer or not. The
VAT Audit report is required to be submitted by the dealer within 10
months of the financial year end to the Sales Tax department. Dealer should follow the
same scrupulously otherwise very heavy penalty is prescribed under
the Act. It may be levied @ one-tenth per cent of the sales turnover.
11 Registration with the department for e-services; It is made mandatory for all dealers
irrespective of their tax liability or periodicity of filing the returns.
Thus, above types of important and several other compliances are expected to be fulfilled
or complied by the dealer. They are the obligations or duties which
dealer is required to perform under MVAT Act 2002 and Rules thereunder .They are duties
cast on the dealer and failure to do so may result into deprival
of few benefits to the dealer.
The section 22(1) says that,
For the purposes of this section, the selection of dealers for audit shall be made from
amongst the dealers.
a) Who have not filed returns by the prescribed dates:
The dealer has to file returns as per periodicity given in MVAT Rules. The
periodicity/frequency of filing the returns is linked to previous year’s tax liability (same
arrangement was there in the BST ACT 1959 and Rules there under) The different forms
of returns are prescribed for different types of dealers i.e. 231, 232, 233, 234 and 235.
There are different provisions for newly registered dealers and dealers under PSI. The due
dates are also different but whether the dealer is required to file monthly, quarterly or
half yearly returns should be strictly followed.
From February, 2008 BIG TAX PAYERS (LTU as they are known in VAT regime) were
directed to file e-returns, but now in last 12 months all dealers (monthly
returns filers, quarterly return filers, six monthly return filers etc.) are directed and
required to file e-returns as per provisions newly inserted in the MVAT Act and Rules. In
fact recently it is made mandatory to file the returns online. This means the physical filing
of the returns is now totally done away with.
The non filers should be construed here as those dealers who have not filed returns by
the prescribed dates (late filers) and those dealers who are totally defaulters; i.e., who
have not filed returns at all for a particular period say for a particular month, quarter or
six months as the case may be as per his liability.
Thus assessee not filing returns within prescribed time can expect a notice for Business
Audit from the Sales Tax Department.Or The section further says that,
b) Who have claimed refund of tax –
Refund may arise due to many reasons - i.e., Purchases Value in a month is higher than
Sales Value, the raw material is of higher tax rate than the finished goods, there is export
or interstate sales; section 5(a) etc. The dealers who have claimed refunds in the returns
filed for the said periods can be taken up for business audit or refund audit.
OR
c) Where the Commissioner is not prima facie satisfied with the correctness of any return
filed by a dealer or is not satisfied with, any claim made, deduction claimed or turnover
disclosed in any return filed by the dealer.
The officer may on apparent verification of a return or returns for a month or quarter,
year etc. and if he feels it necessary to take up a case for business audit due to any doubt
or due to any reason which requires him to ascertain facts and figures related to business
of the said dealer. There may be ‘n‘ number of reasons which may require and or
instigate a officer to take up a case for business audit or may invite attention of an officer
to take up a case for business audit.
Section further says,
d) Who are selected by the Commissioner on the basis of the application of any criteria or
on a random selection basis or
(This is discussed later at length in this note)
e) Where the Commissioner has reason to believe that detailed scrutiny of the case is
necessary,
This is also discussed in detail in this note.
Except this section there was nothing in the MVAT Act, 2002, Rules or Notifications issued
thereunder where the audit or business was discussed. The departmental officers were
however doing it as per instructions given to them. The assessees and the tax
professionals were not knowing the exact nature, process and purpose of the business
audit uptill October 2008, when Hon'ble Commissioner issued a Trade Circular discussing
the objects and scope of the Business Audit. Moreover assessment section is very much
provided in the MVAT Act, 2002 (section 23), which again created little confusion as to
what is audit and what is an assessment.
Summary of Hon'ble Commissioner’s Circular on Business Audit (No. 25-T of 2008 dated
23-7-2008)
SUB. General Procedure for Business Audit
Objects
To ascertain correctness of returns and to identify inadequacies in returns if any when
checked against the books of account and the circumstances of the business.
Procedure of Audit: cases are selected by business audit criteria committee on the basis
of certain criteria. Normally an audit is carried out with prior information of the date to the
dealer, unless there is a deliberate decision to conduct surprise audit. The officer is
authorized by JC. Penalty may be levied by the officer if information sought for is not kept
ready by the dealer at the time of the visit.
Scope of Audit
1) To verify all books of account and relevant records
To make enquiry about tax payment and return filing in allied Acts; i.e., PT, luxury tax,
etc. depending upon facts the auditor may also ask for returns or any other information
related to Income tax, excise
2) It is dealer’s responsibility to give correct and complete information during interview
carried out at the time of visit and dealer should ensure all relevant persons are present
at the time of visit of the officer. The object of interview is to know business and
accounting system.
3) Visiting officer enjoys powers of a civil court u/s 14 – may be utilized by officers
whenever necessity is felt to do so. (i.e., proof of facts by affidavit, summoning and
enforcing the attendance of any person and examining him on oath or affirmation,
completing production of documents)
4) The audit officer is authorized to take stock of goods and ask for clarification if there is
any variation. Also authorized to count cash and bank balance and to ask for
reconciliation if warranted. However should not remove any books or records or cash or
stock from the dealer’s premises.
5) The audit officer may verify any records of any period and any issues in a financial year
for which audit notice is given.
6) If dealer does not co-operate then audit officer can seek intervention of investigation
branch with the approval of the JC.
POWERS of Audit Officer
If any discrepancies are noticed in the process of audit either in returns, books of account
or otherwise then the audit officer has to communicate it to the dealer on the date of
audit or immediately thereafter, on compliance from dealer the audit would get over. The
corrective action could be filing of revised return and making payment of differential dues
if any including interest. In case dealer objecting for the observations then officer shall
initiate appropriate proceedings including assessment.
Duties of dealer
The dealer to afford necessary facility to the auditor to inspect books of account. The
audit process can be fastened only if dealer keeps ready all the records. The queries
raised by audit officer are expected to be clarified with requisite documents and evidence
then only issues are solved. The dealer shall also furnish the e-mail addresses and contact
numbers of his vendors/vendees.
Rights of the dealer
Dealer can ask for valid authorization of audit officer for carrying out audit. The dealer
may or may not accept audit observations communicated to him by audit officer. The
dealer under audit will have a right to know the result of audit within a reasonable period
of time. Normally audit process is expected to finish within 3 months provided dealer co-
operates fully. This time limit is not applicable if audit results in initiation of assessment
proceedings.
What is Business Audit?
The audit is nothing but assessment at the dealer’s POB. But without any assessment
order passed by the officer. It is done with the previous intimation to the dealer. The word
used in the Act is Audit or ‘Business Audit‘ and not the "Audit of Accounts". What is
probably expected here is that the visiting officer by his visit to Dealer’s POB and after
verification of records, relevant books of account etc. and on the spot visit to POB can
make certain observations and study the business of the dealer, which can help officer to
cross check/verify with the returns filed by the dealer and he can ascertain whether
business activity is properly reflected in the returns filed for the said period or periods. In
previous BST Act a year was considered as a unit but in VAT regime a month or quarter is
presumed as a unit unlike a year, it is possible that few checks can be done on the spot
during the time of business audit at dealer’s place and proper tax compliance can be
achieved.
The visiting/assessing officer is probably expected to study the business of the dealer,
processes and practices adopted by the dealer and come to conclusions after verification
of records, if it is done say within reasonable time of the end of that period (month,
quarter) then it can be very effective from the point of view of the
Department/Government. The discussion or interviews with the director, partner, owner of
the business or the person in-charge of accounts and sales tax matters may reveal some
important clues which may not be directly and easily detected from books of account of
the dealer. It may ultimately result in more tax recovery or deny excess set off or reject
any wrong or doubtful claim done by the dealer.
As per VAT concept each and every month of a financial year is considered as a separate
unit and therefore the officer may verify and inspect records of a particular month or a
quarter or of a full year.
As seen in last 3 years, the initial VAT years; i.e., F.Ys. 2005-06, 2006-07, 2007-2008 the
Department is issuing notices for 2/3 year i.e. F.Ys. 2005-06, 2006-07 and thus it is Audit
for full year.
It is seen that an advance intimation of the officer’s visit for the audit purpose is issued to
the dealer who in turn can get it modified/changed from the officer in-
charge of the audit, which is nothing but a adjournment given to the dealers as per his
convenience.
The main difference between old Assessment System (under BST Act) and Business Audit
in VAT regime is that in old system of assessments/ verification of records was done at
Sales Tax Offices and assessment orders were issued/ passed after verification of records
but in VAT audit verification is done at dealer’s
place and order may not be passed, rather it is rarely passed and a intimation in Form No.
07 is issued to the dealer. It is a formal communication issued by the officer to the dealer
where discrepancies are intimated to the dealer from his returns and books of account
which has impact on enhancing tax or reducing set off claim and dealer is required to
revise his returns according to officer’s suggestion/intimation. If dealer is agreed on the
so called discrepancies pointed out by the officer he can file the revised return/ returns
and discharge additional tax liability accordingly or can revise return and reduce his
refund claim.
If dealer disagrees he can explain the so called discrepancies and object for it then officer
can or may issue a formal notice for assessment in Form No. 301 under section 23 of the
MVAT Act, 2002 and may proceed to assess the dealer and then he can pass a formal
assessment order and raise dues according to his findings or may reduce refund
claim.When the matter is unacceptable to the dealer the officer has to issue assessment
notice under section 23 of the MVAT
Act, 2002 and may assess the dealer as per his findings. However it has been observed in
last 3 years that the officers are insisting for the revised returns only and are reluctant to
pass the assessment order. It is probably due to the ideal VAT system which expects
dealers to be self compliant.
Duties of dealer : Comments
When officer comes to a dealer’s POB for Business Audit, the dealer shall offer all relevant
books of account and records to the visiting officer for inspection and verification. The
officer can demand regular books of accounts and all relevant records and evidences in
support of claims as per returns filed for the said period by the dealer.
The dealer should allow and co-operate visiting officer to check/verify the stock and cash
at the time of visit, To furnish any other useful and relevant information, required by the
officer.
However
The officer is not allowed to remove any books of account or records from the dealer’s
place.
Following books may be made available to the officer during visit :
(1) Purchases and Sales Registers (2) Ledger (3) Purchases, Sales Invoices (4) Other
relevant documents (5) Stock Register (6) Copies of returns filed (7)
Balance Sheet copy with VAT Audit Report.
The section 22 does not speak of anything about what the officer is supposed to do during
and after visit. It is described by the Hon'ble CST in the Trade Circular issued by the CST
on 23-8-2008 discussed above.
According to me it is necessary that the;
• Officer should pass order or issue proper written communication to the dealer as to
what is result of audit conducted by the him/ department.
• If returns for a particular month/ quarter or period as the case may be are correct and
complete it should be clearly certified if not, then what are the differential dues which will
be likely to be raised or extra refund reduced or refund enhanced, should be clearly made
known to the dealer.
• If nothing is found worth mentioning which may result in extra tax than declared or
reduce refund compared to the returns filed then NIL order should be
passed.
• The dealer must be aware of officer’s conclusions after visit within a reasonable time
say of 2-3 months and it should be communicated to the dealer what
is status of his returns whether they are correct or wrong or need some
changes/modifications etc.
Rather it will not be wrong if we say that it is the right of the dealer to know the Audit
Results in writing.
It is recently started by the Department and a formal communication in Form No. 07 is
sent to the dealer pointing out the discrepancies noticed by the visiting officer and dealer
is asked to answer it expecting that the dealer will file revised returns based on officer’s
findings.
VAT Audit and dealer
The dealer may not agree or differ in officer’s findings and officer may insist for additional
payment of tax due to one reason or the other, in this situation unless a order is passed
by the officer, the legal process remains incomplete. Further, the dealer also gets a
chance to plead his case at higher forums. There may be certain legal queries as to
interpretation of certain sections of law and its implication given in certain facts and
situations. In such a situation unless a order is passed by the officer it cannot be
contested at higher level.
It is important to do so keeping in view principles of natural justice, probably that is the
reason why section 23 of Assessment in M.V.A.T. Act, 2002 is provided in the Act
immediately after Audit Section.
It will not be wrong to say that outcome of section 22 is finally indicated through section
23, which is Assessment Section.
However, it is noted that the Departmental Officers are not passing any orders but
insisting the dealers to revise the returns. The returns may be revised but as discussed
above if any matter is not easily acceptable to the dealer then it will not be proper to
insist for revised returns by the Departmental officer rather he should pass order and
provide opportunity to the dealer to contest the unacceptable issue at higher forum.
In the State level Advisory Committee meeting conducted by Hon'ble CST dated 22-1-
2008, the Business Audit issue is discussed it is summarized below.
The query was raised at Service Cell meeting Mazgaon Mumbai. by Maratha Chamber of
Commerce, Pune to clarify the scope of audit.
The Hon'ble Commissioner of Sales Tax replied as under –
1) The criteria for Business Audit is dynamic and centrally decided. The list of dealers for
Business Audit is duly approved by the Commissioner of Sales Tax/Addl. Commissioner of
Sales Tax in this regard.
(a) A sample audit of a month to test check discrepancy will be carried out for the quarter.
In case of discrepancy, the audit of entire year will be carried out.
Thus the process of audit is based on risk profile of the dealers / commodities thereof.
(b) Chairman desires to device format to be communicated in respect of discrepancies
found out during Business Audit in this regard.
(A Trade Circular is issued by the Commissioner of Sales Tax dated 23-7-2008 on the topic
Business Audit and Form No. 07 is devised thereafter)
Comments
From the above discussion one thing becomes very clear that the criteria for the Business
Audit is dynamic that is it may be kept changing. It is said to be based on risk profile of
dealers/ commodities and may not be declared by the Government in the initial phases of
MVAT implementation. It may be declared in the future. This is probably to have authority
for randomly selecting the cases for audit and to keep check on the dealers so that the
system should not be misutilised by the dealers or anybody. It is possible that the
Government or the Commissioner of Sales Tax may declare certain criterias for audit of a
particular year or a particular quarter or month of a financial year.
The criteria may be like the various criteria declared from time to time by the
Commissioner of Sales Tax for the acceptance of returns in the BST Act,1959 regime
which is popularly known as Summary Assessments or the order under section 33(2) of
the BST Act 1959
The section 22(1)(c)(d)(e) gives various options available to the departmental authorities
to take up a case for a business audit. The list given below may be the criteria for
selecting the cases for Business Audit according to me (excluding other class of
assessees).
1) The Dealers claiming 6(2) or High Seas Sales claims u/s 5(2) of the CST Act, 1956.
2 ) Dealers with export claims above a certain turnover limit say Rs. 5 crs in a year.
3) Dealers with import from out of country above say 3 crores p.a.
4) Dealers with set off claim above a certain limit say Rs. 10 lakhs in a year.
5) Dealers undertaking works contract or lease activity above Rs 2 crores p.a.
6) Dealers claiming tax free sales or job work above say 5 crores, in a year.
7) Dealers with tax throughput of Rs. 2 crores but paying tax very negligible say Rs.1 lakh
in a year.
8) Dealers claiming major portion of their sales as exempted under the Act or dealers
claiming the exempted sales more than 50% of their sales turnover.
9) Dealers usually filing late returns.
10) Dealers filing returns in time with ad hoc payments.
11) Dealers whose previous audit shows dues raised are more than 20% of the tax paid
with returns or whose refund is reduced by 20% of the claim as per returns.
12 ) The dealers with a track record of frequent ex parte or best judgments assessments
or better known in VAT as unilateral assessments.
13) Dealers with a particular commodity as their main product say hotelier or liquor
dealers with small turnovers say 30 lakhs in a year.
14) Dealers with normal trend to show more purchases as compared to sales and thus
claiming refund or claiming no tax payable at year end or quarter end.
15) Dealers claiming stock transfer or branch transfer above Rs 3 crores in a year or
dealers with substantial portion of turnover disclosed as branch transfer
compared to his turnover.
16) Dealers whose previous business audit has resulted in short payment of tax or excess
claim of set off or excess claim of refund by say 15% or more as compared to his filing of
returns for a particular year or month or a quarter the 15% or more difference is detected
by the departmental authority after conducting
business audit of the dealer.
17) Dealer filing irregular returns or there appears inconsistency in filing of returns or
there is sudden fall in the turnover or sudden rise in the turnover or same range of
turnover is reported from month to month or quarter to quarter
18) Turnover reported in round figure which is repeated randomly.
19) Based on TIN Nos. cases may be taken up for business audit say even numbers or odd
numbers or number in multiples of 5, 10, etc. (last four digits of TIN may be considered)
20) For Composition Dealers i.e., retailers some different types of criteria may be fixed
and the cases may be taken up for business audit may be once in 5/6 years.
21) References received from other sections of Sales Tax Department (Registration
Advisory Visit, Refund Audit etc.) and other Departments (Income Tax, Central
Excise) as to probable tax evasion or duty evasion etc.
Following provision is a very imp. (it is a clause reserved by the Government), "The
Commissioner has reason to believe that detailed scrutiny of the case is necessary"
section (22)(1)(e )
It is a very important clause - when it is felt necessary by the Commissioner in the
interest of revenue to take up a assessee/dealer’s case for Business Audit and therefore a
discretionary power is provided to take up a case for Business Audit, that is reserved by
the Government and it will be any other case found necessary for audit in the interest of
revenue by the Commissioner for the reasons which may be disclosed or may not be
disclosed at all but still the case will also be a eligible and will be selected for business
audit. This clause is always essential to be inserted in any taxing statute so that a
democratic Government can keep proper check on its financial/revenue resources and
therefore obviously Government has to keep few discretionary powers in the hands of its
implementing machinery. The Government and/or its administrative machinery will
always try to plug any suspected, doubtful, probable revenue loss to the State exchequer.
This provision enables the Government to keep proper control on the assessees. The
reasons for the same may not be disclosed at all to the assessee.
The reason to believe is very wide and exhaustive term and can be applied to any
situation and selection of any case for audit purpose according to me it is a
necessary power conferred on the Administrative Authority but only thing that is essential
while using such a discretionary authority that it shall not be used arbitrarily and without
any reason.
The criterias given above are only indicators and a attempt to discuss possibilities. These
probabilities may be changed from year to year or from period to period. They are not
applicable to LTU. Once a dealer is identified as a LTU he is eligible for business audit at
all times for any period/periods.
LTU (Large Tax Payer units) and Business Audit
This is again a new Class of dealers identified in VAT Regime. They are privileged class of
big tax payers whose annual tax payment is above Rs. 1 crore per year. These cases will
be audited every year. All services that is Amendments in RC, various Declarations under
CST Act, Refund claims, Business Audits, etc. will be done at a particular place and only
by a single officer will handle the case like pre VAT Period.
Refund Audit
This is done by different section as the name indicates it is carried in cases where
monthly refund/quarterly refund is claimed. In VAT regime assessment is not a regular
activity as was done previously in BST regime. It is done only when refunds are claimed
as per returns filed and dealer filed Form No. 501 to the respective section. However it
may be noted that it is done under a different section (51) and the business audit and
refund audit are not necessarily mutually exclusive. The refund audit is only limited to
refund purpose without covering the entire activity of the dealer.
How cases are selected for Business Audit?
As discussed above the criteria are not disclosed by the department during initial years of
VAT introduction. A team of senior officials is formed under Additional Commissioner of
Sales Tax (VAT-3) who selects the cases for business audit based on various methods
/criteria fixed by them. The Additional Commissioner of Sales Tax (VAT 3) will be
responsible for policy matters related to Business Audit and he generates general audit
cases for Mumbai as well as mofussil areas - Subsequently it will be done through
computerized process and it will be directed to all offices including mofussil areas to
select cases as per the direction given. At local level other than Mumbai region the Joint
Commissioner can select other cases considering local issues and risk commodities for
audit purpose however he has to seek approval from Additional Commissioner VAT-3. The
specific cases may be selected based on information received as to evasion or any other
deficiencies noticed. It is expected that each case will get audited at least once in five
years, it means ideally 20% cases will be audited each year.
Many times in a VAT statute a word is used SELF ASSESSMENT.
We will try to understand the meaning of above word.
As the name indicates under a self assessment system a tax-payer is responsible for
determining his own tax liability including accuracy and timely reporting and payment of
his tax. Self assessment places more responsibility on the tax-payers. There is no regular
intervention by the departmental officer at each time to check that the return filed is
correct or not. The returns can be submitted to bank or to the department or through
mails (online filing of returns)
Accuracy of return forms is checked and notices are issued (defect notice) to the dealer.
The dealer is expected to comply the same within prescribed time. If the
dealer/assessee fails to comply the notice then it is presumed that the dealer has not filed
the return/returns and he is presumed to be a defaulter for that specific period.
The benefit of self assessment system is that tax officials need to spend less time on
routine work and hence can devote more time in more productive activities like survey,
investigation of selected cases.
Under this section a self assessed case may be reopened subsequently if found necessary
by the department. Because there is no assessment order passed.
In the nut shell
Important features of Audit
1) It is taken up with previous intimation to the dealer at dealer’s POB
2) It may be for a F.Y. or years, may be for a month or quarter. Currently it is done for full
F.Y.
3) It may be taken up only to ascertain and or verify certain claims, issues as per returns
filed by the dealer for a specific period.
4) The criteria for selecting a case for audit may not be disclosed to the assessee rather it
will never be disclosed to the dealer and it may be through COMPUTER generated
systems /Mahavikas.
5) The assessment order will not be passed or it will be passed very sparingly after
properly issuing notice under section 23 for the purpose of assessment but dealer is
asked to file return or revised return as the case may be based on observations/findings
of the officer.
What will be position of Audit in GST regime?
I feel that this type of audit provision or provision with little modifications will be likely to
be there even under GST regime which is expected to roll out in next F.Y. 2010-11. This
type of provision will be always provided in taxation because the check on assesses is not
possible unless such type of provision is provided in the Acts. No doubt the frequency of
audit may be reduced. However, the problem in GST will be that both authorities one
under Central GST and another under State GST may verify the dealer’s records and the
dealer will be required to comply with both legislations and, rules, notifications in this
regard. The addition of services with goods will give rise to many issues like accounting of
lease transactions, luxury services (hotels etc.) works contracting, and ITC/set off issues,
etc. The number of dealers will go up substantially in GST regime resulting into less
frequent business audits of a dealer during a particular span of time. The IGST which
seems to be a substitute for current CST will be again a common statute for both
authorities under the CGST and SGST. The transition phase from VAT to GST will be a
challenging one giving rise to various issues and problems.