Why this type of topic?
Recently amendment is made in the Section 61 of the Maharashtra Value Added Tax Act, 2002 for levy of Penalty for incomplete audit report.
First time in the History of Indian Taxation Laws a Penalty is levied for filing of “Not Complete” audit report; hence this type of Topic is selected.
Let’s discuss the provision of penalty, outcome and how to make the audit report complete.
Amendment in Section 61: Complete MVAT Audit report.
The words “Report of such audit” the words ‘Complete report of such audit’ shall be substituted.
For the purpose of this section “ An audit report shall be deemed to be the “Complete Audit Report” only if all the items, certificates, tables, schedules and annexures are filled appropriately and are arithmetically self-consistent”
Further “Were a dealer liable to file audit report under this section has knowingly furnished the audit report which is not complete, then the commissioner may, after giving a reasonable opportunity of being heard, impose on him, in addition to any tax payable or any other penalty leviable under this section or any other section, a sum by way of penalty equal to 1/10th % of the total sales”.
QUESTIONS TO OUR SELF i.e, we auditors:
Why this provision came?
Is this due to our negligence or one more stick from Dept to shift the burden?
Can dealer prove that he doest know about the complete report?
Will he shift the responsibility on Auditor – As he has a faith in him?
Will this effect our Management Letter of Audit?
Is this not, a very Stringent Compliance of Audit Procedures and Data Compliance on we Auditors?
Can we say that dealer is responsible for incomplete audit report?
Is there a need form WIRC to limit the number of audits like in tax audit?
Time to take professional indemnity insurance policy?
What is mean by Complete Audit Report?
A Complete Audit Report means:if all the items,certificates,tables,schedules and annexure are filled appropriately and are arithmetically self-consistent.
ISSUES:
What about purchases reconciliation?
What about the numbers CST Forms data?
What about the Annexure? TIN No. of Suppliers and Customers, etc.
Hence now more effort required to complete audit report in above fashion.
WHAT HAPPENS IF INCOMPLETE AUDIT REPORT IS FILLED, OTHERWISE THAN PENALY?
Let refer Internal Circular of Desk Audit of 704:
Security or Desk Audit reports of Form 704 files u/s 61 of the MVAT Act, 2002.
Refer Internal Circular No.7A of 2009 Dt: 24.03.2009 for Audit Reports of F.Y.2005-06.
Refer Internal Circular No.12A of 2009 Dt: 21.05.2009 for Audit Reports of F.Y.2006-07.
The scrutiny & Desk Audit to be done by the 704 Cell in Mumbai and in moffussil , etc a dedicated officer in the Business Audit branch should be entrusted with this job.
Detailed procedure is laid down in the circular for :
Scrutiny of Audit Reports:
All the 704 Forms shall be scrutinized for the discrepancies noted by the auditor and the line of action in such cases, where the auditor has advised the dealer to pay the additional tax shall be as follows:
A Notice will be send to dealer, if he pays along with interest the dues, cases will be closed.
If not, than assessment proceedings will be initiated and 100% penalty may be levied.
Procedure in case of wanting declarations:
Issue notice for pending declaration of CST act for assessment directly.
Criteria for selection of Audit reports for Desk Audit:
Detailed desk audit as per internal circular no.7A and 12A should be conducted in the following cases: (Three Criteria)
Risky commodities like:
Works Contract cases.
Utensil Dealers.
Paper Dealers.
A certain cases as selected by Desk Audit Cell (Mumbai).
All late filers of 704.
References of Audit Reports to Business Audit/Investigation Branch:
In the case where business audit/Refund audit/Investigation has been taken up, the form 704 should be transferred to the respective branches/ divisions by the Desk audit cell.
Respective cell of business audit/refund audit will carry out the desk audit of 704.
Committee of Disciplinary Action on Auditors of 704:
During the scrutiny or desk audit of 704, if it is observed by the officer that the audit report submitted by the auditor is incomplete or has been wrongly certified by the auditor or,
Auditor is negligent in preparing audit report.
Desk audit cell in Mumbai or JCIT (VAT admin) will report to the following committee for examination and further necessary action. The constitution of the committee is as under:
Addl. Commissioner of Sales Tax (Est.) Chairmen.
Joint Commissioner of Sales Tax (HQ-1) Member.
Joint Commissioner of Sales Tax (Legal) Member.
Deputy Commissioner of Sales Tax (Desk Audit Cell Mumbai) Member Secretary.
The committee shall scrutinize the audit report referred to them and if they form an opinion that disciplinary action needs to be initiated against the auditor, then the committee shall refer the case to respective Institute for initiation of disciplinary action, with the approval of Commissioner of Sales Tax.
Such cases should be selected for business audit.
All the officers are directed to follow the instructions scrupulously and any deviation from these instructions will be viewed seriously.
How to make VAT audit report Complete?
This chapter contains following topics, which will help in drafting Audit Report in Form 704 and may make it Complete:
Qualification, Remark, Observation, Opinion, Disclosure or Notes by the Auditor in the MVAT Audit Report will make it complete.
Following are areas were these are required to be given:
Disclosure under Part I- Para 3 for specified 16 certifications points and Para 5 for other Observations...
Disclosure under Annexure E- Reasons for Excess or Short Claim of Setoff.
Disclosure under Annexure F- Method of Computation and Observations, if any.
Annexure K- Reconciliation Statement of Sales and Purchases.
Some important issues and suggested illustrative disclosure are given:
ISSUE :
(Additional Place of business not included in R.C. but turnover considered in Return)
Remark:
“The additional place mentioned in Sr. No. 1 or _______________ is not included in Registration Certificate under MVAT Act, 2002 obtained by the dealer, but the turnover of sales and purchases and taxes there on are included in the Returns filed for the period under audit. This disclosure is in line with clause no. 4 of Trade Circular No. 26T of 2006 dated 18.9.2006.”
ISSUE :
(Turnover of URD Period included Audit Report)
Remark:
"The dealer has obtained Registration from date____. Being first year of operations the books of accounts are prepared from ____ to 31st March 2011. Figures of URD period from___ to _____ period are disclosed in this report. This disclosure is in line with clause no. 5 of Trade Circular No. 26T of 2006 dated 18.9.2006.”
ISSUE :
(Turnover of URD Period included in Audit Report and dealer has applied for administrative relief)
Remark:
“The dealer has obtained Registration from date____. Being first year of operations the books of accounts are prepared from ____ to 31st March 2011. Figures of URD period from___ to _____ period are disclosed in this report. This disclosure is in line with clause no. 5 of Trade Circular No. 26T of 2006 dated 18.9.2006. Further dealer has applied for administrative relief on Dt._____ and received the permission on Dt__________. The Setoff as per rule 55 (1) has been availed by the dealer for the URD period.”
ISSUE :
(Misc. Purchases not included in Turnover of Purchase)
Remark:
“The dealer has not included purchases for administrative use in the returns filed. However, details in respect of administrative Expenses involving purchases are not ascertainable as the dealer has not maintained records in respect of the same and the same have not been included in the turnover of purchases. Consequently, the dealer has not claimed set-off of the tax paid on such purchases in the returns filed.
ISSUE :
(Capital Assets Purchases not included in Turnover of Purchases for e.g. Motor Car)
Remark:
“The dealer has not included purchases for capital assets in the returns filed. The turnover of purchases of capital assets Rs.-_____ has not been included. Consequently, the dealer has also not claimed set-off as per rule 54(a) i.e. Motor Car of the tax paid on such purchases in the returns filed.”
ISSUE:
(CST returns not filed, being no inter-State or export sales during the period.)
Remark:
“During the period, the dealer has not effected any sales in the course of inter State trade or exports and as therefore not filed returns under the CST Act,1956 in accordance with the administrative concession granted vide Trade Circular No. 15 of 1981 dated 2.7.1981.Thus no details are reported in Schedule VI accordingly”
ISSUE :
(Petrol Pump Dealers in motor spirits have not paid VAT on sales thereof being exempted U/s 41(4).)
Remark:
“The dealer is dealing in retail trade of petroleum products i.e., Petrol Pump dealer and has not paid tax on the sale price of motor spirits in the returns filed by him as per section 41(4). These sales are exempted sales in the hands of dealer. The same has been considered for Annexure F of ratio analysis.”
ISSUE:
(Advise to file revised returns)
Remark:
“The dealer has been advised to file revised returns for the all Months/Quarters/Six monthly, ending upto March 2011. The dealer has filed the revised returns and cognizance of the same has been taken in this Audit report which is based on the same. “
ISSUE:
(Adjustment of refund against prior period tax liability in the same financial year).
Remark:
“The dealer has adjusted refund of the month Sept 10 of Rs_____ against tax liability of the month May 10 of Rs_____. The Interest of Rs_____ has also been adjusted against the refund for the late payment/ adjustment. This in line to Section 50.”
ISSUE:
(Retailers Composition scheme & cash sales)
Remark:
“The dealer has not issued any Bills, Cash Memo or Invoice for Cash Sales. Sales are booked from Cash book as a regular accounting practice. Being No records of sales invoices is available, we are unable to know whether the 9/10th sales are to persons other than dealer as per section 42(b) by the dealer. Subject this all other conditions are complied as per the explanation and information given by dealer and as per audit check carried out of the records maintained.”
ISSUE:
(Pro rata method for bifurcation of sales, were identification is impossible.)
Note:
“The dealer is consistently following pro-rata method for bifurcation of sales on tax rate wise based on Purchases and tax rates of items purchased. The sales identification is impossible due to peculiar nature of retail business. Dealer has relied on Circular No. 53T of 2007. Thus our disclosure is based on above explanation give by dealer”
ISSUE:
(Dealer shifting to Normal Taxation from Composition Scheme.)
Note:
“The dealer was under Composition Scheme from ____ to ____. Due to crossing of Turnover on ____ date, dealer has shifted to Normal Taxation. Dealer is under Normal Taxation from ____ to _____. Our disclosures under this report includes both periods and is based on books of accounts maintained by the dealer”
ISSUE :
(Invoices, Returns, etc, destroyed in Floods or impounded by other tax authorities)
Remarks: Source a Guide to MVAT Audit page 47 published by WIRC of ICAI.
Case—I: Where the accounts are reconstructed and corroborating evidence is fully available
The dealer has informed us that the books of account for the period ……… (Date) to ……….. (Date) were destroyed due to flooding of the office premises. The dealer has reconstructed the accounts for the period ………….. (date) to ……………. (date) based on the corroborating documents available with him as well as those obtained from the concerned third parties. Our certificates in Para 2B are to be read subject to above.
ISSUE:
(Method for computation of ratio for reduction of set off on branch transfers is not reasonable. Refer rule 57(9) (b) (ii))
Remark:
“The dealer computes the ratio for the purpose of reduction of the set-off on account of branch transfer of manufactured goods on the basis of sale price in respect of sales and at cost in respect of goods transferred to branches. This results in a higher ratio in favor of sale and lower reduction in the set-off. As against the ratio of ___: __Computed by the dealer, the ratio computed on the basis of quantities / sale price of the goods sold and transferred to branches is __:__The set-off is therefore required to be further reduced by Rs. ___/”
ISSUE:
(Contravention of condition of Composition Scheme)
Remark:
“The dealer has imported ______________ [description of the goods] for the purpose of the business on __________ [Date], or Issue Tax Invoice, etc in contravention of the condition of the composition scheme notified by the State Government. The tax payable by the dealer as a result of this contravention after adjustment of set off is Rs.________/-”
Issue .:
(Gross profit to Gross Sales: )
Annexure F, Sr.No.1:
“The dealer has obtained the tax audit report under Income Tax Act, 1961 duly audited by an qualified chartered accountant for the year 2007-08, 2008-09, ratios are calculated there and cognizance of same taken and disclosure is made accordingly. The method followed is “Gross Profit divided by Gross sales” as mentioned in tax audit report”
Issue .:
(Previous Year figures not available, being newly registered dealer)
All ratios:
Annexure F:
“The dealer has started business on date_____; hence books of accounts are maintained from that date to 31st march 2011, which is the first year of business. Hence the information of pervious year is not provided.”
Issue:
(Previous Year figures not audited)
All ratios:
Annexure F:
“The dealer books of accounts are not unaudited for the pervious year being turnover were below the specified limit under The income tax act or MVAT Act, Hence the figures mentioned in pervious year are unaudited and reliance has be place on returns filed by the dealer.”
Issue :
Reconciliation statement of Sales and purchases not provided by the dealer;
Remark:
“In Annexure K, the reconciliation statement of sales and purchases has been not provided being the same has not been provided by the dealer.”
Issue:
Reconciliation statement of Sales provided but purchases not provided by the dealer;
Remark:
“In Annexure K, the Sales reconciliation statement has been given as provided by the dealer. The same is considered in this audit report and turnover and tax liability reported in 704 is duly reconciled with it. The dealer has not provided reconciliation of Purchases, as per information and explanation given by the dealer, the setoff ledgers are reconciled but Turnover of Purchases as per MVAT Act and Books are not reconciled”
Issue ;
Survey u/s 133 of Income Tax Act, 1961 was conducted on dealer, dealer has disclosed unrecorded Stock of Rs.____
Remark:
“On _____ date survey u/s 133 was conducted by the Department of Income Tax on the dealer. The dealer has disclosed Unrecorded Stock of Rs_______. The Dealer has accounted Un-register dealer purchases in tune of Rs.______ accordingly.
Issue;
Search or Inspection U/s 64 of the MVAT Act, 2002 has been conducted on the dealer.
Remark:
“On___ date, as per powers of section 64, search or inspection of the premises of the dealer was conducted by ____. The dealer has disclosed unrecorded sales of Rs________ or Unrecorded purchases of Rs.___________ and the same are accounted in the books of accounts of dealer subsequently. The dealer has filed the revised accordingly and paid the tax of Rs____ @ 4% or 12.5%.”
Issue;
Option of Composition availed by the dealer for CST works contracts:
Remark:
"The dealer has opted for composition for CST works contracts as per section 42. The dealer has also relied on the case of “Mahim Patram Private Limited” (6 VST 248) of Supreme Court.”
Issue:
Business commenced during the Year;
Remark:
“The dealer has commenced business during the year on Date_______. Dealer has obtained Voluntary registration on Date____ or Applied for registration on ______ after crossing the Turnover of 5 lakhs. The dealer has been allotted registration i.e., _____. As per rule 18(1) of MVAT rules, 2005 the dealer has filed first return from 1st April to of the year to end of quarter in which he becomes liable i.e., from 1st April to _____. Thereafter dealer has filed quarterly returns upto 31st March 2011.”
Issue ;
Business closed during the year;
Remark:
“The dealer has closed his business operation w.e.f ______. The application of closer has been duly filed in From 103 with dept of Sales tax on ________. As per rule 18 (2) of MVAT rules 2005, the dealer has filed his last return till the closure date_____ of the business. Setoff of Rs.____as per rule 53(5) has been disallowed on the closing stock of goods other than capital goods.”
Issue;
Business transferred during the year, and dealer carried forward the business due to death, etc:
Remark:
“The dealer has continued the business after death of Mr.____________ who was the proprietor of the business and father of the dealer on ________. The application for transfer of business has been duly filed in Form 103 on ________. As per section 44 and rule 55(7) the tax liability and setoff has been calculated by the dealer and accordingly filed the returns.”
Issue ;
Accounting Treatment and disclosure of VAT Setoff:
Remark:
For Accounting purchases other than capital goods, the Dealer has followed Para 6 and 7 of AS-2 “ Valuation on Inventories” were “ Cost of Purchases” includes only those taxes, which are not subsequently recoverable by the enterprise form the taxing authorities.” Accordingly a separate ledger of Setoff receivable has been mentioned.
Issue ;
Accounting Treatment and disclosure of Capital Goods and Setoff thereof:
Remark:
The dealer has followed Para 9.1 of AS-10 “Accounting of Fixed Assets”, which provides that “The Cost of an item of fixed assets comprises its purchase price, including import duties and other non-refundable taxes or levies and directly attributable cost of bringing the assets to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price…”
Issue:
Accounting treatment and its disclosure of Composition Tax, Inclusive Tax on sales in works contract, or effect of rule 57, etc is to be given in books of accounts.
Remark:
“The dealer has not charged VAT separately but has made a composite charge, i.e., tax has not been shown separately in invoice. As per rule 57 dealer has calculated the tax and segregate the portion of sales which is attributable to tax and credited the same to “VAT Payable Account” at periodic intervals as per returns filed.”
Issue ;
Instruction No. 12 to Audit Report;
Non availability of Trial Balance in case of dealer having Multi State Activity:
Remark:
“The dealer is carrying on business in Multi States, i.e., in state other than Maharashtra. It’s HO/ Branch is at _____ in Maharashtra for which MVAT and CST registration is obtained by the dealer. As per information and explanation provided by the dealer, separate books of accounts are not maintained State Wise. Further dealer do not have an accounting system or software for preparing State wise trial balance. The dealer maintains accounts in SAP/ERP software on all India bases and have common data base. Separate Sales and purchase register is maintained by the dealer for the transactions of Maharashtra State, on the basis of which the dealer regularly files MVAT and CST returns. The Sales and Purchase reconciliation of Books of accounts and Form 704 is provided in Annexure “K”. Due to non availability of trial balance of Maharashtra State from dealer the same has not been attached which was required as per instruction no 12 to Audit report.”
Issue;
Instruction No. 19 to Audit Report;
“Where dealer is required to maintain the records about the sales, purchases, Imports and Exports under Central Excise Act, 1944, the Customs Act, 1962 or under the State Excise Act in such cases the Auditor should invariably correlate the details of sales, purchases, Imports and Exports disclosed under the said Acts and disclosed under MVAT Act. Any material difference noticed should be reported at Para 5 of Part-1 accordingly. (Instruction 19)
Remark:
“As per information and explanation provided by the dealer and on the basis of Statutory Audit Report under The Companies Act or Income Tax Act, provided by the dealer, the compliance of Central Excise Act, 1944, the Customs Act, 1962 or under the State Excise Act would have been considered there in. In compliance to above instruction, we have relied on the audited financial statement of the dealer and the copies of returns filed by the dealer under respective acts. As per information and explanation provided by the dealer there are no such material differences to report in Form 704.”
ISSUE:
Non Filing of Form 405 or delay in filing;
Remark:
“The dealer has not filed the annual return of TDS deduction as per rule 40 (d) within three months from the end of the financial year. But the dealer has deducted and paid the TDS as per Annexure D”.
Issue:
Non Maintenance of Stock Register;
Remark:
“The dealer has not maintained Stock register, as per information and explanation given by the dealer, due to her peculiar nature of retail business there are numerous items and maintenance of stock register on day to day basis not possible. The same has been reported in Tax Audit Report under Income Tax Act, 1961.”
Issue:
Verification of Bank Statements: Clause m certification:
Remark:
“The Statutory Audit of Books of Accounts of Dealer has been conducted by an in depended auditor under the companies act or under Income tax Act. The dealer has provided the audited books of accounts to us. As per the information and explanation provided by the dealer, the statutory auditors have audited the books of accounts with the bank statements and drawn profit and loss account and balance sheet. The dealer has certified that the books of accounts drawn are in agreement to all bank statements. With reference to Para 1C in part 1 of 704, the limitation of audit, we have certified the same on the above basis and explanation provided by the dealer.”
Issue:
Interest under section 30(4):
Remark:
“Interest under section 30(4) is applicable from 27-6-2009. The business audit of the dealer was conducted on Date__________. The dealer has filed revised returns for the period 1-4-2008 to 31-3-2009 on _____ date. Hence Additional Interest @ 25% of differential tax liability of Rs_________ has been calculated and paid by dealer on______ date.”
Issue:
WCT-TDS deducted by the employer, but certificated not received by the Dealer. Section 31(4) credit not available of TDS.
Remark:
“During the financial year WCT-TDS deducted by the M/s______________, who is employer of the dealer of Rs.________. Dealer has not received Certificate of TDS deducted during the year. Hence TDS has not been adjusted against the Tax liability by the dealer according the section 31(4). The details in Annexure C as not been provided being no certificate received by the dealer”
Issue:
Setoff-Sub Contractor under composition scheme, being principal contractor under composition scheme as per rule 53(4) (b):
Remark:
“The dealer is a sub contractor in case of a contract entered with principal contractor M/s____________. The contract amount is Rs.____________. The set off on corresponding goods used in this works contract has been calculated as per rule 53(4) (b) and retention of 4% has been taken, being principal contractor is under composition scheme”
Issue:
Mandap keeper under composition Scheme- Form 233 instead of Form 232.
Remark:
“Dealer is a Mandap Keeper under composition scheme as per section 42(4), filing returns in Form 233 as Form 232 does not contain the required details. Hence Schedule III has been reported in this Audit Report instead of Schedule II, which is applicable to dealer legally according to rule 17”.
Issue
Annexure J: TINWISE details of sales and purchases not available.
Remark:
“The dealer has provided the information as Annexure J to the extend available and possible. The same has been reported on the basis of above. As per dealer’s accounting system the information is provided and there is no impact on tax liability”
Issue :
Annexure E: SETOFF retention and disallowance figures not given separately i.e, Sub rule wise of rule 53 and 54.
Remark:
“The dealer has provided the information as Annexure E to the extend available and possible. The same has been reported on the basis of above. As per dealer’s accounting system the information is provided and there is no impact on tax liability, the purchases on which setoff retention and disallowance taken are not shown separately by the dealer, but claim of setoff is taken as per MVAT Act and Rules by the dealer”
PLEASE REMEMBER!
The vat auditor will have to make suitable observations, remarks, qualifications, etc. depending on the facts of the case and guidelines issued in this regards.
AS THE MVAT LAW IS EVER CHANGING.
Disclose, don’t haste for close.
By:
CA Umesh Sharma
CAclubindia
