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Business Audit under

the MVAT Act , 2002

Presentation on 08TH May 2010 at


Intensive Course on MVAT by WIRC
CA KIRAN G. GARKAR
Business Audit under
the MVAT Act , 2002
 Business audit
 Refund audit
 Its procedure
 Relevance in MVAT Audit

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Coverage of topic
 Legal provision : Section 22

 Trade Circular 25-T/2008

 Internal Circulars

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Accounting provisions
 Sec. 63 – Accounts to be maintained
 By every dealer liable to pay tax
 Who is asked by the CST in writing
 In respect of sale & purchase of goods

 By notification–for dealer/class of dealers


 To be kept at POB
 G/R- D/N & C/N – rate diff. to be claimed in
month of accounting

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Accounting provisions (cont..)
 Sec. 86 Tax invoice

 Rule 77 Declaration on tax invoice

 Rule 55 conditions for grant of set off


 To maintained a true a/c of purchases of
goods

 Sec. 84 Declaration of op. stock as on


1.4.05
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Objective
 Usual route
 Assessment through Returns &
verification of books of accounts

 Administrative tool
-- Exceptional assessment
--Voluntary compliance/Self policing

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Objective
 To ascertain and ensure compliance of
laws implemented by Sales Tax Dept.
 Practical level- to ascertain correctness of
returns
 To identify inadequacies of returns,
 when checked with books of accounts
 And the circumstances of the business.
 To quantify the liability and enforce
recovery , if returns are not filed.
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Sec.22 : Audit – An Analysis
 Audit qua Accounts v/s qua Business
 Enlarged scope.
 Not restricted to accounts but also to
cover the entire business.

 With a view to promoting compliance – CST


may arrange Audit of the Business of any RD

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Sec.22 : Audit – An Analysis
contd….

 Sub-sec.1: Criteria for selection of dealers


– who have
 Not filed returns in time
 Claimed refund of tax
 CST prima facie not satisfied with
correctness of any return filed OR is not
satisfied with any claim, turnover etc
 Selected based on ‘criteria or on random’
 Reason to believe
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Sec.22 : Audit – An Analysis
contd….

 Sub-sec.5: During the course of audit – the


dealer to
 Afford him necessary facility to inspect
Books, documents – which may be
available at such a place.
 Afford him facility to check or verify the
cash or stock.
 Furnish information

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Sec.22 : Audit – An Analysis
contd….

 Officer cannot remove any books of


accounts, other documents or any cash or
stock

 Time with in which Business audit is to be


completed – not provided

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Sec.22 : Audit – An Analysis
contd….
 Sub-section 2,4,6,7 & 8:
Deleted wef 1.4.2005

 Sub-section 3:
Delegation by CST in writing:
Deleted wef 15.8.2007

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Documents/data required at the
time of business audit.
 Balance sheet/Trial balance/ Sch. under
Companies Act, IT Act incl. Tax Audit
Report in Form no.3CD.
 Sale & Purchase register- Summaries
 Sales invoices/Purchase invoices
 Returns & challans filed under MVAT Act,
2002 & CST Act, 1956.[Allied laws also]
 Ledger and all books of account

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Documents/data required at the time
of business audit (cont..)
 Stock registers
 stock or cash verification sheets –to
facilitate verification of cash & stock - found
at POB
 Detailed party wise statement of sales and
purchases
 [e-Form 801 now prescribed for audits
which commenced on or after 1.4.2009]

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Documents/data required at the
time of business audit (cont..)
 DN and CN , if any.
 Details and necessary dispatch proof of
return of goods; i.e. sales return and
purchase return
 Transport receipts and delivery challans.
 Import/export documents like bill of
lading, bill of entry, packing lists, high
seas sale agreement if any, clearing
agents bill etc. supporting documents.

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Documents/data required at the time
of business audit (cont..)
 Reconciliation statement of sales and
purchases with MVAT returns filed
Registers, Ledger, Manufacturing ,
Trading, Profit & Loss A/c, Balance Sheet
 Month wise summary of sales/purchases.
 Declarations in support of exemptions
claimed under MVAT ACT, 2002 and CST
Act, 1956; i.e. C forms, H forms, F forms
etc.
 Any other documents/books required
during conduct of audit.
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Documents/data required at the time
of business audit (cont..)
 Statement of various input tax credit
availed on
 opening stock as on 1.4.2005
 Regular purchases
 Expenses
 Assets purchased.
 Rate of tax on input and output goods.
 List of capital assets, and addition/
reduction if any.

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Documents/data required at the time
of business audit (cont..)
 Audit officer may also ask for agreement,
purchase orders, work orders, tender
documents, if required for ascertaining
correctness of returns.
 Allied laws-PT/ Luxury Act
 Depending upon the facts, return or other
info. related to IT/Excise law

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Scope of Audit
 Interview
 Free hand u/S 14
 Physical stock of goods
 Cash/bank balance
 Reconciliation
 Discretion of checking other period/ issues
 Intervention by Investigation Branch
 If info. Not kept ready, Penalty ?

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Powers of Audit officer
 Powers or Duties?

 To communicate his observations to the


dealer, if possible on the date of audit or
immediately thereafter.

 No order / information contemplated

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Powers of Audit officer
 If discrepancies found
 Intimation (no time limit)
 Form 7 [Administrative purpose]
 After 1.7.09, under section 63(7)
 No form yet prescribed[604 wef 1-5-10]
 To file revised return & pay differential
tax, claim lesser refund or recalculate
CQB.

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Powers of Audit officer
 Corrective action
 File revise returns, pay off differential dues
with interest.
 W.e.f 1.7.09, interest @25% under Sec.30(4)
 If not acceptable to dealer- initiation of
appropriate proceedings incl. assessment.
 Rejection of claim of refund / reduction in
claim - Assessment notice (u/s.23)
 If already assessed – review u/s.25
 Intimation to appellate authority
 Orders to levy interest and penalties
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Rights of the dealer
 To ask for valid authorisation of audit
officer.
 To check identity proof of audit team
 To continue his conduct of business
 To take help of his Sales Tax consultant
 Right to know results within reasonable
time

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Internal Circulars
 15A of 2008 dtd.4/8/2008 for refund appli.
 Desk audit & Select ones for business audit
 Other criterias
 Random sampling ,
 Refund = > Rs. One Crore
 25% refund reduced in preceding year
 Abrupt rise in refund claim compared to
previous year

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Internal Circulars
 First and last refund claim
 Dealers availing benefits under any PSI
for expansion unit
 Not covered under Voluntary refund
scheme
 Paying tax in investigation proceedings
and then claiming refund

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Internal Circulars
 17A /2008 dtd.18.08.08
 Pre audit preparations, dealer’s profile,
planned approach
 Type of audit
 Entire year or periods
 Specific issue based audit
 Scope of specific audit: expandable
 Penalty: Defiance of law or prima facie
proof of ‘mens rea’.
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Internal Circulars
 Time limit: Three months from date of visit
 Scrutiny of bank Statements
Not merely placing on record

 Taking Stock/Cash counting:
 Not to be resorted in routine manner
 Express permission from JC for strong
and valid reasons
 20A/2009 dtd 4.9.09: Instead of
permission, discretion to be exercised
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Internal Circulars
 18A/2009 dtd.18.08.09
 Criteria for keeping forms on record
Inter-State TO: Value of C form for record
 Up to 1 crore:Rs.50,000
 Up to 10 crore:Rs.2,00,000
 Above 10 crore: Rs.5,00,000
 Formats
 For forms kept on record
 Received but not kept on record
 Defective forms & Not produced
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Internal Circulars
 Instructions for cross checks
 Representative documents to be taken on
record for exports : Direct and deemed
 Deemed Exports:
 Conditions to be complied with
 Relevant documents
 No disallowance on ground that details
of overseas importer have not been
produced or defaced on the document
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Business Audit – Some issues
 Time limit to initiate or complete the
business audit ? No such limitation
 Under the instructions of the business
auditor- revised return filed – differential
taxes paid under protest
 If no assessment is done? Remedy of
appeal can’t be resorted
 If assessed –option to appeal open

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Business Audit – Some issues
 Can there be business audit even if refund
audit is done?
 As such there is no bar
 No duplication of efforts
Tr. Cir. No 56 T/2007 Para 11(iv)
 It may be noted that intimation does not
bar an authority from Initiating a fresh
business audit proceedings or any other
proceeding, for that matter against the
dealer for the same period.
Tr. Cir.22 T/2009 [6.8.09]
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Business Audit – Some issues
 Can there be business audit even if
Assessment is over? Yes- Business
auditor may recommend review
proceedings- refer to appellate authority.

 What if the stand of the MVAT Auditor and


Business auditor is divergent?

 Declaration Forms – pending – Should


taxes be paid if insisted by business
auditor?
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Business Audit – Some issues
 Notice for conduct of the Audit?
Only intimation letter issued.
 To end with intimation letter only, if any
 Multiplicity of proceedings
 Concept introduced under PT Act
 No finality
 Departure from Advisory nature
 Lack of transparency

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Refund Audit
 No specific provision under the Act
 One of the aspect of Business Audit
 Trade Circular 3T-2007 dated 10.1.2007
 Trade Circular 56T-2007 dated 23.8.2007
 Trade Circular 3T-2010 dated 18.1.2010
 Internal Circular 2A-2010 dated 10.2.2010
 Main Hurdle
“Tax received into Govt. Treasury”

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Relevance in MVAT Audit
 MVAT Auditor to take a call on this front

 Business audit notice is received


 Refund application in Form 501 filed
 Keeping track of developments

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Relevance in MVAT Audit
 Where Business audit/Refund audit is
being conducted simultaneously
 Likely Results based on observations of
Audit team
 Intimation , if any under sec.63(7)
 Action/compliance from Dealer’s side
 Proper observations in Form 704

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Relevance in MVAT Audit
 Where Business audit/Refund audit is
complete, prior to MVAT Audit
 Results
 Observations of Audit team
 Intimation , if any under sec.63(7)
 Action/compliance from Dealer’s side
 Suitable disclosure in the Form 704

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