Scrutiny of Service Tax and Central Excise Returns

CA Jayesh Gogri

The provisions pertaining to filing of returns/declarations/forms under Central Excise and Service tax law are based on the principal of ‘self assessment’, which means that every assessee should make true and correct disclosures in its returns and pay the taxes due. However, appropriate mechanism was not there (especially for small & medium assessees) which can actually check the appropriateness of the returns filed by assessees. Further, in majority of the cases (except in case of search etc), the instances of tax evasions/leakages are noticed by the Department only during the EA 2000 audits or during the investigations/inquiries etc.

Therefore, it appears that in order to have proper check on the appropriateness of returns filed by small and medium assessees, CBEC has came out with a procedure for making full utilization of a tool of manual scrutiny of returns.

CBEC has recently issued two Circulars No. 185/4/2015-Service Tax, dt: 30/06/2015 and No. 1004/11/2015-CX, dt: 21/07/2015 providing instructions on detailed manual scrutiny of Service Tax and Central Excise Returns. The said instructions for Service Tax are applicable from 1^st August 2015 onwards.

Every return scrutiny process consists of 2 types of scrutiny; namely, preliminary scrutiny and detailed scrutiny. Detailed description of both the types of scrutiny has been provided below

I. Preliminary Scrutiny under Service Tax and Central Excise:

Preliminary Scrutiny of returns would be done online on the basis of validation checks incorporated in ACES by the Directorate General of Systems & Date Management. Such Preliminary Scrutiny under Service Tax and Central Excise would cover scrutiny of all the returns filed by the assessees for:

• Ensuring completeness of the information furnished
• Ensuring Arithmetic Correctness
• Ensuring Timely Payment
• Ensuring Timely Submission of Returns
• Identification of non-filers and stop fillers of Returns

Returns with certain errors would be marked for Review and Correction which will then be processed by the Range Officers.

II. Detailed Scrutiny under Service Tax:

a) Process of Detailed Scrutiny

Scope of detailed Scrutiny under Service Tax would cover following:

• Checking taxability of service
• Checking correctness of the Value of Service
• Checking effective Rate of tax after
  • Checking admissibility of exemption
  • Abatements
  • Exports
• Correctness of availment and utilization Cenvat Credit

It has been clearly specified that detailed scrutiny is supplementary to audit but not audit and hence, detailed financial records should not be called for in routine manner and officer should rely mainly on assessment related documents like agreements/Contracts and Invoices.

b) Selection of Returns

Focus of detailed scrutiny is on those assessees who are not audited and whose service tax payment (cash and cenvat) for the year 2014-15 is less than Rs. 50 Lakhs. However, Chief Commissioner may direct manual scrutiny of assessees who have paid service tax (cash and cenvat) more than Rs. 50 lakhs. Each Commissioner will select equal number of assessees from each of the 3 tax brackets which are made on the basis of tax paid viz. Rs. 0 – 10 Lakhs, Rs. 10-25 Lakhs and Rs. 25-50 Lakhs.

In addition to the above, risk parameters and risk tools would also govern the selection of returns for detailed scrutiny. The following procedure would be followed by the Department’s end:However, the list of returns to be taken up for detailed scrutiny would be finalized by AC/JC in-charge of the Division. Assessees who have been selected for audit or have been audited in past 3 years should not be taken up for scrutiny. It has been provided that in no case, an assessee should be subjected to both audit and manual scrutiny.

c) Methodology to be followed

It has been provided that, returns of FY 2013-14 shall be taken for details scrutiny. A detailed checklist has been prepared which enumerates the lengthy exercises to be undertaken with respect to the following:

• Reconciliation for validation of the information furnished under ST-3
• Taxability of services which may have escaped assessment
• Classification (for the purpose of due availment of abatement/exemption benefits)
• Valuation and
• Cenvat Credit availment and utilization

It has been specified that an Inspector may undertake a detailed scrutiny of a minimum of 3 assessees in a month. Also, the scrutiny process shall not exceed a period of 3 months.

d) Documentations and Findings

The scrutiny officer is supposed to record his findings under each of the subject of checklist along with any action that needs to be taken by the Range. The officer may also compile issues which can be referred to audit or anti-evasion. If the detailed scrutiny results in detection of any frauds and it appears that Section 73(1) of Finance Act, 1994 is invokable, ST-3 returns of past periods should also be verified.

All the finding shall be discussed in Monthly Scrutiny Monitoring Committee Meeting headed by AC/JC where each Range should present Scrutiny Report.

It has been informed that after introduction of GST, the basic principles of detailed scrutiny of returns and reconciliation would remain the same.

III. Detailed Scrutiny under Central Excise

• Mandatory detailed scrutiny of minimum 2% to a maximum of 5% of returns received within a monthto be conducted following prescribed scrutiny procedures
• Selection of assessees shall be based on Risk score and procedure for using it shall be as per DG (Audit) vide letter F. No. 381/20/2015 dated 18.05.2015. However, Chief Commissioners and Commissioners shall also have powers to manually select returns for detailed scrutiny. Monthwise detailed scrutiny plan should be laid down by the Commissionerate headquarters
• Assessee who has been selected for audit in a given financial year shall not be selected for detailed scrutiny
• Once the return of an assessee has been selected for detailed scrutiny, the return of the assesse should not be selected again for the next 12 months for detailed scrutiny
• Once an assessee has been selected for detailed scrutiny, most recent return filed by that assesse should be used for conducting the detailed scrutiny
• The ratio of returns of Service Tax & Central Excise to be scrutinised in a composite range (comprising of Central Excise and Service tax assessees) shall be in the ratio of the number of assessees registered as Service Tax and Central Excise assessees respectively
• On issues relating to any difficulty in access of returns on ACES, DG (Systems) shall be directly contacted. In case the problem is not resolved after a long time gap, prints outs of Service tax returns may be taken and manual scrutiny may be undertaken.