Provisions of Audit under Service Tax Law

Tax Audit Limit

Service Tax is a kind of indirect tax having a scheme of self-assessment. Under this scheme service tax liability is determined by assesse itself. To ensure that whether service tax liability determined by assesse is correct, complete and as per the law it become essential to have a scheme of audit of service tax records maintained by assesse. Following schemes of audit are incorporated under service tax law:-

1. Departmental Audit

2. Special Audit

3. Audit by Comptroller Auditor General of India (commonly known as CAG)

A. Departmental Audit:-

Departmental Audit is governed by provisions stipulated under rule 5A(2) of Service Tax Rule, 1994. Audit under this sub-rule is conducted by the Central Excise/Service tax officer authorized by Commissioner. Generally these officers are superintendent or inspector of central excise/ service tax. CBEC issued a latest Service Tax Audit manual-2011, prescribing the manner in which audit to be conducted by officer entrusted with the duty of audit.

Recently a judgment is delivered by Hon’ble High Court of Delhi dated 04.08.2014 in case of M/s Travelite (India) [2014-TIOL-1304-HC-DEL-ST]. That judgment quashed the rule 5A(2) of the Service Tax Rules, 1994 on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing.

Hon’ble Apex Court granted a stay order on this judgment as petition filed by revenue.

On 5th December-2014, CBEC issues a notification no. 23/2014-ST and substituted the rule 5A(2) as follows:

“Every assesse, shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, or a cost accountant or chartered accountant nominated under section 72A of the Finance Act, 1994,-

(i) the records maintained or prepared by him in terms of sub-rule (2) of rule 5;

(ii) the cost audit reports, if any, under section 148 of the Companies Act, 2013 (18 of 2013); and

(iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961),

for the scrutiny of the officer or the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be.”

The differences between rule 5A(2) before amendment and after amendment are as follows:

1. Before amendment demand for production of prescribed records could not be done by a Chartered Accountant or Cost Accountant nominated u/s 72A of Finance Act, 1994 but now after amendment this can be done by CA/CMA.

2. Trial balance or its equivalent has been substituted by Cost Audit report (if any) u/s 148 of companies Act, 2013

3. Before amendment prescribed records were required to be made available within 15 working days or further period as might be allowed. After amendment prescribed record required to be made available within period specified by the above mentioned officer/audit party/CA/CMA.

According to Service Tax Audit manual-2011 issued by CBEC, the Service Tax Audit manual outlines procedures to be adopted for conduct of audit of Service tax assesses under chapter-V of the Finance Act, 1994 (as amended) and the rules framed there under. This ensures that the audit is carried out in a uniform, efficient and comprehensive manner in accordance with audit standards. In order to make best use of manual, the auditor must study assesse master file, previous audit reports including cost audit reports (if any), Final Accounts of the assesse including Trial Balances, Contracts entered into by the taxpayers, changes in the service tax law and procedures, Boar’s instructions and Circulars, relevant case laws etc.

Period to be covered under departmental audit:-Every audit should invariably cover the retrospective period up to the previous audit by the department audit party or the last five years, whichever is less and should extent up to the completed financial year preceding the date of commencement of audit.

Frequency of departmental Audit is as follows:-

1. Taxpayer with service tax payment above Rs. 3 crores (Cash and cenvat) to be audited every year.

2. Taxpayer with service tax payment between Rs. 1 crores and 3 crores (Cash and cenvat) to be audited once every two year.

3. Taxpayer with service tax payment between Rs. 25 lakh and 1 crores (Cash and cenvat) to be audited once every five year.

4. Taxpayer with service tax payment up to rs. 25 lakh (cash and cenvat)- 2% of taxpayer to be audited every year.

List of documents required for departmental audit:-

1. A copy of application for registration (ST-1) and copy of registration (ST-2).

2. List of centralized registration with branches.

3. A copy of list of all records maintained by your office.

4. Copy of intimation filed by you under rule 5(1) of Service Tax Rules, 1994, in respect of records being maintained.

5. Copy of balance sheet, profit & Loss Account, Trial Balance and Annual Report.

6. Copy of company internal audit report.

7. List of all ledger accounts wherein entries have taken place.

8. Copies of Tax audit reports.

9. Copies of Cost Audit Reports.

10. Details of registration with any other government departments/agency regularity authority.

11. List of inputs and input service suppliers.

12. List of bank accounts.

13. Sample copies of bills, invoices, Debit/credit notes.

14. Income tax Return of assesse/partners/directors.

15. Copies of Service Tax Returns.

16. List of show cause notice issued and their present status and many other documents.

B. Special Audit: – Finance Act, 2012, introduced a new section 72A in Chapter-V, w.e.f. 28th May, 2012. This new section 72A give power to the commissioner of central excise to direct the any person liable to pay service tax to get his accounts audited from a CA/CMA as nominated by Commissioner. However, the commissioner of central excise can use the power conferred by section 72A in followings situation (when he has reason to believe so)-

1. Any person liable to pay service tax has failed to declare or determine the value of a taxable service correctly; or

2. Such person has availed and utilised credit of duty or tax paid-

(a). which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or

(b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or

3. has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner

The chartered accountant or cost accountant (nominated by such Commissioner) shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him. However, the person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the such audit and proposed to be utilised in any proceeding under the provisions of this Chapter or rules made thereunder.

Before introduction of this section, section 14AA of central excise Act, 1944, was use to conduct audit.

C. Audit by Comptroller Auditor General of India (commonly known as CAG):-Hon’ble Supreme Court in the case of Association of Unified Tele Services Providers & other Vs. Union of India held that CAG can examine the records of private entities using natural resources on the basis of revenue sharing arrangement with government.