A brief on Service Tax Audit

Hiregange & Associates

Introduction to Audit:

The world today is moving to huge concerns in India as well. Turnovers of tens of thousands of crores are quite common. The owners and the management are separate and distinct. In the days of concentrating on core competencies, specialized audits are necessary.

Normally audits serve the purpose that the government gets its due taxes, assessee gets a confirmation that he is tax compliant, the benefits available under the law are availed, the tax authorities get a confirmation that due taxes have been paid, the corporate governance disclosures can be made with a sense of comfort, stakeholders assured that material errors/ liabilities do not exist.

Need of Service Tax Audit

Service tax in India was bought into existence in the year 1994. Initially, only 3 services were bought into the net, with effect from 1st July 2012 the new system of taxation of services known as Negative list came into existence under this scheme apart from those services listed in the negative list are taxable.

Since the concepts in service tax is not clearly defined, it would leave the assesses unaware of the applicable current provision and unsure whether they are fully aware of the service tax law from all the perspectives of the transaction.

On the one hand there is uncertainty about their understanding of the taxability of their transactions and on the other hand the departmental officer either on enquiry, investigation or audits points out certain aspects which may bring in an impact on the organization which may be nominal or quite substantial.

Therefore it is cautious for any organization to reduce such risks by taking help of professionals who would examine the transactions, systems, concepts and compliances and procedures and provide suggestion and assist the organizations to achieve the objective of minimizing the risk of later impact (financial or otherwise) of non-compliance, short payment, non-payment etc. The exercise done by the professionals is called in different names like ‘Service Tax Review’, ‘Service Tax Compliance Review’, ‘Internal Audit of Service Tax’ etc.,

The scope of the auditor would primarily depend upon the terms of the engagement, as there is no statutory obligation on the assessee to get their transactions and records review, audited.

The professional audit is through an independent check of various records and activities carried out by the assessee, the professionals determine the following:

> The liability if any can be determined.

> Whether the assessee is in compliance with law can be determined.

> Procedural irregularities

> Ignorance of law on the part of the assessee

> Detection of non-compliance of law

> Benefits of various notifications availed if so whether the procedural aspects are followed pertaining to the same.

> Risk analysis

Stages involved in performing an Audit by Professionals:

The audit would not directly start at the premises of the client. There are certain steps that area part of audit exercise which can start with preparation of assessees permanent file.

A professional has to follow certain methodology (principles and procedures) to carry on the service tax audit in accordance with the professional standards, which are condensed as follows:

> Overview of the assessee’s business/factory/industry

> Preparation of assessee’s profile and the permanent file

> Risk analysis

> Formulating an audit plan on the basis of the area coverage.

> Visiting the assessee’s premises for conducting verification

> Documentation of the observations

> Formulation of audit report

> Follow up action for compliance

Methodology of Indirect Tax Audit

The indirect tax audit would involve the following steps:

> Evaluation of internal controls as to the proper quantification and discharge of the indirect taxes;

> Collection of information about the company and the industry with particular information on amount of imports, percentage of customs, amount of removals, quantum of CENVAT, proportion of credit, etc.;

> Design the audit programme depending on the evaluation of internal controls. This would include the records to be verified, areas to be verified and the specific aspects to be checked;

> The audit should be consultative in nature without compromising the independence which is required to give opinion;

> The report on indirect tax audit should also provide specific comments on the statutory information, material matters reported by way of an executive summary and the assertion or qualification.

Areas covered under the Audit:

Though there may be number of aspects and areas which may have to be covered. However in general the following areas may have to be covered.

Contracts and agreements: This is very important to determine correct classification and valuation of services provided the billing and receipt pattern as well.

Financial Statements: the notes to accounts could give details as to foreign currency transactions undertaken for period under audit, in order to determine liability on services received from outside India

Income of the concern: this would indicate the incomes that could be liable to service tax. Whether the service tax correctly computed and paid. If there is any income as reimbursement of expenses from the customers, then it should be ensure that the same has been considered for payment of service tax.

Expenses: On reviewing expenses the eligible credits can be determined; if there any liability on reverse charge mechanism on the service recipient can be identified.

Input service bills: indicate the true nature of the expenses incurred, whether the bills are addressed to the service provider, whether all the requirements laid down under the Cenvat Credit Rules, 2004 are mentioned.

Cenvat Credit Register: This should be checked to ensure that the credits are captured correctly as per input service invoices, the date of payments of invoices, whether it is done within 3 months of date of invoice, etc.

Returns: This should be reviewed to ensure correctness, completeness, accuracy and reconciled with financial records.

Assets: Determine the location of asset and whether it is used to provide a taxable output service or not.

Conclusion & Report:

The professional auditors will form a conclusion on the basis of the checks and verification undertaken. The auditor should report and comment upon the areas where the service tax law and procedures are not followed correctly or to be followed correctly by the assessee.

The format of the report on the indirect audit may depend upon the type of the service tax being conducted. The report should be addressed to the person as given in the engagement letter.

The report may contain the following sections:

a. Scope of the Audit;

b. Management/Administration Summary;

c. Compliance of the previous audit (if the audit is done already);

d. Conceptual Points;

e. System Points;

f. Transaction points.

The report also should ideally include/ consider the comments of the officers of the company.

Author – Hiregange & Associates