Audit under service tax is
covered by section 14AA of Central Excise Act, 1944 as applicable to service
tax and section 72A inserted by the Finance Act, 2012 w.e.f. 28-5-2012. The
Central Board of Excise and Customs (CBEC) has issued guidelines for audit of
accounts of Service Tax assessees.
Finance Act, 2012 had amended
section 83 of the Finance Act, 1994 w.e.f. 28-5-2012 by omitting section 14AA
of Central Excise Act, 1944, while inserting certain other sections in section
83. Section 14AA of Central Excise Act, 1944 deals with special audit in cases
where the credit of duty availed or utilized is not within the normal limits
However a new section 72A has
been inserted by the Finance Act, 2012 w.e.f. 28-5-2012 in Chapter V of the
Finance Act, 1994 which provides for ‘special audit’.
Audit by Chartered Accountant and
The Finance Act, 2009 has added
‘chartered accountant’ to the cost accountants in section 14A and 14AA of the
Central Excise Act, 1944 so as to empower the Chief Commissioner of Central
Excise to nominate a chartered accountant or cost account for conducting
special audit under the provisions. An explanation has also been inserted to
explain that chartered accountant would mean a chartered accountant as defined in
section 2(1)(b) of the Chartered Accountants Act, 1949. Thus, w.e.f. 19.8.2009,
a chartered accountant can also be appointed for conducting special audit for
the purpose CENVAT credit under service tax. Section 14AA of Central Excise
Act, 1944 deals with special audit in cases where credit of duty availed or
utilized is not within normal limits etc and is applicable to service tax under
section 83 of Finance Act, 1994.
Scope of Audit
The scope of Service Tax audit
covers all services which are subject to levy of Service Tax and the selection
of assessees and auditing of those assessees who have been selected for
auditing will be subject to the guidelines and procedures prescribed in Service
Tax audit manual. (Circular No. 775/8/2004-CX dated 17-2-2004)
The audit shall cover all areas
of accounts and revenue as per proforma which will have summary of audit
reports, summary of audit result, working papers on preliminary review, systems
information, organization chart, tax accounting, service information,
evaluation of internal controls, general accounting, revenue system, analysis,
audit plan, Service Tax trend and reconciliations.
While doing the audit, care
should be taken to ascertain whether any part of the service charges have been
shifted in the expense account thereby suppressing the value of taxable
service. At times checking of bank account with expenses and receipts is also
important. Any liability accrued for import of services should be examined as
also the exchange rate fluctuations. Under section 66A, a company may be liable
to service tax with respect to services provided by a foreign branch to its
Indian head office. Such services may not be reported as turnover in the
financial statements. Auditors should obtain a list of foreign branches and
branch accounts and try to scrutinize the same so as to ascertain the value of
taxable services. A good service tax audit approach would include the following
knowledge of the service provider’s business, accounting systems, returns and other
reports filed, history of past assessments, litigation, etc.
the trial balance and getting used to the chart of accounts.
the accounting system of the service provider.
the premises of the service provider including godowns, warehouses, depots,
branches, units etc.
the internal control system of the service provider.
case of multi-locational units, trial balance should be obtained unit-wise.
the various records maintained by the service provider.
Section 72A of the Finance Act,
1994 has been introduced with a view to provide for a special audit to be
carried out by a chartered accountant or cost accountant nominated by the
Commissioner. The special audit shall be ordered where the service tax assessee
has failed to declare or determine the value of taxable service or has availed
and utilized credit of duty or tax beyond the normal limit or by means of,
collusion or willful misstatement or he is having operations spread out in
multiple locations. It is further proposed to provide that the chartered
accountant or as the case may be, the cost accountant shall submit a report to
the Commissioner on completion of the audit and such audit may be ordered even
though such accounts had been audited under any other law for the time being in
force. Before initiating proceedings on the basis of the report, a reasonable
opportunity of being heard shall be given to the service tax assessee so
Thus, section 72A gives
comprehensive powers for special audit for service tax purposes. Accordingly,
(a) Special audit can be
conducted on the directions of Commissioner of Central Excise.
(b) Commissioner directing
such audit can do so if he has reasons to believe that any person liable to pay
tax has committed certain action or deeds.
(c) Audit can be in respect
of any person liable to pay service tax.
(d) Such person-
filed to declare or determine the value of taxable service correctly.
availed and utilized credit of duty or tax paid, which is not in the normal
limits compared with the capital, goods, used or other relevant and appropriate
factors or by means of fraud, collusion, or any willful misstatement or
suppression of facts.
operation in multiple location and it is not possible or practicable to obtain
a true and complete picture of his accounts from the registered premises.
(e) Direction can be given to
get his/its accounts audited for the period and scope as specified by the
(f) Such audit shall be conducted
by a chartered accountant or cost accountant as defined in Chartered
Accountant’s Act, 1949 and Cost and Works Accountants Act, 1959 respectively.
(g) The audit report,
duly signed and certified shall be submitted by the auditor to Commissioner
within stipulated time frame.
(h) Audit u/s 72A shall be
conducted irrespective of any other audit being carried out of the accounts of such
person under any other law in force.
(i) An opportunity of
being heard shall be provided to the auditee in respect of material gathered
during audit and proposed to be utilized in any proceedings.
The provisions of section 72A are
akin to those of section 4A and 14AA of Central Excise Act, 1944. It also
covers correct determination and declaration of valuation of service and
gathering of desired information in case of multiple location operations of
The condition precedent for special
audit under Section 72A of the Finance Act, 1994, as amended, is reason to
believe that any person liable to pay Service Tax, has failed to declare or
determine the value of a taxable service correctly, or has availed and utilized
credit of duty or tax paid in excess of entitlement by means of fraud,
collusion or any willful misstatement or suppression of facts or has operations
spread out in multiple locations and it is not possible or practicable to
obtain a true and complete picture of its accounts from the registered premises
falling under the jurisdiction of the said Commissioner.