Audit of Service Tax Assessee
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 etc.
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 Cost Accountant
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 -
· Overall knowledge of the service provider’s business, accounting systems, returns and other reports filed, history of past assessments, litigation, etc.
· Obtaining the trial balance and getting used to the chart of accounts.
· Understanding the accounting system of the service provider.
· Touring the premises of the service provider including godowns, warehouses, depots, branches, units etc.
· Evaluating the internal control system of the service provider.
· In case of multi-locational units, trial balance should be obtained unit-wise.
· Understanding 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 audited.
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-
· has filed to declare or determine the value of taxable service correctly.
· has 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.
· has 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 commoner.
(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 assessee.
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.