Applicability of audit under MVAT Act, 2002 To whom audit is applicable? As per Section 61(1) of the MVAT Act, 2002, audit is applicable to A dealer w

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1 MVAT AUDIT 2013 Approach & Important Issues 25 TH November, 2013 By 1

2 Applicability of audit under MVAT Act, 2002 To whom audit is applicable? As per Section 61(1) of the MVAT Act, 2002, audit is applicable to A dealer who is liable to pay tax and his turnover, either of sales or purchases, exceeds Rs. 60 Lakhs during the Financial Year A dealer who holds a Liquor license in Form PLL, BRL, E, FL or CL. Who is a Dealer? Sub section 8 of Section 2 defines a dealer as a person who buys or sells goods in the State of Maharashtra for commission, remuneration or otherwise in relation to his business When a Dealer is liable to pay tax? Any dealer becomes liable to get registered and to pay tax if his turnover of taxable goods sold or purchased during FY exceeds Rs and turnover of all sales exceeds Rs. One Lakh, if he is an importer Rs. Five Lakhs if he is not an importer Besides any person who has voluntarily registered under this Act is also a dealer liable to pay tax. Any dealer who becomes liable to pay tax, continues to be so liable till his registration is duly cancelled. 2

3 Basic Provisions Who can conduct Audit? Practising CA/ICWA alone can be appointed as Auditor for audit under MVAT Form & Time Limit for submission of Audit Report Audit report has to be submitted by the Dealer in Form No. 704 within nine months and fifteen days from the end of the year to which the report relates Rule 65 & 66 Due Date for FY is

4 Basic Provisions Penalty for Non-filing of Audit Report The responsibility of submitting the audit report to the Sales Tax Department is of the dealer and not of the Chartered Accountant. For non compliance (including submitting an Incomplete Audit Report), Dealer can be charged penalty equal to 0.1% of Turnover of Sales or Purchases and can be prosecuted for imprisonment for 6 months However, in view of proviso to section 61(2), no penalty under this sub-section shall be imposed, if the dealer files the audit report within one month after the aforesaid prescribed due date and proves to the Commissioner of Sales Tax that the delay was on account of factors beyond his control. 4

5 Audit Appointment and Engagement No procedure is laid down for appointment of VAT Auditor under the MVAT Act. A CA/ICWA working as Tax Consultant for the Dealer or Statutory Auditor of the dealer can also conduct MVAT Audit u/s 61. But an internal auditor of the dealer cannot conduct VAT Audit as VAT Audit is an audit under Statute. There is no ceiling on number of MVAT Audits The VAT Auditor should obtain from the dealer a letter of appointment for conducting the VAT audit. The letter of appointment should also specify the remuneration of the VAT auditor. If there is change of Auditor, new Auditor should first communicate with the previous auditor, before accepting the appointment. A dealer can appoint two or more chartered accountants as joint auditors for carrying out the VAT Audit. 5

6 Approach to VAT Audit Entire system of VAT is based on self-assessment by a Dealer. Tax liability is calculated and paid by the tax payers through their periodical returns. As an essential cross check however, statutory provision has been made for verification of returns by an independent auditor in minute details by going through the books of accounts and also by analysing and interpreting the provisions of the State VAT Laws. A certification at the end of audit, as to whether there was any under-assessment made by the dealer requiring additional payment or whether there was any excess payment of tax warranting refund to the tax payer, is therefore an important element of VAT administration. 6

7 Approach to VAT Audit Format of Audit Report gives an impression that Audit is like a Virtual Assessment, Consisting mainly of Verification of correctness of returns filed Verification of sales and tax liability & potential liability on account pending CST declaration forms Verification of purchases Computation of set-off / input tax credit Verification of branch transfers and F forms Verification of compliance, viz filing of returns TDS on works contracts Finally leading to Determination by the Auditor, of differential liability or refund for a Dealer. 7

8 Approach to VAT Audit Audit Report in Form 704 is divided into Three Parts namely Sr. No. Part Particulars A Part -1 is related to verification and certification, computation of tax liability and recommendations to the dealer B Part -2 is related to general information about the dealer under audit. C Part -3 is about the various Schedules and Annexures 8

9 Considerations for the preparation of Report Where the returns are correct and compete and there are no material defects in the turnovers reported and liability determined, Unqualified Report can be given by the Auditor. In other cases a Modified Report can be given by an Auditor. Relevant Para Numbers from Part I need to be used for giving applicable qualifications and remarks of the Auditor. 9

10 Getting Started 10

11 1) Understanding the Business Auditor should acquire full knowledge of the client s business and policies This involves understanding /knowing: a) the nature of business b) the nature of its products c) the processes involved in manufacture, production and ascertaining whether any part of the work is to be sent out of the entity for further processing d) key personnel involved e) Events and risks that may have an impact on the audit report transactions of related parties that are material to the financial statements. The auditor should obtain sufficient audit evidence in this regard accounting and internal control system of the dealer f) Effect of a CIS environment on the audit. The auditor should have sufficient knowledge of the CIS to proceed with the audit. 11

12 2) System based Sales Tax Record Sales tax primarily relates to sale and purchase of goods. Auditor should therefore advise the dealer that system for data captured in the financial accounts should be so designed that it identifies each and every transaction of sale and purchase of goods recorded in the books of accounts according to their respective meanings under sales tax law. This will ensure linkage between accounting data and returns to be filed under sales tax and will make the sales tax compliance easier for the tax payer. From sales tax point of view sale and purchase turnover for MVAT/CST includes most of the charges relating to goods up to delivery except insurance and installation. 12

13 Following Statements need to be compiled for the purpose of Form 704 a) Consolidation of Monthly Returns, along with details of taxes paid. b) Sales and Purchase Summaries as per respective Registers. c) Soft copies of above registers in Excel Format (if possible) d) Files of Sale and Purchase Bills organized in the order of entries made in the Sale and purchase Registers, so that some of these can be easily verified at random during MVAT Audit. Continued 13

14 e) Statement of Debit and Credit Notes raised after close of the year. f) Statement of Addition and Deletion in respect of Fixed Assets, & a note on whether and how these transactions are covered by Sale and Purchase Registers. g) Computation of Revised GTO of Sales and Purchases as per Register, Credit Notes and Statement of Movements in Fixed Assets h) Reconciliation of Sales and Purchases with Profit and Loss Account. i) Details of Other Income to prove that all income from sale of goods is covered by Revised GTO of Sales. j) Details of Expenses (Other than Purchase of Materials) such as Printing and Stationery, Repairs and maintenance, Misc. Exps. etc to prove that all purchases of goods ate covered by Revised GTO of Purchases. Continued 14

15 k) Statement of Invoices in respect of inter state sales made against concessional forms such as C, E1/E2, F, H,I etc.,along with details of Forms received from customers for such invoices. l) Statement of Export Sales showing Bill of Lading & Shipping Bill details m) Statement showing Set Off Available based on Revised GTO or purchases n) Statement showing Reconciliation of Net Tax Due as per Statement of Consolidation of Returns and as per Revised GTO of Sales and Purchases. 15

16 Form 704 A] Letter of Submission of Audit Report in Form 704 :- This is a statement of tax liability under the MVAT & CST Acts as per the auditor and the dealers acceptance of the amounts given by the auditor thereon. In addition under changed format, details of Challans through which liability accepted by the dealer is paid is also to be given as a part of Letter of Submission 16

17 B] Part I:- It is related to Audit Report, verification and certification, computation of tax liability and recommendations to the dealer:- 1. Part 1 of Form 704 is a Certificate given by Auditor on certain points affecting compliance and calculation of correct tax liability of the Dealer. 2. Reporting under Part 1 is for entire business of the dealer and specific observations for aspects of compliance and calculation of tax liability are covered under Part Conclusions reported under this Part are based on workings given under Part 3, and hence a link between these two Parts must be closely monitored while preparing the Report. Any mismatch between information provided under these 2 Parts can create problems for the Auditor. 17

18 i) In Para 5, auditor has to give qualifications or remarks having impact on the tax liability based on additional dues as per Para 4 Table 5. j) In Para 6, auditor has to give any of the following recommendations to the dealer based on the audit findings:- Sr. No. Particulars i) Pay additional tax liability ii) Pay back excess refund received iii) Claim additional refund iv) Reduce the claim of refund v) Reduce tax liability vi) Revise closing balance of CQB vii) Pay interest under-section 30(2) viii) Pay interest under-section 30(4) MVAT (Rs.) CST (Rs.) k) In Part I, After Para 6 Now, there is a specific column for Auditor s Signature, Name of the Firm and Firm Registration Number. Besides Mobile, now Landline number of the Auditor is also required to be mentioned in the New

19 The audited figures of turnover of sales, purchases and set-off calculation to be given under the above applicable schedules shall be based on the following points of consideration :- A) Verification of Sales under MVAT Act, 2002 Sales Tax is a tax on sale of goods and hence gross tax liability for any dealer emerges out of sales. Gross Turnover of Sales as per Sales Tax Includes:- a) Freight, packing forwarding and insurance (subject to different provisions under MVAT & CST Acts for sale price) b) Works Contracts and Leases c) Local, Inter-State and Export sales d) Branch Transfers outside the State of Maharashtra e) Transit Sales u/s. 6(2) of CST Act f) Sales tax or VAT whether charged separately or not g) TDS deducted by customer h) Sales of Capital Assets i) Miscellaneous disposals of goods j) Debit Notes for reasons other than Goods Returns 19

20 Excludes:- a) Recoveries of APMC, Service tax b) Cost of labour and services for Works Contracts c) Payments to sub-contractors in certain cases d) Interest on HP transactions e) Goods returns within 6 months from date of sale f) Credit Notes for reasons other than Goods Returns Key legal provisions affecting determination of Sales Turnover Sale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words sell, buy and purchase, with all their grammatical variations and cognate expressions, shall be construed accordingly. The term Goods includes all movable property 20

21 Importance of correct classification Calculation of tax liability requires correct rates of tax to be considered appropriate to the goods sold. The rates of tax are laid down in Schedule A to Schedule E of the Act. Schedule A is for exempt goods and Schedule C is for goods attracting concessional rate of 4%/5%. Schedule E is for residual goods which attract 12.5% rate of tax. Section 7 states that the packing material of any goods sold shall be taxable at the same rate that is levied on the goods so packed. Valuation of OMS Branch transfers forming part of GTO is very critical because it has an impact on calculation of Set off. 21

22 Points to be considered while vouching of sale bills are summarised as follows:- a) If movement of goods is Inter-state, Check whether i. Movement of goods from one state to another normally attracts CST rate of 2% (C form) or Schedule Rate in the absence of C Form. ii. Movement of goods from one state to another (Deemed export) - CST 0% (H form) iii. Movement of goods from one state to another Stock Transfer (F-form) iv. Movement of goods from outside the country (Physical Exports) NIL tax. (Verify shipping bill & bill of lading) v. Sale to SEZ Nil tax (Form I). vi. High Seas Sale Sale in the course of import Verify Bill of lading duly endorsed in the name of the Customer and High Seas Sale Agreement mentioning P.O. No. of the Customer. b) If movement of goods is Intra-state (within the state) i. Check whether MVAT is Charged as per Schedule Rate or not. This is because there are no concessional form sales under VAT regime. ii. If goods are sold in the course of export (deemed export within the state) MVAT 0% (Verify Purchase Order of Customer) and proof of exports from Customer. 22

23 Contentious Issues Denial of Exemption for In Transit Sales and Branch Transfers Certain sections of Department have drawn adverse inferences from the recent SC Judgment in A&G Projects & Technologies Ltd Vs State of Karnataka [(2008) VIL 40 SC] Case, in the matter of exemption of In Transit Sales, where despatch of goods has been done from Maharashtra As for facts of SC case, the appellants were engaged in the execution of divisible works contract in Karnataka and were registered under the Karnataka sales tax laws. There were three contracts relating to the procurement and supply of equipment. These were the contract for supply of equipment between the appellants and the ultimate customer, the contract between the appellants and the sub contractor located outside Karnataka and, finally, the contract between the sub contractor and the manufacturer of the equipment. These three contracts were before the Supreme Court. 23

24 Appellants argued before the assessing authorities that there were three different sales transactions. The first one was the sale of equipment by the manufacturer of the equipment to the sub contractor and the second and third sales were sales of the equipment by the sub contractor to the appellant and thereafter by the appellants to the ultimate customer. First sale was an inter- State sale and the subsequent two sales were interstate sales and were also eligible for exemption from tax for subsequent or in transit sales under the relevant Section 6(2) of the CST Act. The assessing authorities in Karnataka rejected this claim for exemption for the subsequent sales under the Act and held that all three sales were sales under Section 3(a) of the Act, and not under Section 3(b) of the Act, because all 3 sales contracts were made before inter state movement of goods and hence the exemption from tax for in transit sales under Section 6(2) was not applicable 24

25 Besides rejecting the exemption from central sales tax on the aforesaid basis, the assessing authorities also invoked the provisions of Section 9 and the proviso thereto, regarding levy and collection of the central sales tax, to hold that such second and third sales would be taxable in Karnataka State and not in the State from which the goods originated as per the first sale, Tamil Nadu in this instance. The matter was thereafter litigated in stages in appeal and finally went to SC for decision. Supreme Court held that the dividing line between sales under Section 3(a) and those under Section 3(b) was that in the former case the inter State movement of goods happened because of the contract of sale whereas the sales under Section 3(b) were those where the contracts came into existence after the commencement of movement of goods. 25

26 The apex Court held that Section 6(2) relating to exemption from tax for in transit sales was only applicable to those sales which qualified under Section 3(b), as sales effected by a transfer of documents of title. Since, in the instant case, the subsequent sales were also sales under Section 3(a) in that they also occasioned the movement of goods from one State to another, the benefit of exemption from tax was not available at all under Section 6(2). The Court then proceeded to hold that the appropriate State that could consequently charge such subsequent inter-state sales to tax was the State from where the goods originated during their movement from one State to another, as per the first sale. The Supreme Court held that since all three sales in question were Section 3(a) sales, the proviso to Section 9 would not apply in order to enable Karnataka State to tax these subsequent sales. Accordingly, the Supreme Court held that Tamil Nadu alone could tax all three sale transactions. 26

27 Judgment therefore establishes a principle that if subsequent sales contracts were in place prior to the commencement of the inter-state movement of goods, such subsequent sales could not be Section 3(b) sales at all and accordingly they would not qualify for the exemption for in transit sales, as envisaged in Section 6(2) of the Act. A subsequent inter state sale can get covered under either Section 3 (a) or 3 (b) Only if a subsequent inter state sale is covered under Section 3 (b), it is entitled for exemption under Section 6(2), subject to certain conditions. For a subsequent sale not entitled for exemption under Sec 6(2), Appropriate State for the payment of tax will be, State from which movement of goods has commenced if the subsequent sale is covered by definition given under Sec 3(a) or a State from where such subsequent seller, if registered under the CST Act, could have obtained C Form declaration, if a sale is covered under Sec 3(b). 27

28 Though judgment in the A&G Projects case appears to lay down different principle in respect of subsequent sale, actually it reiterates the principle of mutual exclusivity for application of Sections 3(a) and 3(b), as laid down under Tata Steel Case. In the Tata Steel case, the court was required to examine the very applicability of 3(a) or 3(b) to answer the question raised before it. The court in that case observed that the literal construction of the two clauses would often overlap (that is, both the situations can coexist), which was not the intention of the legislature and hence one has to narrow down the construction of these two clauses so as to make them mutually exclusive. The court then propounded a carving out theory to establish mutual exclusivity by laying down the principle that where a transaction of sale is covered by both the clauses, it has to be held to fall under clause (b) i.e., in overlapping situations, clause (b) prevails over clause (a). 28

29 Hence, this principle laid down by the Supreme Court in 1960 gave birth to the common practice we observe today in trade and industry, of structuring the subsequent inter-state sale transaction as in-transit sale so to fall under clause (b) even though it was otherwise covered by clause 3(a). A pre existing order cannot thus be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stood transferred by implication like constructive transfer. A reference to the contract coming into existence after movement commences, made by the Court in A & G Case should be construed to mean reference to Contract of Sale and not an Agreement to Sale. A pre existing order is at the most an agreement to sale but the actual transfer of documents is a contract of sale and if such transfer happens after the movement has commenced, such sale can still be covered under Sec 3 (b) and is eligible for exemption. 29

30 While conducting In transit Sales, it should therefore be always considered that crux of the exemption under Sec 6(2) is Sale made by way of transfer of documents of Title to the goods during their inter state movement. Those responsible for such sales must ensure that the sales contracts relating to the second and subsequent sales are made effective only after and not before the commencement of the inter-state movement of goods, as per the first sale. At Departmental Level also, a better sense appears to have gained acceptance. West Bengal VAT authorities, vide Trade Circular NO. 11/2010 dated ) has set out the departmental position that contract of sale and sale itself are altogether different in case of inter state sale, and a pre-existing order or predetermined parties will not negate any 3(b) sale if other requirements are found fulfilled i.e. physical or constructive transfer of documents of title to the goods is made. Maharashtra Govt. as usual is yet to follow suit and to relieve dealers from un necessary anxiety and litigation. 30

31 Contentious Issues Exemption for Branch Transfer under CST is also liable to be rejected if the dispatches can be correlated with specific requirements of customers to whom goods are later sold by the Branch 31

32 Contentious Issues Inter State Works Contracts After amendment to the constitution by inserting Article 366(29A) providing definition of the term taxes on sale or purchase of goods to include deemed sales, States were empowered to levy tax on sale or purchase of goods involved in execution of works contracts, if such sales were intra state sales. Even after amendment, no tax was payable under the CST Act on deemed sale of goods effected in the course of inter-state trade as the definition of sale provided in the Act did not include such deemed sales. The Finance Act, 2002 amended CST Act, 1956, from by substituting section 2 (g), the scope of definition of the term sale is widened, to include therein Deemed Sales. 32

33 The definition of the term sale price of the CST Act was amended by the Finance Act, 2005 from , whereby a proviso was inserted in section 2(h) of the Act. Accordingly, for works contract sales, the Central Government is given power to prescribe by way of rule to determine the sale price of goods in a prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed. Till date no such rules are prescribed. The SC in case of M/s. Mahim Patram 6 VST 248 (SC) held that till Rules are prescribed by government to determine sale price of works contract sales, State rules shall be applicable to determine sale price of the goods for levy of tax under the CST Act. Therefore, in Maharashtra, provision of rule 58 shall apply for determination of sale price for levy of CST. Similarly, sub-clause (ja) is inserted in section 2 of the CST Act by Finance Act, 2005 defining the term works contract as a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property 33

34 Section 3 of the CST Act, provides for principals to determine when a sale or purchase of goods takes place in the course of inter-state trade or commerce. These principles have been applied by the courts in case of deemed sales like works contract and lease transactions. After the amendment to CST Act, 1956, by Finance Act, 2002, the position is very clear for application of provisions of section 3 to the deemed sales. In case of works contract sales, inter-state movement of goods takes place of goods with which works contract is executed as well as processed goods. In both cases, a sale is deemed to have effected in the course of inter-state trade and liable to pay tax under the CST Act. In case of works contract, the property in goods generally passes as and when goods are used in works contract and not on delivery of goods. Section 3 (b) of the Act provides for passing of property in goods in a particular manner; i.e., by transfer of document of title to the goods. Unless, the property in goods passes by transfer of document of title to the goods, while it is in transit from one State to another the provisions of section 3(b) and section 6(2) are not applicable. 34

35 However in such cases, it is possible to contend that contract is not an indivisible works contract but divisible contract involving sale of goods by transfer of document of title to the goods as such exempt from payment of tax under section 6(2) of the CST Act, subject to production of required form C and E-I. Sale in the course of import or export Section 5 Under section 5 of the CST Act, no tax is payable on any sale or purchase of goods which occasions import of goods into India or export of goods outside India. Further any sale of goods effected by transfer of document of title to the goods before it crosses the custom frontier of India, popularly known as High seas sale, is also exempt from payment of tax under section 5(2) of the Act. Under section 5(3) of the CST Act, any sale of goods to the exports to comply terms of any pre existing export order is also exempt from payment of tax, subject to production of form H. 35

36 The provisions of section 5 apply to works contract sales also, even prior to amendment to section 2(g) of the Act from The Commissioner of Sales Tax in case of Mazgaon Dockyard (DDQ dt ) allowed the claim of the dealer for exemption under section 5(2) of the Act and held that when under the contract, the good are imported by the contractor under the specific terms of the contract and used in works contract then it has occasioned movement of goods from outside India and exempt under section 5(2) of the CST Act. As a result of amendment by Finance Act, 2002, the dealer can issue Form C for purchase of goods in the course of inter-state trade for the purpose of works contract sales. Under section 8 of the Act, sales to the SEZ or developer of SEZ, is exempt from payment of tax against Form I. This provision is applicable to Works contracts. 36

37 Sequential steps of data compilation in e-704 Form:- Sr. no. Steps 1) Compilation of Annexures from A to K. (whichever applicable) 2) Compilation of Schedules I to VI (whichever applicable) 3) Updation of Part II 4) Updation of Part I 5) Letter of submission 37

38 Important Current Issues 1 Denial of Set off Mahalaxmi Cotton. Vs St. of Mah. (11 May 2012) 51 VST 1 (Bom) & SLP # of 2013 dt 25 Feb 2013 (SC dismissed the SLP)... Mah. State Govt filed affidavit & confirmed : 1. To chase sellers who are defaulters for Returns & recovery of taxes, invoking full machinery under the Act 2. To prosecute hawala / suspicious dealers, recovery proceedings & cancellation of their registration (2059 Suspicious / hawala dealers list put up on website) 3. To take action against dealers who have defaulted in filing vat audit reports 4. The e-system is capable of providing transparent & accountable governance for tax payer 5. In case of short filers, buyers will be granted proportionate setoff 6. Defaulters list will be uploaded on website & setoff will be denied 38

39 Important Current Issues 1 Denial of Set off Mismatch of Seller s J1 & Buyer s J2 Reasons Error in TIN (name), Net amt, VAT amt, DN, CN, Year end transactions, etc, Dealer has not given any data in J1 or J2; Seller declared as defaulter as Non-filer or Short-filer on Dept. website under Dealers Services menu, Seller declared as Hawala dealer on Dept. website under List of Suspicious Dealers in pop-up menu of whats new Implications for Seller: Error in data or Suppression of sales; Liability to pay VAT sales tax. Remedy Revised Return/Annexure, Ledger Extract Implications for Buyer: Denial of claim of higher setoff Remedy Revised Return/Annexure, Ledger Extract 39

40 Important Current Issues 2 Changes in Form 704 (Notification # VAT/AMD-2013/1B/Adm-8 dt 23 Aug 2013 ) New Table 6 & Certification Point Report any similar issue involved in Auditee s case where a decision against the State Govt or Commr was given by the Tribunal and the Reference / Appeal is pending before appropriate forum in the following dealer s case which is/are appearing in the list of pending references/appeals kept on website of the Dept.: Important issue pending from Deptt side High Seas Sale in respect of Airway Bill In view of various such cases and ongoing updating on Website, reporting on this point will be an onerous task for Auditor and may require to incorporate disclaimer in the Report Report PAN of URD works contractor for VAT TDS data in Annex D Annex G / I / J1 / J2 : Number of Rows increased from 1000 to 5000 Payment details added in Statement of Submission if liability pointed out by Auditor is accepted by the Dealer Annexures J3 & J4 relating to DN/CN merged with J1 & J2 40

41 Current Issues Important amendments applicable to FY One revised return allowed for complete FY to incorporate changes made in VAT audit With Amendment to sec 32 A, direct demand notice can be issued to dealer for payment dues in 704 accepted by dealer, but not paid with int Carry forward of refund to next fy limit incr to 5 l from 1 l from FY onwards 41

42 THANK YOU From CA M.B. ABHYANKAR - 42