Ref:_ 1. Circular No. 15/05 Dt. 04.04.05
2. Circular No.11/05 Dt. 17.06.05
In the circular first cited the salient
features of the Kerala Value Added Tax Act, 2003
were communicated to all officers. In the circular
2nd cited detailed instructions were
issued regarding the procedures to be adopted for
the scrutiny of the statements furnished in Form
25A prescribed under the KVAT Rules, 2005 with regard
to the claim of input tax credit in respect of goods
held as opening stock on 01.04.05 and purchased
during the period 01.04.04 to 31.03.05 which had
suffered tax under the Kerala General Sales Tax
Act, 1963.
2. The success of VAT mainly depends on the effectiveness
of the audit mechanism. Sections 23 and 24 of the
Act deal with audit visits and Audit Assessments.
Section 23 provides for audit visits. The power
for conducting audit visits is vested in officers
not below the rank of a Dy. Commissioner designated
for the purpose. Accordingly Dy. Commissioners (Audit
Assessment) have been notified as the officer designated
under section 23. Audit visits under section 23
have to be done by audit officers authorised by
the designated officer in writing. Asst. Commissioners
(Audit Assessment) as well as Commercial Tax Officers
(Audit Assessment) can be nominated by the designated
officer as audit officers. Rule 37 of the KVAT Rules,
2005 lays down the procedures for audit visits.
Rule 37 (4) stipulates that audit visits during
a period of one year from the date of commencement
of the Act have to be done only under the directions
of the Commissioner.
3. Audit visits have to be preceded by a sound selection
of cases for audit. This has to be done impartially
and on a scientific basis. Once the computerization
of the department is completed, the VAT software
itself will take care of the selection process.
But, till such time this will have to be done manually.
It is imperative that proper discretion is exercised
in selecting cases for audit. The cases selected
should be representative in character. The following
factors need to be taken into consideration in selecting
cases:
A)
Primary Factors:
i.
Type of business- whether manufacturer, whole saler,
retailer etc.
ii.
Volume of taxable turnover.
iii.
History of the dealers- Previous offences and under
declaration and the degree of compliance indicated
by the number of assessments and reports of previous
visits.
iv.
Evasion prone commodities
v.
Cases not previously selected for audit
vi.
Refund claims and excessive claims of input tax
credit
vii.
Specific information regarding proven or attempted
evasion of tax Information gathered through vehicle
checking, other agencies like Central Excise, Customs,
Income Tax etc, Information from other dealers and
informants.
viii.
Failure to register.
B)
. Secondary factors.
i)
Number of visits already made
ii)
Availability of trained and effective staff to form
inspection teams.
iii)
Extent of available information.
4. Keeping the above factors in view, the following
instructions are issued for the conduct of audit
visits and consequential assessments:
(1). In the circular 2nd cited, the Commercial
Tax Officers (VAT Circle) were directed to conduct
preliminary scrutiny of Form No. 25 A submitted
by dealers and forward cases, which in their opinion
required further scrutiny, to the Audit Assessment
wing. Input tax credit under section 11(13) was
provided in order to prevent cascading on account
of goods already subject to tax under the KGST Act
again being subject to tax under the KVAT Act. But
reports show that many dealers levied tax under
the Act on such tax suffered goods on the price
of the goods inclusive of the KGST suffered. This
is against the principles of VAT. Granting of input
tax credit under section 11(13) in such cases would
result in unjust enrichment of traders which is
unconstitutional. In the Kerala Value Added Tax
(Amendment) Act, 2005, a further proviso has been
inserted under sub-section (13) of section 11 which
provides for disallowing input tax credit under
that sub-section where it is found out on audit
that the dealer has charged tax under the Act on
the goods held as opening stock, on the turnover
of such goods which is inclusive of the tax paid
on such goods under the KGST Act. The Commercial
Investigation Wing will collect as much information
as possible regarding collection of tax by dealers
as above. The invoice issued by the dealers during
March 2005 and April 2005 evidencing this would
also be collected from various sources (including
consumers) and cases which require audit shall be
forwarded to the Dy. Commissioners (Audit Assessment).
The Intelligence wing and the Commercial Tax Officers
(VAT Circles) will also collect as much information
as possible and forward cases requiring detailed
verification to the Dy. Commissioner (AA) concerned.
Such cases shall be selected for audit, preference
being given to dealers who deal with goods which
were subject to higher tax rates under the KGST
Act (12 % and above)
(2) In the cases of export and interstate sale,
full refund of input tax paid is provided for .
In the case of stock transfers refund of tax paid
in excess of 4 % is provided for. Till further under,
all refund cases should be fully subjected to audit.
The dealers claiming refund have to file an application
in Form No.21B or 21C, as the case may be, along
with declaration in Form 21J obtained from the dealer
who sold the goods to the dealer claiming refund.
The declaration requires the selling dealer to certify
the remittance of tax in respect of the goods sold,
which has to be confirmed by the assessing authority
with whom the seller is registered. But where the
selling dealer claims input tax credit in respect
of his purchases, the output tax remitted by him
for a month will not be the total of the output
tax collected by him. This aspect should be taken
into account while conducting audit of such cases.
The Dy. Commissioners (Audit Assessment) will first
ascertain the total number of refund claims in each
office and the amount involved in each case and
then do an ABC analysis of such cases and then prepare
the audit plan in such a way that thrust is given
to cases where the refund claim is the highest,
but not totally ignoring cases where the amount
of refund claimed is less. In other words, the sample
selected for each month should be a mix of all the
categories, weightage being given to major claims.
(3). Section 21 of the Act provides that where the
return submitted by a dealer under sub-section (1)
of section 20 is in the prescribed manner and accompanied
by the prescribed documents, the assessments relating
to the return period shall be deemed to have been
completed, subject, of course, to the provisions
of section 22, 24 and 25. The returns filed and
the statements furnished therewith provide us with
sufficient data for selection of cases for audit.
It is therefore imperative that the scrutiny of
the returns is completed on a time bound basis and
as much information as possible, which will help
in the selection of cases for audit, is gathered.
When computerization is completed the scrutiny of
the return and selection of cases for audit will
by and large be done through the computer. But till
such time, the scrutiny will have to be done manually.
The available manpower may not be sufficient to
complete the scrutiny in some offices. The audit
officers [including Asst. Commissioners (AA)] will
have to associate with the Asst. Commissioners and
Commercial Tax Officers in the VAT circle in conducting
the scrutiny in offices where the scrutiny is in
arrears. The following procedure shall be followed
in the matter:
(i)
The Dy. Commissioners (Audit Assmt) shall allot
the Audit officer [including Asst. Commissioners
(AA)] to such offices where there is substantial
pendency of scrutiny of returns, at the request
of the Dy. Commissioner of the district concerned.
(ii)
The returns shall be distributed among the Commercial
Tax Officers and the Audit officers deputed for
the purpose as per the plan to be finalized jointly
by the Dy. Commissioner and Dy. Commissioner (AA)in
such a way that the Audit Officers get time for
conducting Audit visits and other work.
(iii)
In cases where defects are noticed, the Audit officers
deployed shall hand over the scrutinized return
to the Asst. Commissioner (Assmt)/Commercial Tax
officers of the VAT Circle with a note on the defects
noticed. The Asst. Commissioners (Assmt)/Commercial
Taxes Officers, VAT circle shall then, issue notice
to the dealers concerned, pointing out the defects.
It is not necessary in such cases to call for the
books of accounts of the assessee or to propose
a best judgment assessment since section 22 allows
the dealers to file a correct return and pay the
tax due thereon with interest and avail himself
of the benefit of self assessment. A best judgment
assessment will become necessary only where the
dealer fails to file a return or to file a fresh
return after the defects in the return being pointed
out. The Asst. Commissioner (Asmt)/Commercial Tax
Officer concerned will be held personally responsible
for prompt issue of defect notices and delay/ ineffectiveness
will be viewed seriously.
(iv)
Wherever a best judgment assessment is warranted
whether under sub-section (3) of section 22 or under
sub-section (1) of section 24, the Asst. Commissioner
(Assmt)/Commercial Tax Officers concerned shall
transfer the records to the Audit Assessment wing
and assessment shall be done by the Audit Officers.
(v)
The Dy. Commissioner (AA) and the Dy. Commissioner
of the district concerned shall jointly review the
progress of scrutiny once in a fortnight. Details
of reviews will be included in the monthly diary.
(vi)
The Asst. Commissioner (Audit Assmts)/Commercial
Tax Officer (Audit Assmt.) shall keep a record of
the number of returns scrutinized by him and the
number of returns in which defects are noticed and
furnish the details in the monthly diary submitted
by him.
(vii)
In districts where the Asst. Commissioners (Audit
Assmt) or Commercial Tax officers (Audit Assmt)
are not so deputed, the Asst. Commissioners (Audit
Assmt)/ Commercial Tax officers (Audit Assmt) shall
conduct a random scrutiny of five percent each of
the returns already scrutinized by the officers
of the VAT Circles and found to be defective and
also of those in which no such defects were detected,
as per a programme to be fixed by the Dy. Commissioner
(Audit Assessment), and select cases for audit.
(4)
Under section 11 of the Act input tax credit is
allowed against output tax payable for the return
period and if input tax is not fully set off against
output tax, the amount of input tax remaining unadjusted
against output tax is carried over to the subsequent
return period. If the returns filed show excess
input tax over output tax, it can be indicative
of sales suppression. So cases in which the returns
filed show excess of input tax over output tax continuously
for three return periods should be selected for
audit.
(5)
Parcel Agencies, (including Railways) clearing and
forwarding agents, banks, warehouses etc have to
file periodical returns. The details available in
such returns will form a database, for the Department.
But until computerization is completed, the details
gathered through these returns will be transferred
to the dealers’ folder for being considered for
selection for audit.
(6)
The other cases which can be selected for audit
are:-
(i)
Cases where the returns filed show fall in taxable
turnover inspite of increase in purchase continuously
for two return periods.
(ii)Cases
where attempts of evasion of tax have been detected
through vehicle checking or inspection of business
places or though verification of extracts taken.
Dealers will be ranked on the basis of the number
of offences/gravity of offence detected.
(iii)
Evasion prone commodities: The Commercial Investigation
wing should collect information regarding commodities
in which tax evasion is rampant and pass on the
same to the Dy. Commissioners (Audit Assessment).
A certain percentage of the dealers dealing in such
commodities will be selected.
(iv)
Dealers against whom departments like Central Excise,
Income Tax etc have booked cases should be fully
selected. In the case of offences booked by Customs,
the Commercial Investigation Wing will identify
cases, which have a bearing on VAT and communicate
to the Dy. Commissioner (Audit Assmt) and cases
will be selected out of such cases.
(v) Commercial Tax Officers (VAT Circle), Commercial
Investigation wing and the Investigation Branch
should do random verification of the declarations/invoice
filed at the check posts or those collected during
checking of goods vehicles at places other than
check posts and identify cases where the sales declared
are not commensurate with the import of goods into
the state, and dealers selected out of such cases
can also be included in the field of choice.
(vi) Commercial Investigation wing should gather
information regarding unregistered dealers having
volume of business sufficient for attracting liability
for registration. Such cases will be selected for
audit.
(vii) Consumers get first hand information regarding
the evasive tactics of dealers and can be of help
to the department in arresting evasion of tax. They
should be encouraged to inform the department about
dealers who follow evasive tactics (failure to issue
bills for sales, under value the sales, show the
sale bills as estimates, maintain undeclared godowns,
smuggling goods into or out of the state etc.)
(viii) Cases involving substantial quantities of
closing stock as compared to purchase and sales.
(ix) Cases involving substantive changes in trade
practices- E.g. excessive stock transfers, material
decline in inter-state purchases, material increase
in exports/sales to exporters.
(x) Dealers having substantial transit sales
(xi) Sales to Mahe dealers.
(7). Preparation for Audit:-
Once cases are selected by the Dy. Commissioner
(Audit Assmt) and Audit officers have been nominated,
the Audit officers will have to prepare for Audit.
The officers should -
(a)
Study the contents of the dealer’s folder to see
whether there are any special features of the activities
of the dealer to be looked into during audit visits.
(b)
Gather additional information from the actual returns
if the information already passed on to the Audit
officers is found to be inadequate for audit purposes.
Care should be taken to ensure that the information
gathered do not fall into the wrong hands.
(c)
Acquire basic knowledge about the nature of the
trade or industry. In the case of a manufacturing
concern, the officers should study the manufacturing
activities involved, the raw materials used, the
input out put ratio etc. Necessary data for this
may be gathered from the Department of Industries
and Commerce, Rubber Board, Publications etc. The
Dy. Commissioners (Audit Assmt.) shall, in their
periodical meeting, discuss these topics and try
to enlarge the areas of knowledge of the officers.
(d)
Refer to reports of previous audit visits to see
whether any aspects identified on previous visits
need to be pursued.
(e)
Ascertain if the dealer is maintaining computerized
accounts, the systems of accounting and the software,
which has been declared by the dealers, and ascertain
whether there is any change in the system subsequent
to such declaration.
(8).
Audit Visit.
As
per rule 37(2) a notice has to be issued to the
dealer before Audit visit, giving a minimum of fifteen
days’ notice.
The
actual procedure to be followed during audit visit
may vary from trade to trade and from industry to
industry depending on the purpose of the visit,
size of the business, manufacturing process involved,
complexity of the accounts kept, reputation of the
dealer etc, which the officers may finalise, in
consultation with the Dy. Commissioner (Audit Assmt.)
or Asst. Commissioner (Audit Assmt.), as the case
may be, on the basis on the guidelines given above.
But there are certain general points to be borne
in mind while conducting audit visits.
(a)
The visiting officers shall first contact the person
in authority (director, manager, partner, proprietor
etc.)
(b)
The person contacted should be asked to confirm
whether the dealers information available with the
officer, is correct.
(c)
The officer should ascertain, the problems, if any,
faced by the dealer in complying with the provisions
of law and should attempt to help the dealer with
genuine problems. Care should be taken not to answer
hypothetical questions or to enter into arguments.
The officer should not also give answers on issues,
if he is not sure about the correct answer. In such
cases the officer should arrange to give answers
in due course.
(d)
The person in authority should be asked to nominate
a person responsible for the maintenance of accounts
and filing of returns to furnish the audit officers
with the required information
(e)
The officer should ascertain the activities involved.
(f)
Details available with the officer should be cross
verified with reference to the records maintained
by the dealer to see whether the statements already
furnished tally with the accounts kept.
(g)
The officers should ensure that the returns and
other statements submitted before the VAT circles
have been signed by a person duly authorised in
this behalf, in writing as intimated to the assessing
authority.
(h)
The officer should examine whether goods have been
utilised for non-business purpose and if so whether
liability to reverse tax has been conceded.
(i)
The officers should also examine whether the deduction
claimed as discounts is actually permissible.
(j)
The audit team should verify the invoice to see
whether the rates applied are correct.
(k)
The team may take extracts from the accounts or
other records which, in the opinion of the officer,
are to be included in the dealers folder.
(l)
The officer should verify whether the dealer is
adopting any dubious methods for evading tax which,
in the opinion of the officer, would necessitate
a further detailed investigation or inspection.
In such cases the officer should not seek any clarification
from the dealer (as evidences may be lost) nor should
he mention anything in the reports. This should
be kept confidential for further confidential investigation
or for making any surprise inspection. However,
such matters should be reported in writing to the
immediate superior and the Dy. Commissioner (Audit
Asst)
(m)
The Audit officer should also inspect the stock
of goods, verify the receipt, and consumption of
raw materials, records relating to placing and receipt
of orders for goods etc.
(n)
Any other useful information concerning the dealer
should be noted.
(o)
On conclusion of audit the Audit officer should
again meet the person in authority and thank him
for the cooperation. He should also be informed
of the defects noted during audit and the stepsto
be taken for rectification. Indications about malpractices,
forgery etc noticed should not, however, be given,
since further verification or investigation may
be adversely affected.
The
officer should give a report on audit to the Dy.
Commissioner (Audit Assmt) concerned.
(9)
Audit Assessment
(i) All cases audited may not lead to assessment.
Section 24 of the Act provides for audit assessments
only when any discrepancy is noticed in audit.
The second proviso to sub-section (1) of section
24, newly inserted by the Kerala Value Added Tax
(Amendment) Act, 2005, gives an option to a dealer
to avoid audit assessment by filing revised returns
and paying the balance tax, interest and thrice
the interest as settlement fee in cases where the
defect noticed in audit is only application of
wrong rate of tax, wrong claim of input tax credit,
special rebate or refund. When no irregularity is
noticed in audit, the officer will give a certificate
of audit in Form No.18B to the dealer concerned
on the report of audit being accepted by the Dy.
Commissioner (Audit Assmt).
(ii) Audit assessment under section 24 will be
justified in the following situations:
·
Where the details furnished in the return are found
to be incorrect, either because output tax reported
is too low or because input tax claimed is too high.
·
Where the dealer cannot produce records to substantiate
the sales or purchases or claims of input tax, special,
rebate, exemption or refund.
·
Deduction is claimed in respect of discount where
discount had not actually been given or where the
discount is not allowable.
·
Exemption has been wrongly claimed or where taxable
sales are misclassified as non-taxable sales.
·
Goods are appropriated for non-business purposes;
but no reverse tax is admitted.
(iii) The procedure prescribed under section 24
read with Rule 39 shall be strictly followed in
completing the assessments.
(iv) Assessment of escaped turnover under section
25, protective assessment under section 26, and
the assessments under sub-sections (3) and (4) of
section 48 shall also be done by the Audit Officers.
(v) The Intelligence /Investigation wing shall inform
the Asst. Commissioner (Audit Assmt) about materials
gathered by them through shop inspection, vehicle
checking, extract verification and other investigation
on detection of such cases and also forward the
records of the cases on completion of the proceedings,
under intimation to the Dy. Commissioner (Audit
Assmt.). The Dy. Commissioner (Int.) concerned
will ensure that the processing of such cases is
not delayed beyond three months except with the
approval of the Dy. Commissioner (Int) concerned
for justifiable reasons.
(vi) The Dy. Commissioner (AA) shall exercise his
jurisdiction U/s 24(2) of the Act. Accordingly,
he may, on his own motion or on a reference being
made by the assessing authority or on an application
of an assessee, call for and examine the record
of any proceedings in which an assessment is pending
and if he considers that, having regard to the nature
of the case or the amount involved or for any reason,
he may issue such direction as he thinks fit for
guidance of the assessing authority to enable him
to complete the assessment. Such direction shall
be binding on the Assessing authority both in the
VAT Circles and Audit Assessment Wing. While exercising
this jurisdiction, if any question of law arises,
he may, if necessary, refer the matter to the Commissioner
for directions.
(vii) The Audit Officers shall forward all proceedings
pertaining to assessment and penalty together with
the connected records to the concerned VAT Circle
for recovery of tax, penalty and other amount due
under the Act within 7 days of the date of acknowledgement
of the order and demand notice by the dealer concerned..
(viii)
The officers of VAT Circles shall enter the demand
created, both under VAT Circles and Audit Assessment
Wing, in the register of Demand, Collection &
Balance and initiate action to collect the arrears.
The details of assessment and penalty proceeding
completed by the VAT Circles as well as the Audit
Officers shall be reported to the undersigned through
the DC/DC (AA) as the case may be.
(10)
The Dy. Commissioners (Audit Assmt) shall prepare
their audit plan for three months commencing from
September 2005 onwards immediately and personally
discuss with the undersigned before finalising the
same.
5. The capacity building of the audit wing can be
achieved only through continuous evaluation of the
results achieved and exchange of information amongst
the officers of the Audit Wing. Each Dy. Commissioner
(Audit Assmt) shall arrange a group discussion by
audit officers working under his jurisdiction every
month. Various methods of evasions detected and
the kinds of defects noticed shall be discussed.
The discussion shall be held on the 15th
working day of every month. The Dy. Commissioner
(Audit Assmt) shall include a brief note on the
discussion in his monthly D.O.letter to the Commissioner.
6. The functioning of each wing of the department
is complementary to each other. Increase in the
overall efficiency of the department can therefore
be achieved only through regular interaction among
officers of the different wings of the department.
The officers of the VAT Circles, audit and intelligence
wings in each district will meet once in a month
and discuss issues which affect the effective functioning
of the respective wing. This meeting will be held
on the same day on which the Dy. Commissioner holds
his monthly conference which shall be on the tenth
working day of every month. Officers of the cadre
of Asst. Commissioners and Commercial Tax Officers
of the VAT Circles, Audit Assessment Wing and Intelligence
and Investigation Wings will invariably attend the
meetings held at the place where they are stationed.
The Dy. Commissioners (Audit Assmt) and Dy. Commissioners
(Int) shall attend such meetings in each district
coming under their jurisdiction, once in three months.
The Asst. Commissioner (Audit Assmt) and the Inspecting
Asst. Commissioners (Int) and the Inspecting Asst.
Commissioners (IB) shall report the result of such
meetings to the Dy. Commissioners concerned. The
Dy. Commissioners of the districts shall include
a note on such interactions in their monthly D.O.
letter to the Commissioner.
7.
This circular is meant for circulation among the
departmental officers only and not to others.
8.
The District Dy. Commissioners, Dy. Commissioner
(Audit Assmt) and Dy. Commissioners (Int) shall
acknowledge the receipt of this circular and circulate
this among the officers of the respective wings.
Sd/-
Commissioner
