Telecom firms Vodafone Essar Digilink Ltd and Bharti Airtel Ltd will be examined by special auditors for wrongfully availing of Cenvat (Central value-added tax) credit and non-payment of service tax in the Uttar Pradesh (UP) circle, an official said.

This is a special audit covering all aspects of audit with a focus on wrongful availment of Cenvat credit by the two companies, Suchitra Sharma, commissioner, Central excise and service tax, Lucknow, said. Sharma also said that while the Central excise commissioners office undertakes routine audits of companies, this is a special one that will be done by an outside agency.

Cenvat is an input tax on the purchase of raw materials and capital goods. Service providers in India are entitled to claim a set-off of various input levies (such as excise and countervailing duty) on the purchase of capital goods and inputs used in producing output services. This set-off, claimed from the government, is commonly known as Cenvat credit.

Bharti Airtel said the notice was a routine one and that it was compliant with all rules.

At Bharti Airtel, we strictly follow all statutory, regulatory and fiscal guidelines. We have received a letter from the Lucknow office of the Central excise department on the utilization of Cenvat credit in Uttar Pradesh. This is a routine inquiry and the company will comply with all requirements as per law, said a spokesperson.

Vodafone Essar Ltd, which owns Vodafone Essar Digilink, declined to comment on the issue. A Vodafone executive, who didnt want to be identified, said the company hadnt received any notice.

The special audit in the case of Vodafone and Bharti will essentially look into the aspect of leakage of revenue that has been found in the books of accounts of these companies, said a professional close to the development, who did not want to be identified.

A team of cost accountants will look into the books of these companies for five years. In a similar inquiry for the Delhi circle earlier this year, a recovery of Rs125 crore was made.

Sharma said the government has already completed its own audit and had hired professionals for a closer look at the accounts.

The lack of clarity in the definition of capital goods under the Cenvat credit rules has been creating confusion, especially for telecom operators, according to Siddharth Mehta, senior manager (indirect tax) at audit and consulting firm KPMG.

Although I am not aware of this particular audit, telecom service providers have been facing problems in interpreting what qualifies for Cenvat credit and what does not both under capital goods and inputs, he said. For instance, while some service providers consider facilities such as towers and shelters as capital goods, the rules do not consider them as capital goods on a strict interpretation.

Mehta also said the broad objective of the credit scheme under Cenvat in principle is that credit to service providers be available for all goods used in providing taxable services.

The way out now is implementation of the goods and services tax (GST), under which the credit regime is expected to be liberal and applicable to all business activity, he added. The Union government wants to implement a uniform GST across the country by 1 April, a step thats being resisted by some states.

The department of telecommunications (DoT) already has audits running on the two firms along with other major incumbent operators Idea Cellular Ltd and Tata Teleservices Ltd after the Telecom Regulatory Authority of India suggested this be done. All the reviews pertain to fiscal 2007 and 2008. The audits were called after brokerage firms pointed to some discrepancies in revenue reported by Reliance Communications Ltd (RCom). RCom has disputed the findings of the DoT-ordered special audit.

At the end of September, Bharti Airtel, Indias largest telecom firm, had 7.2 million of its 110 million total mobile subscribers from the UP (east) operating area. Vodafone Essar had 8.2 million mobile subscribers from this operating area out of its total 82.8 million subscribers.