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Detailed Manual Scrutiny of Service Tax Returns
December, 18th 2015

Central Board of Excise and Customs introduced self-assessment of Central Excise duties payable in 1996 and for Service Tax in 2001. With the introduction of self-assessment, the department also provided for a strong compliance verification mechanism through scrutiny of returns/assessments, internal audit and anti-evasion. The procedures for carrying out detailed scrutiny of returns was laid down by the Board vide Circular No. 113/07/2009-ST dated 23.04.2009. However, with the introduction of the Point of Taxation Rules, 2011 and the advent of negative list-based comprehensive taxation of services in 2012, it becomes necessary that the guidelines for detailed scrutiny of returns needed a revision. In this background, the CBEC vide Circular 185/4/2015-Service Tax dated 30th June, 2015 has outlined the manner of detailed manual scrutiny of ST-3returns to be effective from 01.08.2015.

Preliminary Online Scrutiny:- The purpose of preliminary scrutiny of returns includes ensuring the completeness of the information furnished in the returns, arithmetic correctness of the amount computed as tax and its timely payment, timely submission of the return and identification of non-filers and stop-filers. On the basis of the validation checks incorporated in ACES by the Directorate General of Systems & Data Management (DGS&DM), preliminary scrutiny of all returns is done online in ACES and the return having certain errors are marked for Review and Correction (Rnc). These have to be processed accordingly by the Range Officers.

Scope for Detailed Manual Scrutiny:- The purpose of detailed manual scrutiny of returns is to ensure the correctness of the assessment made by the assesse. This includes checking the liability of the service, the correctness of the value of taxable services in terms of Section 67 of the Finance Act, 1994, read with theService Tax (Determination of Value) Rules, 2006 and the effective rate of tax after taking into account the admissibility of an exemption notification, abatement or exports, if any; ensuring the correct availment/utilization of CENVAT Credit on inputs, capital goods and input services in terms of the CENVAT Credit Rules, 2004, etc. In doing this, the proper officer must rely mainly on assessment-related documents like agreements/contracts and invoices. Detailed financial records should not be called for in a routine manner.

Selection of Returns for Detailed Scrutiny:- The focus of detailed manual scrutiny of the returns would be on the returns of those assesses which are not being audited. The detailed return scrutiny would be conducted in respect of such assesses whose total tax paid (Cash+CENVAT) for the FY 2014-15 is below ₹ 50 lakhs. Each Commissionerate has to select equal number of assesses for carrying out return scrutiny from each of these three total tax paid bands (Cash+CENVAT) viz., ₹ 0 to ₹ 10 lakhs, ₹ 10-25 lakhs and ₹ 25-50 lakhs for the financial year 2014-15.

The assesse who have been selected for audit or have been audited recently (in the past three years) should not be taken up for detailed scrutiny. However, the Chief Commissioner may direct detailed manual scrutiny of an assessee’s return who has paid service tax (Cash + CENVAT) more than ₹ 50 lakhs in certain specific cases. In no event should an assessee be subjected to both audit and detailed manual scrutiny.

Methodology:- Detailed scrutiny of returns must be conducted by the Service Tax Range headed by the Superintendent and assisted by a complement of inspectors. However, the Divisional DC/AC shall be responsible for the overall supervision of this business process in respect of his/her division. Before return scrutiny is initiated, the assessee must be given prior intimation of atleast fifteen days and the purpose of the exercise must be spelt out in an Intimation Letter in a prescribed format. Returns scrutiny must be done for a complete financial year by looking at two half-yearly returns in conjunction. To begin with, the returns for the financial year 2013-14 shall be taken up for detailed scrutiny.

One of the important objectives of return scrutiny is to ensure validation of the information furnished in the self-assessed ST-3 return. The validation exercise would require reconciling information furnished in the ST-3 return with ITR Form Nos. 4, 5, 6 and 26AS and any third party information made available. In addition to this, the scrutiny exercise must also look at the correctness of self-assessment with respect of taxability, admissibility of abatement and eligibility for exemption, valuation and CENVAT credit availed/utilized. For achieving the stated objectives, the checks have been categorized as follows:

  • Reconciliation for validation of the information furnished in the ST-3 returns;
  • Taxability in respect of services which may have escaped assessment;
  • Classification (for the purposes of due availment of abatement/exemption benefit;
  • Valuation; and,
  • CENVAT credit availment/utililsation.

The scrutiny officer must record his findings under each of the subject of the checklist as mentioned above. It is possible that the officer may come across some issues which may have to be referred to audit or anti-evasion. While some cases may take time, the scrutiny process of an assessee should be completed in a period not exceeding three months.

Even after the introduction of GST, it may be appreciated that the basic principles of scrutiny of returns and reconciliation of records would remain the same.

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