The Board vide Circular No. 113/07/2009-ST had laid down the procedure for carrying out detailed scrutiny of Service Tax Returns (ST-3) and had circulated a return scrutiny manual for Service Tax.
However, with the introduction of Point of Taxation Rules, 2011 and advent of Negative List in July, 2012, CBEC has now revised the instructions on detailed scrutiny of ST-3 returns, with effect from 01.08.2015 vide Circular No. 185/4/2015-ST dated 30.06.2015.
The Board Circular states, "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." The Department wants to extend this to GST.
The following is the gist of guidelines issued for manual scrutiny for understanding and guidance.
Preliminary Online Scrutiny:
The purpose of preliminary scrutiny of returns includes :
ensuring the completeness of the information furnished in the return,
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.
Scrutiny is done online in ACES and the returns having certain errors are marked for Review and Correction (RnC).
These have to be processed accordingly by the Range Officers.
Detailed Manual Scrutiny
The purpose of detailed manual scrutiny of returns is to ensure the correctness of the assessment made by the assessee.
Checking the taxability of the service,
The correctness of the value of taxable services (Section 67 of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006 ) and ,
The effective rate of tax after taking into account the admissibility of an exemption notification (25/2012-ST), abatement (26/2012-ST), or exports (Rule 6A) , if any; ensuring the correct availment/utilization of CENVAT Credit in terms of the CENVAT Credit Rules, 2004, etc.
For scrutiny, 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.
A Return Scrutiny Cell should be created in the Commissionerate Headquarters. The Return Scrutiny Cell shall maintain the records of the assessees and the returns which are selected for detailed scrutiny and also the results.
A Checklist has been prepared for carrying out detailed manual scrutiny of selected ST-3 returns. For achieving the stated objectives, the checks have been categorized as follows:
Reconciliation for validation of the information furnished in the ST-3 return;
Taxability in respect of services which may have escaped assessment;
Classification (for the purposes of due availment of abatement/exemption benefit);
CENVAT credit availment/utilization.
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 at least fifteen days and the purpose of the exercise must be spelt out in an Intimation Letter.
Validation of the information furnished in the self-assessed ST-3 return is required which includes reconciling information furnished with ITR Form Nos. 4, 5, 6 and 26AS and any third party information made available.
The risk parameters and the risk tools which would govern the selection of the returns for detailed manual scrutiny have been developed. The risk scores for the Service Tax returns for the financial year 2014-15 have been calculated. The data has been segregated on the basis of Zone/Commissionerate/Division/Range. The data resides with DGS&DM which will be shared with the Service Tax & Central Excise field formations through secure data exchange.
Eligibility / Selection
The list of returns to be taken up for detailed scrutiny would be finalized by the Additional/Joint Commissioner in-charge of Division (or in his absence by the Commissioner).
Main focus on small assessees whose total tax paid (Cash + CENVAT) during FY2014-15 is less than ₹ 50 lakhs, though on the direction of Chief Commissioner, scrutiny of ST-3 can be made of assessee whose monetary limit exceeds ₹ 50 lakhs. Each Commissionerate has to select equal number of assessees for carrying out returns scrutiny from three tax paid bands viz: ₹ 0 to ₹ 10 lakhs, ₹ 10-25 lakhs and ₹ 25- 50 lakhs for the FY 2014-15.
The assessees who have been selected for audit or have been audited recently (in the past three years) should not be taken up for detailed scrutiny. In no event should an assessee be subjected to both audit and detailed manual scrutiny.
All the officers should maintain strict confidentiality regarding the Risk Score data including the original score, further selection by the Commissionerate, etc. Under no circumstances it is to be shared with the assessee or any other authority since this is information available in a fiduciary relationship, pertaining to a third party, and which may entail further investigation.
Scrutiny process should be completed in a period not exceeding 3 months.
In order to ensure transparency of the scrutiny process, it is important to document the findings flowing from the scrutiny effort. For this purpose, an Observation Sheet should be prepared. The scrutiny officer must record his findings under each of the subject of the checklist namely, reconciliation, taxability, classification, valuation and CENVAT credit. Under each of these heads, the officer should record any action that needs to be taken by the Range. The findings should clearly outline the process of scrutiny that led to the outcome.
All scrutiny findings in a month must be discussed in a Monthly Scrutiny Monitoring Committee Meeting headed by the Additional/Joint Commissioner in-charge of the Division (or in his absence by the Commissioner) where each Range should present their scrutiny findings in the form of a 'Scrutiny Report' . The meeting should be attended by all the Range Inspectors, Superintendents and DC/ACs of the Divisions whose supervisory control is with the said ADC/JC. This would provide an opportunity to the officers from other Ranges to respond to the findings and also share best practices. The views of the committee on the return scrutiny findings must be documented and follow up action taken. Important issues may be put up to the Commissioner for information.