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« Indirect Tax »
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Indirect Tax Impact - Tax Audit - AY 14-15
August, 19th 2014
 

The tax audit under Income Tax has undergone a change. There are already a number of compliances which professionals felt was asking for too much. In this amendment additional disclosures/ duties of judgment/ reporting have been additional thrust on the auditor. Assessees may not be too concerned as they are of the view that it is the auditor’s headache. In the view of the paper writers this would add a few days more of work. We understand the ICAI is making representation to postpone to the next year or at least provide a few more months. We may have to wait for some time to get authentic information on what would happen. The guidance note by ICAI may also be issued by the end of this month.

However this is an opportunity to add value to the client who may till date not be aware and not complying, exposing himself to great risk. It could also ensure that the benefits available under the law are suggested for client to avail. Also an opportunity to make a difference and change in perception of the auditor from cost to value.

In this booklet we examine the Indirect tax Impact.

This would need to understand some of the important activities/ events when the liability under the taxes arises.

Part - I – Basic Understanding of Indirect Taxes

Part- II – Clauses in Tax Audit Report and their connection to IDT

Part- III – Possible Errors and Disputes in major Taxes/ Duties

Part – IV – Old Format Vs New - Comparison

Part - I – Basic Understanding of Indirect Taxes

Background / Concept of IDT

Indirect Tax unlike direct tax is as the name suggests borne by somebody else. Normally the consumer of the goods or services bears the impact. In most contracts the burden is shifted to the consumer/ user unless contractually all taxes are included in the price agreed. [ Not a very prudent method from the dealer/ manufacturer/ service providers point of view] Everybody rich or poor buying the goods or availing the services pays the same amount. It is directly inflationary as cost of goods/ services increases to extent of net tax payable.

The total direct tax is expected to be ₹ 7,45,000 Crores. indirect taxes for this year for the centre could be about:

Service Tax- ₹ 2,20,000 crores Central Excise – ₹ 2,00,000 crores

Customs Duties – ₹ 1,80,000 crores.

For the States

CST/ VAT – ₹ 700,000 Crores [ All States together]

State Excise – Info not available.

Entry Tax ( Octroi – Maharastra) , Profession Tax, Entertainment Tax, Luxury Tax – maybe around 10-15% of VAT/CST. – ₹ 100,000 Crores for the Country as a whole.

Total Direct Taxes = 745,000 cr Vs IDT = 1400,000 Cr. Almost Double !!

We have examined based on the quantum and impact the relevant provisions under 10 major indirect tax Laws. Some important methods to determine the same are also discussed to enable the Tax Auditor to report as under:

  1. VAT
  2. CST
  3. Service Tax
  4. Central Excise Duty
  5. State Excise Duty
  6. Customs Duty
  7. Entry Tax
  8. Luxury Tax
  9. Entertainment Tax
  10. Profession Tax

Clause 4 of the 3CD – Whether the assesse is liable to pay indirect taxes?

The basic understanding of the indirect tax laws is necessary now to be able to discharge the duty as Tax Auditor for answering this question. It is possible that the ICAI may issue a guidance note which would avoid reporting on this and that would be a defense if this question is raised.

  1. VAT : Value Added Tax is a tax on the value added to a commodity at each stage of production or distribution till final consumption within a State. Entry 54 of State List- II of VII Sch of Constitution of India sets out that tax on sale or purchase of goods other than newspapers is within the power of the individual States.

Restricted to sale or purchase intra- state and would exclude goods sold/ purchased in the course of import or export out of India. This is a multi point tax. Invoice Price and Tax Credit method is followed in all Sates in India. In this system the tax is imposed on the gross sales value. The payment is after deducting the tax paid within the State on all inputs/ goods.

Therefore it is imperative that the manufacturer/ dealer procure goods from within the States under a valid tax invoice to ensure optimising his taxes.Procurement from outside the State under CST would lead to a cost as no credit is available.

The net VAT payable is after availing the Input Tax credit on capital goods and inputs or traded goods purchased within the States. Some restriction on goods ( not eligible) and some reversal for usage other than for sale at certain %ages have been specified in each state.

CST: The tax is on the value of all sales of goods other than electrical energy in the course of inter state trade or commerce. Entry 92-A of Central List- I of VII Schedule to Constitution of India empowers the centre to charge. The States have been allowed to collect and utilise these collections.

CST would not be levied for sale or purchase within a State, sale to diplomatic missions / Un, penultimate export( sale just before the export), sale in the course of import or export outside India and subsequent inter state sale( E-1/ E2 – transactions).No credit is available though the VAT laws allow usage of VAT credit for payment of CST.

Important Terms in CST/ VAT:

Sale means any transfer of property in goods by one person to another for cash deferred payment or for any other valuable consideration.

It also includes “deemed sales” which are:

  1. Transfer otherwise that in pursuance of a contract- compulsory acquisition.
  2. Transfer of property in goods ( whether a goods or in some other from) involved in execution of works contract – construction of building, erection of plant or machinery, powder coating, re-treading of old tyres etc.
  3. A delivery of goods on hire purchase or installment basis – Buying of TV/ mobile/ vehicle on payment of down payment of 10% and rest in monthly installments where control, possession and use provided to the buyer, with no intention of taking back.
  4. A transfer of right to use any goods for any purpose( whether or not for a specified period) – payment of monthly rental for a machine, vehicle, shuttering material where ownership still with the hirer. Here the control and possession needs to be parted to the customer.
  5. Sale to unincorporated association or body of persons to members of that body – Sale of food and drinks in a recreational club.
  6. Supply or Sale of foods and drink – Restaurant, hotels, outdoor catering.

Note: Sale would not include the consumption of goods/ inputs while providing a service where the dominant object is provision of service. Examples could be use of medicines by doctor in consultation, use of stents in heart surgery, use of explosives in quarrying contract, use of paper in printing of photographs,

Goods are defined to mean all materials, articles, commodities and all other kind of movable property but do not include newspapers, actionable claims, stocks shares and securities.

The major areas of dispute / errors under CST/ VAT are provided vide Annexure- 1. The auditor may share with the client on record as also get an assurance that the law has been complied with.

Specific Demonstration of Due Care

  1. Verify the Nature of Income Received by Assessee and broadly decide whether he is covered under VAT Law. Sometimes there may be a chance that the assesee is also covered under both VAT and Service Tax. It is pertinent to note that the Assessee might not have Sales Turnover but still he may be liable for VAT in respect of Purchases from Un-registered Dealer.
  2. Obtain reconciliation of tax paid rate wise as per the returns filed and compare with the turnover as finalized.
  3. Obtain reconciliation of input tax credit claimed and compare with the credit as indicated in the finalized the financials.
  4. Broad calculations on whether the figures are reasonable as compared to previous years.

In case of variations, depending on impact- observed, reported or qualified report maybe decided.

The Possible Errors/ Disputes in this area are provided for reference in Annexure – 1

  1. Service Tax: Service Tax is a tax on provision of services for a consideration from one person to another. It is also a value added tax at each stage of service and is a destination based consumption tax akin to VAT. It is applicable to all activities other than those which are excluded in the definition of “services” or set out in negative list and includes those set out in the declared services. The declared / deemed services are:
  1. Renting of immovable property- letting out of commercial space, leasing of factory as a whole.
  2. Construction contracts- The incomplete portion of such contracts for which monies are received before the completion.- single sale of apartment in progress.
  3. Works Contract-service portion – Agreement to construct, repair, job work with material.
  4. Temporary transfer or permitting use or enjoyment of Intellectual Property Rights- Know How, trademarks, designs etc. Some overlap with VAT exists in this entry leading to double taxation.
  5. Services relating to Information Technology Transfer- While a tangible sale of software would be ONLY liable to VAT, the customization, provision of services to troubleshoot, design, download electronically, access rights would also be liable under this entry. Again as in IPR there is a possibility of double taxation due to non resolution of issue between centre and States.
  6. Agreeing to the obligation to refrain from an act or tolerate an act or a situation or to do an act- Maybe only transactions in economic sphere would be covered here such as non compete fees.
  7. Hire purchase transactions and financing transactions on the part which is administrative or management fee other than interest.
  8. Transfer of goods by way of hiring- In this case where the effective control and possession of movable property is not given to the customer it is said to be service. Transportation of employees by way of hiring of buses with drivers, providing of a bull dozer along with the operator.
  9. Service portion in an activity of supply of food in restaurant, outdoor catering etc. This entry also overlaps with the State VAT and is presently under challenge.

42 exemptions are provided in the MEGA exemption in addition to a few other general exemptions such as small service provider of ₹ 10 lakhs.

Normally the pure transactions of transfer of title to an immovable property or movable property are excluded as they are a subject matter of State levy.The deemed sales (referred to above- VAT sections) are also similarly excluded. The service of employees to employers has also been excluded specifically in addition to fees taken by courts and arbitral tribunals.

In the case of certain services, the service receiver has been made liable to pay the tax where the Revenue failed to collect from the provider:

  1. Goods Transport Agent ( As differentiated from a truck owner/ operator) – 25%
  2. Services received from a person outside India as per the Place of Provision of Service Rules. – 100%
  3. Sponsorship- 100%
  4. Insurance intermediaries – 100%
  5. Services from Arbitral Tribunal- 100%
  6. Services from Advocates other than business entities – 100%
  7. Services from Government/ local authority as specified – 100%
  8. Director of Company or body corporate- 100%
  9. Recovery agents for banks/ financial institutions- 100%

Post 1.7.12 when the negative list was put in place the liability for all activities which are not fully liable for VAT would have to be examined whether fitting into negative list or in exemptions. If not there would be a presumption that they are liable to tax. The joint charge mechanism was also introduced where both the provider as well as the receiver is liable:

  1. Manpower Supply – Prov- 25% - Rcvr- 75%
  2. Security services– Prov- 25% - Rcvr- 75%
  3. Works contract– Prov- 50% - Rcvr- 50%
  4. Renting of motor vehicle- where capital goods credit availed by provider – 60% - Pcvr- 40%
  5. Renting of MV where credit not availed- Provider – Nil – Recvr- 40%

The negative list deals with mainly the activities in the state list [ trading, entertainment, manufacture, betting, toll) as well as activities such as education, agriculture, transportation of goods/ passengers, governmental, distribution of electricity, dwelling units, funeral/ crematorium/ mortuary services.

The Exemptions are varied and some are reasonable and in public interest or to avoid unnecessary disputes. However many transactions which should have been exempted are yet ot be notified.

The activities which are specified as declared services, those that not excluded, not in negative list or not specifically exempted would be liable to tax,

The valuation of services is normally on the gross amount and for some services abatements ( deductions) have been specified subject to conditions. The pure reimbursements have been kept out of the value of services but allocated expenses, sharing with margins are liable to tax.

The cenvat credit on capital goods used for providing a service would be available even if used partially for that taxable activity. The inputs used for providing service are eligible. However where the service provider avails an abatement, he needs to check the availability. Input services used for provision of services are also available with restrictions. All inputs and input services are NOT eligible.

The Possible errors/ disputes in service tax is provided vide Annexure-2 to this booklet.

  1. Central Excise Duty: The duty is attracted when excisable goods are manufactured ( including deemed manufacture) in India and removed for home consumption( other than for exports).

Important Terms:

Goods are articles material or substances which are capable of being bought and sold for a consideration. They should be movable- i.e. not immovable as in fixed permanently to the earth or fixed permanently to such permanent strcuture0- such as a central air-conditioning plant erected in a building. They should also be marketable – capable of being sold. Almost everything is capable of being sold.

Excisable Goods: Goods specified in the central excise tariff ( 96 chapters based on the Harmonised System of nomenclature) Again except for waste and unworkable machines/ parts almost all items are in the CET.

Manufacture: Includes conversion of a product into another by processing, assembly. A becomes B. For specified items under the Indian metrology Act ( mainly for Fast Moving Consumer Goods and White Goods) even the processes of packing, repacking labelling, branding, ….. as specified in the Chapter Notes of CET would also be deemed to be manufacture. For the items in the Third Schedule of the CET ( mainly the same as under deemed manufacture + a few) the activity of packing repacking and in addition , declaring the MRP or altering of the MRP is deemed to be manufacture.

A person who conducts the above activities whether the owner of the goods or not is a manufacturer. He would consequently be liable to pay duty. Therefore pure job workers/ processors could become liable. It is interesting that in such cases, he would be liable on the sale price of the customer or if captively consumed by the customer then on the value of goods + the job work charges.

Classification : The CET provides the classification of goods based on which the rate as well as exemption if any could be determined. There are a few interpretational rules as well as decided case laws on most products. The normal rate is 12.36% today and since exceptions are few- classification disputes are few.

Exemptions are normally based on the essentiality looking at the public good, location and end use for defense or research. The major exemption is the Small scale exemption which is available if the previous year value of clearances ( as differentiated from turnover) is less than 400 Lakhs. The exemption however is restricted to ₹ 150 Lakhs after which one would have to pay the duty as applicable and could also avail the cenvat credit on the stocks in hand. This exemption is also not available to manufacture of branded goods unless one is in a rural area.

The other major exemption is the job work exemption ( Not 214/86, 84 and 83/94, 70/92 63/95…) In all these notifications the sender is made responsible to pay or law allows neither to pay. Where goods are received without any exemption the job worker would be liable.

Valuation: The valuation of excisable goods is based on transaction value ( invoice value) as long as the goods are sold at arms length and no additional consideration exists. When it is not then the valuation rules would have to be applied. Some of the FMCG products are specified as under MRP where the value of sale is not important and on removal the duty would be payable based on the MRP less abatement specified. Some goods are under capacity based levy and on tariff value though the numbers would be few.

Cenvat Credit for the manufacturer is much more liberal than for service providers though both pay the same rate. However the majority of disputes in central excise are on account of allegation of excess/ ineligible credit availment. Rule 6(3) which requires reversal of input/ input service credit used commonly for manufacture of exempt/ dutiable goods or exempt/ taxable services has been most commonly done inaccurately. Capital goods credit being taken along with depreciation on the credit amount under Section 32 or 32AC of the ITA would disentitle the credit.

Removal of manufactured goods is necessary for duty to be attracted. Goods removed to depots/ consignment agents. Stock transfer would all be liable to duty of excise. Moulds and deis which are manufactured by the job worker/ supplier of manufactured parts need not be removed on payment of duty as they are not removed in normal course at all.

  1. Customs Duty: The levy of customs duty is on import or export of goods under entry 83 of List I of VII schedule of Constitution of India. The customs law seeks to prevent import of undesirable products and regulate some specified products. The large majority of products are however freely importable on payment of the appropriate duty of customs. Duty is payable as on the date of filing of Bill of Entry and not on the date when the good enter India. At times due to cash flow / business constraints the importer is allowed to warehouse the goods and would file bill of entry as and when required and pay the duty at such times.

Exports Duty is normally not there except for products like ores or those that the country does not wish to encourage such as onions/ rice / sugar etc for the time being. This can keep changing depending on the policy/ situation.

Export benefits: Normally exported goods are eligible for a number of incentives in the form of duty free imports, rebate of local duties and taxes paid, duty drawback, Focus market scheme, Focus product scheme, Served from India scheme, Status Holder Incentive Scheme for larger exporters. Many times these benefits are not applied for or followed up on.

The components of the duty are: Basic Customs duty- acts as a barrier and protects the domestic industry. However over time this has come down for most goods to 10%. The next component is the additional duty of customs which is equal to the central excise duty applicable to same goods. This acts as ensuring a level playing field for imported products as in most countries no taxes are allowed to add to the cost of goods exported. The rate would also be normally 12%. Other than this there is a special additional duty to offset the sale tax/ vat impact which is at 4%. This can be refunded for the trading activity as the same suffers the CST or local VAT.

There are some protective duties such as anti dumping duty, safeguard duty which are to protect against dumping at below cost by the exporting nations or when the proportion of import can cause damage to the Indian manufacturers.

Classification and Exemptions principles are same as central excise duty though the philosophy maybe different. Ex- Rate of parts would be lower than the rate of finished items to encourage the manufacturing activity in India. The rates of customs duty are more variable as compared to excise duty with favourabel rates for imports from countries with whom India has bilateral ties.

Valuation under customs considers the comparable prices of same/ similar goods.

At times the import is done under a condition and if not met then the duty along with the interest and penalty would lead to a significant cost. This can happen in the following cases:

  1. EPCG – Import at 3% or 0% based on fulfilling export obligations.
  2. Many EOUs end up with less exports than planned and therefore may not be able to meet their export targets and keep postponing the compliance.
  3. Goods imported under advance license to be used strictly only for export of goods can be used for domestic production and would have to suffer the duty.

Cenvat Credit: The cenvat credit for the manufacturers as well as service providers is available on the additional duty of customs ( also called CVD) which is normally 12%. The special additional duty of 4% however is ONLY available to the manufacturer.

  1. Entry Tax

The Karnataka Government has enacted the Karnataka tax on Entry of Goods Act, 1979. The Act has come into effect from 01, October 1980 which extend to whole state of Karnataka.

Definition of Entry Tax

Entry tax is a tax levied on entry of any notified goods from any place outside the State into the limits of state of Karnataka for the purpose of either consumption or use or sale.

The tax shall be payable on the cost of goods in the state. Cost includes purchase value of the goods, insurance, excise duty, countervailing duty or any other duty, sales tax, transport fees, freight charges and all other charges levied on such goods.

Threshold limit: The threshold limit for payment of tax is five lakhs rupees and the tax shall be payable only by the dealers other than dealers who are manufacturers and dealers who do not bring any goods from outside the state.

Basis of Levy: The taxable event under this act ‘Entry of goods into the state’ for consumption, use or sale which means entry tax is applicable only when title of the goods is transferred or the goods cease to exist in its original form.

Goods brought into the limits of the taxable territory and sold outside the state or exported from the country, then goods are not taxable to Entry Tax.

Presently the Following Commodities are coming under the ambit of Entry Tax:

Sl.No

Commodities

Rate of Tax

  1.  
  1. Crude Oil

1

 
  1. Petrol

5

 
  1. Diesel

5

 
  1. Super Light Diesel Oil

5

 
  1. Furnace Oil

5

 
  1. Naphtha other than for use in manufacture of fertilizers

5

 
  1. Rectified spirit, Neutral Spirit, Ethyl Alcohol

4

 
  1. Petroleum Products i.e. to say
    1. Lubricating Oil
    2. Transformer Oil
    3. Brake Fluid or Clutch Fluid
    4. Bitumen(Asphalt)
    5. Tar and Others

Excluding Liquified Petroleum Gas (LPG), Aviation Fuel and Kerosene

5

  1.  

Sugar other than levy sugar, confectionary and the like

1

  1.  

Textiles namely, cotton woolen or silk or artificial silk including rayon or nylon and other man-made or synthetic fabrics manufactured in mills or power looms and hosiery cloth in length, and including fabrics coated with or impregnated with PVC or cellulose derivatives (whether or not manufactured in mills or power looms)

 
  1.  

Tobacco Products, of all description including cigarettes, cigars, churuts, zarda, quimam, etc, but excluding Snuff

 

2

2

  1.  

Machinery of all kinds and parts and accessories thereof but excluding agricultural machinery

2

  1.  

Films of all kinds including X-ray films and photographic paper

5

  1.  

Lifts and elevators (whether operated by electricity or hydraulic power) and parts and accessories thereof)

5

  1.  

Raw Material and Inputs, which are used in the manufacture of Tobacco Products and Liquor

1

 

When goods specified in Sl.Nos, 2, 3, 5, 6 and 7 above are brought into a local area for consumption or use as raw material, component part and input in the manufacture of either an intermediate or finished products other than for use in manufacture of tobacco products and liquor, no tax thereon is attracted in terms of Explanation I to the Notifcation No.FD 11 CET 2002, dated 30-3-2002

Likewise, goods purchased within the limits of the Local Area do not attract Entry Tax as there is no entry of goods affected by the purchaser. Determination of Local Area assumes significance like for example two different Municipal Area of two Cities situated within the State of Karnataka constitute two different Local Areas.

Exemption is also available in case the goods have suffered entry tax in one local area subject to providing of Form -40 by the supplying Dealer to the effect that those goods have already suffered entry tax.

Other Miscellaneous Indirect Taxes [ Collated Information ONLY]

State Excise Duty:

State excise duty is levied by the State Government by virtue of the powers derived from Article 246(3) of theConstitution read with entry 51 of the second list (state list) of the seventh schedule thereto. This entry reads as follows:

“duties of excise on the following goods manufactured or produced in the state and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:-

  1. Alcoholic liquors for human consumption;
  2. Opium, Indian hemp and other narcotic drugs and narcotics.

But not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.”

THE KARNATAKA EXCISE ACT, 1965

An Act to provide for a uniform excise law in the State of Karnataka --To provide for a uniform law relating to the production, manufacture, possession, import, export, transport, purchase and sale of liquor and intoxicating drugs and the levy of duties of excise thereon, in the State of Karnataka and for certain other matters hereinafter appearing;

State Excise Revenue

"Excise revenue" means revenue derived or derivable from any duty, fee, tax, penalty, payment (other than a fine imposed by a court of law) or confiscation imposed or ordered or agreed to under the provisions of the Act or of any other law for the time being in force relating to liquor or intoxicating drugs.

The methods by which the State Excise revenue is raised fall under two main divisions.

(i) Direct taxation- By means of fixed duties imposed on excisable articles; and

(ii) Indirect taxation- By means of license fees for the right to manufacture, possession, cultivation, import, export, transfer and sale of excisable articles.

The under mentioned Central laws govern and regulate the levy and collection of Excise duties and authorize the State Government to superintendent and execute the excise administration in respect of such laws.

(i) Narcotic Drugs and Psychotropic Substances Act, 1985 (N.D.P.S. Act,) and Rules made thereunder;

(ii) The Medicinal and Toilet preparations (Excise Duties) Act 1955 and rules made thereunder.

Restriction on Import and Export of Excisable Articles

Without the sanction of the State Government no intoxicant is allowed to be imported or exported or transported except-

(a) After payment of any duty to which it may be liable under the Excise Act or on execution of a bond for such payment.

(b) On compliance with such condition, as the State Government may impose a tax.

Professional Tax:

  1. Professional Tax in Karnataka is levied under the Karnataka Tax on Professions, Trade, Callings and Employment Act, 1976.
  2. Profession Tax shall be paid by every person exercising any Profession or calling or is engaged in any trade or holds any appointment, public or private as specified in the Schedule to the Act.
  3. A tax on profession can be imposed if a person in fact carries on profession etc., irrespective of question of income.
  4. A person is defined under the Act to mean:

any person who is engaged in any profession, trade, callings or employment in the State of Karnataka and includes :

  1. Hindu undivided family (HUF)
  2. Firm
  3. Company
  4. Corporations
  5. Other Corporate bodies
  6. Any Society
  7. Any Club or Association.

[Every branch of a firm, company, corporation or other corporate body, any society, club or association is treated as separate person for the purpose of tax liability.]

  1. Liability to pay tax:
  1. The tax payable under this Act by any person earning a salary or wage, shall be deducted by his employer from the salary or wage payable to such person before it is paid to him.
  2. Every person liable to pay tax under this Act (other than a person earning salary or wages, in respect of whom tax is payable by his employer) shall obtain a certificate of enrolment from the assessing authority in the prescribed manner.
  1. Exemption from payment of tax:
  1. No tax is payable by persons who have attained age of sixty five years.
  2. No tax is payable for holding any profession for less than 120 days in that year.
  3. No tax shall be payable by a person in respect of any year if the period during which he exercises such profession or calling or us engaged in the trade or holds the appointment or is employed does not exceed 120 days in that year.
  1. Exemption:

The following classes of persons are exempted from payment of Profession Tax:

  1. All charitable and philanthropic hospitals or nursing homes situated in places below the taluk level in all districts of the State except Bangalore and Bangalore Rural District.
  2. Directors of Companies registered in Karnataka and nominated by the financing agencies owned or controlled by the State Government or by other statutory bodies.
  3. Foreign technicians employed in the State provided their appointments are approved by the Government of India for the purpose of exemption from payment of income tax for the said period (exemption is for a period of 2 years from the date of their joining duty).
  4. Combatant and civilian non combatant members of the Armed Forces who are governed by the Army Act, the Navy Act and the Air Force Act.
  5. Salaried or wage earning blind persons.
  6. Salaried or wage earning deaf and dumb persons.
  7. Holders of permits of single taxi or single three wheeler goods vehicle.
  8. Institutes teaching Kannada or English Shorthand or Typewriting.
  9. A Physically handicapped person not less than 40% of permanent disability (subject to production of certificate from the HOD of Government Civil Hospital).
  10. An ex-serviceman not falling under SL No.1 of the Schedule.
  11. Central Para Military Force (CPMF) Personnel
  12. Persons running educational institutions in respect of their branches teaching classes upto twelfth standard or pre-University Education.

Luxury Tax:

  1. A luxury tax is a tax on luxury goods : products not considered essential.
  2. Tax means the luxury tax levied and collected under The Karnataka Tax on Luxuries Act, 1979.
  3. According to section 4B of the Act, "Luxuries" means commodities or services specified in the Schedule ministering to enjoyment, comfort or pleasure extraordinary to necessities of life.
  4. Different items of luxuries attract different tax rates.
  5. Applicability:
  1. On charges collected for luxuries provided in a hotel for residents or others such as health club, beauty parlour, swimming pool, conference hall and the like when such charges are collected separately.
  2. On luxuries provided in a club to the members who are required to pay any amount as fee, deposit, donation or any other such charges at the rate as specified.
  3. Where charges for luxury provided in a hospital are more than one thousand rupees per day, there shall be levied and collected a tax at the rate of eight per cent of such charges.
  1. The luxury tax does not apply to items that are sent out of the state, and if tax has been paid on items, according to the Karnataka Sales Tax Act of 1957, the luxury tax does not apply to those items.
  2. Exemptions:
  1. No tax shall be payable in respect of a member who has attained sixty five years of age and who is not a corporate member subject to such conditions as may be prescribed.
  2. No tax shall be payable in respect of a member of a Youth club registered or recognized as such by the Department of Youth Services.

Entertainment tax:

  1. Entertainment tax is a tax on entertainment under The Karnataka Entertainments Tax Act, 1958.
  2. Entertainment tax is a tax which is levied on cinema, video shows, cable T.V. operators, amusement, recreation parlors, exhibition, performance, pageant and game / sports and horse races.
  3. There shall be levied and paid to the State Government entertainments tax on each payment for admission to entertainments.
  4. “Payment for admission” shall not include any sponsorship fee or advertisement charges paid to the proprietor or any person connected with or conducting or organizing any event of sport.
  5. Exemptions:
  1. In respect of entertainments held in newly constructed cinema theatres situated within the limits of any specified local authority or class of local authorities.
  2. In respect of a cinematograph show of a film which has been certified by an institution recognized by the State Government as an educational film or a children's film.
  3. If the entertainment is a cinematograph show conducted by a film club or film society satisfying the prescribed conditions and recognized by the Commissioner, exclusively for the benefit of its members and without deriving any profit.

Part- II – Clauses in Tax Audit Report and their connection to IDT

In this backdrop, the changes made in the Forms 3CA, 3CB and 3CD are very significant move towards ensuring that there is no leakage of revenue by mismatch between compliances and disclosures under income tax and indirect taxation law. To this end, CBDT via Notification No. 33 dated 25th July 2014, had made some changes inForm 3CA, 3CB and 3CD. Via these changes the compliances which a CA is required to ensure and disclosures which are required to be made by a Chartered Accountants has been increased. An effort has been made to compile and put in place all additions impacting indirect taxes below. Listed below are the modifications/ additions made in this notification.

Major Changes which are proposed to be made and impact:

3CA: Point 3.In the opinion part, now apart from mentioning that particulars in Form 3CD are true and correct, auditors have to mention observations/ qualifications if any.

Disclosure:

Insertion of words “According to examination of books of account including other relevant documents” –this increases the verification Scope of the Auditor.

FORM 3CB

Changes made are on similar lines as that in Form 3CA as mentioned above to extent observations/qualifications, if any to be listed out.

FORM 3CD

The important changes made in Form 3CD are addition of some new clauses thereby requiring more disclosures. The responsibility to arrive at the liability may not exist and the auditor could rely on assertion of client. Listed below are the modifications/ additions made relevant from indirect taxes perspective.

PART A

Point 4: Now have to mention whether the assessee is liable to pay Indirect tax like excise duty, service tax, sales tax, custom duty etc and furnish the registration number for the same. Part- I on this booklet provides information on different indirect taxes which maybe needed to be known for compliance.

DisclosureWhere liable to pay indirect taxes such as excise duty, service tax, sales tax. If there is liability then give registration number or identification no allotted for same.

Possible Value Additions at time of audit:

Indicate if

  • Activity amounts to manufacture of excisable goods or provision of taxable services?
  • Requirement to take registration under excise or service tax where wrongly claiming exemption, such as SSI exemption on branded goods.
  • The excise duty/service tax/customs duties or VAT being paid at wrong rate.
  • Imports made from related parties and possibility of referring to SVB.

Point 6Date of commencement of previous year for newly started business:

Disclosure: Date of commencement of new business: report dates when started new business activities and excise/service tax and excise/service tax/VAT registration details where liability to pay such taxes is there to be disclosed at 4.

PART B

Point 11(b) and (c): Earlier only required to mention a list of books of account maintained; now also to mention the address at which the books of accounts are kept. Further if books of accounts are not kept at one location, now need to furnish the addresses of locations.

11(c) Apart from mentioning the list of books examined, also have to mention the nature of relevant documents examined.

Disclosure:

  • Obtain and give list of addresses where the books of account are kept.
  • Details of books of account kept at each location.

Possible Value Additions at time of audit:

  • Bring to client attention locations where books kept, but not registered under service tax / excise/VAT and CST and taxes liability of excise duty/service tax/VAT and CST not being paid.

Point 16: Amounts not credited to PandL A/c, being(b) the pro forma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax where such credits, drawbacks or refunds are admitted as due by authorities concerned.

Disclosure:

Obtain from client and disclose amounts of the drawbacks, refund of duty of customs /excise or service tax, or refund of sales tax or VAT accepted as due by tax authorities.

Possible Value Additions at time of audit:

Mention where any drawbacks, refunds of indirect taxes received into bank account are not booked into accounts.

Point 18: Particulars of depreciation allowable as per Income Tax Act, 1961 in respect of each asset or block of assets in the following form……….(d)additions/deductions during the year with dates; in…..including adjustments on account of (i)Central value added tax credits claimed and allowed under Central Excise Rules 1944 in respect of assets acquired on or after 1.3.1994. This is to enasure that double benefit is not availed by the client.

Disclosure: Cenvat credits availed on assets acquired.

  • The terminology made contemporary. There is no substantive impact of this change.

Possible value additions at time of audit:

  • Reconcile credits availed on capital goods as per the financials with cenvat credits availed on capital goods as per the ST-3/ER-1.
  • The depreciation claimed on the duty paid portion [ either under sec 32 or 32AC] of capital goods which is restricted.
  • If come across in vouching missed out input services credits related to capital goods then mention to client.
  • Bring to client notice in case of differences.
  • Check if (i) credits are being captured directly into accounts or (ii)there is separate Cenvat credits register being maintained to avail credits. This could be maintained in excel sheets.
  • The first method would be best practice to ensure completeness of credits which were availed to ensure that there are no missed out credits.

Point 21: Details of amount debited to PandL A/c being in nature of capital, personal, advertisement expenditure etc, with nature, sl no, particulars, amount:

Expenditure incurred at clubs for club services and facilities, expenditure by way of penalty or fine for violation of any law for time being in force.

Expenditure by way of any other penalty or fine not covered above.

Expenditure incurred for any purpose which is an offence or prohibited by law.

Disclosure: Details of such expenditure mentioned above.

Possible value additions at time of audit:

  • Differentiation between liquidated damages and penalties. First one allowed as deduction and next not.
  • Differentiate from mandatory penalties which exist and those which indicate a mala fide.
  • Mention there could be service tax on expenses by way of penalty or fine in some cases post 1.7.12.
  • To be treated as a service, an activity has to be carried out for a consideration. The fines and penalties which are legal consequences of a person’s actions are not in the nature of consideration for an activity. Not liable to service tax.
  • The service tax may not be applicable on other fines, as there is no activity for a consideration.
  • But in absence of any specific exclusion/exemption service tax could be demanded on same.

Point 26: In respect of any sum referred to in clause(a),(b),(c),(d),(e),(f), of Section 43B, the liability for which:-

  • (A) Pre-existed on first day of previous year but not allowed in assessment of any preceding previous year and was paid or not paid during previous year.
  • (B) was incurred in the previous year and was paid on or before due date for furnishing return of income taxu/s139(1) or not paid before aforesaid date.

As per Section 43B

  • Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of -

a) any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force);…………………………

  • State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost passed through profit and loss account.
  • Disclosure: Details of Liability provided by assessee to auditor to be taken.

Possible value additions at time of audit:

  • Tax dues as per P and L and accounts
  • Whether correct or not does not seem to be required.
  • Broad checks could be put in place.
  • Determine tax due as per books and in returns can be compared and differences reported with suggestions to reconcile.
  • It is to be reconciled.
  • If there is huge/material difference then observation or even qualify in the audit report in 3CA under point 3 or in 3CB in sl no.5

Similar to point 18 in point 27 where sets out now: (a) Amount of Central Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account and treatment of outstanding Central Value Added Tax credits in the accounts.-earlier referred to Modified Value Added Tax Credits.

Disclosure:

  • Report on amount of Cenvat credits availed of or utilized during previous year and how it is treated in PandL and treatment of O/S Cenvat credits in accounts. Both availed and utilized to disclose.
  • The terminology made contemporary. There is no substantive impact of this change.

Possible Value Additions at time of audit:

  • Reconcile credits availed on capital goods as per the financials with as per the ST-3/ER-1.
  • Bring to client notice in case of differences.
  • Check if (i)credits are being captured directly into accounts or (ii)there is separate Cenvat credits register being maintained to avail credits. This could be maintained in excel sheets.
  • The first method would be best practice to ensure completeness of credits which were availed to ensure that there are no missed out credits.
  • Point 35(B) In case of manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products

Disclosure: Raw materials: opening stock, purchases during previous year, consumption during previous year, sales during previous year, closing stock, yield of finished goods, percent of yield, shortage/excess if any.

Possible Value Additions at time of audit:

  • Abnormal shortage in the items could indicate missed out sales with corresponding shortfall in payment of excise duty which may need to be paid with interest and penalty at time of audit.
  • Abnormal excess could mean trading goods are being cleared as manufactured goods on payment of excise duty. Could lead to demands at later date for reversal of credits.

Point 37. Disclosures on cost Audit to include disqualification or disagreement on any matter/ item/ value/ quantity as may be reported/ identified by the Cost Auditor. Earlier the requirement was to only state whether Cost Audit was carried out or not and to enclose copy of report.

Disclosure: Report on details of disqualification or disagreement on any matter/item/value/quantity identified by cost auditor.

Possible Value Additions at time of audit:

  • Suggest there could be undervaluation of manufactured excisable goods removed for captive consumption not done as per CAS 4.
  • Under-valuation of materials manufactured and consumed for providing services on which service tax is paid.
  • When CAS-4 certificate obtained very long ago, suggest taking on periodic basis such as quarterly, half yearly or annual.

Point 38: Similar disclosure as above point 37, to be made with respect to audit under Central excise Act as mentioned above. Disqualifications and disagreements to be reported.

Disclosure: Comment if any audit was conducted, if yes report on details of disqualification or disagreement on any matter/ item/ value/quantity as reported/identified by the auditor.

Possible Value Additions at time of audit:

  • Suggest excise duty to be paid on intrinsic values of manufactured excisable goods.
  • Suggest to check valuation of manufactured goods sold to related parties.
  • Credits availed without receiving materials nor used for manufacturing processes.
  • Irregular availment of restricted Cenvat credits as per definitions under Cenvat credit rules. Caution such credits could be demanded along with penalty.

The penal consequences under central excise are in annexure 2.

Point 39: Disclosure as above point 37, to be made with respect to audit under section 72A of Finance Act as mentioned above.

Disclosure: Comment whether audit was conducted under the Central Excise Act, if yes give details of disqualification or disagreement on any matter/item/value/quantity as reported/identified by auditor.

Possible value additions at time of audit:

  • Part of the service charges could have been shifted in the expense account thereby suppressing the value of taxable service.
  • At times checking of bank account with expenses and receipts could disclose the missed out value of taxable services.
  • Any liability accrued for import of services should be examined as also the exchange rate fluctuations. Such services may not be reported as turnover in the financial statements.
  • Auditors should obtain a list of foreign branches and branch accounts and try to scrutinize the same so as to ascertain the value of taxable services received on which service tax to be paid.
  • The penal consequences under service tax are in annexure 2

Point 40: Details regarding turnover, gross profit etc for previous and preceding previous year.

Disclosure:

  • Details of total turnover, GP to turnover and NP to turnover, stock in trade to turnover and material consumed to finished goods produced.

Possible Value Additions at time of audit:

  • Under service tax and VAT [for a trader] if huge variance in turnover, could indicate that omitted to record some transactions.
  • Under central excise, if there is huge variance from year to year for the material consumed to FG, could indicate clandestine removals.

Point 41: Details of demand raised or refund issued during the previous year under any tax laws other thanIncome Tax Act, 1961 and Wealth tax Act, 1957 along with details of proceedings:

Disclosure:

  • Details of demand raised or refund during previous year under any tax laws other than IT and Wealth Tax Act.
  • The details not just to be disclosed under excise/service tax but also under other tax laws, which could be KVAT. The details may also relate to demand related to one of earlier assessment years but demand raised in the previous year.
  • Whether mere disclosure suffices or statutory auditor needs to qualify his report, especially where a demand under other taxes is huge.

Possible Value Additions

  • Whether prima facie demand is sustainable or not.
  • Advise to seek the legal opinion from indirect taxes professionals on the demand.

Conclusion

The new format contains more details to be given and leads to more reporting requirements on statutory auditor.They may also need to get acquainted with indirect taxation laws to realize impact of the reported items and guide their clients accordingly.

In this article the paper writers have sought to cover the overview of IDT, the changes and impact in the prescribed forms. For further queries host on pdicai.org or reach at mhiregange@gmail.com or roopa@hiregange.com.

Acknowledgements to Articles of Hiregange and Associates- Madhuri S, Nalini M ,Nandini H, Vidhya R for collating the information as well as preparing the ppt.

Part III – Possible Errors/ Disputes in Some Major Taxes.

Annexure- 1

Possible Errors and Disputes Expected in K-VAT

Conceptual:

These are errors which are quite common which once committed continue to be practiced and become the norm for years till someone questions the same. The reasons for the same could be the ignorance of the officers responsible for K-VAT in the company and the fact that most other dealers / manufacturers internal departments want to maintain a distance from the department. The errors could be as under:

  1. Non payment of net tax within 20th of subsequent month.
  2. Non payment of K-VAT on unregistered dealer purchase.
  3. Tax payments for URD purchases, set off not availed.
  4. Tax payments for URD purchases, set off availed immediately rather than at the time of sale (dealer) or at the time of use in manufacture (manufacturer).
  5. Inputs set offs missed out due to lack of knowledge on admissibility/ or clarified by departmental officers.
  6. Inputs set offs reversed for interstate sale/ exports by dealer / manufacturer.
  7. Non deduction of 2% for stock transfer out of the state for manufacturer under the special rebating scheme.
  8. Availing Input on Goods on which Input Tax has been restricted like Input on Food Articles, Motor Vehicles, Furnitures etc.,
  9. Inputs set offs reversed on oral instructions of departmental officers/ audit parties without validating the same with consultants.
  10. Inputs set offs not proportionately reduced for rejection of inputs.
  11. Set offs availed for inputs used to manufacture exempted items.( first schedule or specific exemption)
  12. Inputs set off not availed for the inputs used commonly in taxable and no taxable items.
  13. Input set off availed on Xerox copy of tax invoice.
  14. Availing and utilizing the set off on defective input documents such as: no TIN No., K-VAT not clearly indicated, no consecutive serial number.
  15. Availing KVAT set off on construction materials where the dealer does not deal in such goods
  16. Input set offs on differential duty charged by the supplier by way of an invoice not being taken as inputs not received at that time.
  17. Proportionate duty not reversed when both common inputs are used in manufacture of products, which are taxable and exempt, when no separate accounts are maintained to distinguish usage.
  18. Utlilisation for the payment of input set offs availed in respect of the goods received after the month end upto 20th. (Before the due date of payment.)
  19. Removal of scrap without a tax invoice and without discharging the tax.
  20. Not debiting tax when the materials on which set offs are availed are removed to the service wing of the factory or to the service unit.
  21. Goods being classified under a wrong heading.
  22. True apportionment of partial rebate in October and April for common inputs not done.
  23. Frequent delays in taking the input set off necessitating the payment of tax.
  24. Inputs removed on payment of tax when actually the input set off has not been taken on the receipt of the same materials.
  25. Failure to Include the list of Commodities used for Resale/Manufacturing/Mining etc., in CST Registration which may result into denial of Statutory Forms like C Form, F Form H Form to Dealer.
  26. Failure to Declare Turnover of Interstate Sales and Purchases in the Return which again may result into hindrance in obtaining Statutory Forms.
  27. Issuing Statutory Forms towards unauthorized Transactions.
  28. Non filing of Revised Returns within the time limits (Six Months in Karnataka), to correct any omissions or corrections like addition of Unavailed Input while filing Original Returns, Non disclosure of Interstate Purchase and Sales in appropriate Columns, etc,

Systems

The compliance procedures as well as the record keeping aspects have also been covered as under:-

  1. Not having a proper system of ensuring completeness of input set offs. Consequently no available set offs missed out.
  2. The system of double check on set offs whether short / excess availed especially in case of higher amounts of set offs due to clerical errors.
  3. Inquiry of instances of inordinate time gap between the receipt of materials as per security records and the raising of Goods Receipt Notes.
  4. The system of cancellation of invoice where the VAT debits has already been done without a procedure for reversal.
  5. The absence of a system of recording entry in the job work control register when the goods are sent for job work or when they are returned back along with recording the scrap returned.
  6. The procedure required to avail set off (entry in stores ledger for the receipt, the consumption and inventory of the inputs) not being followed.
  7. Verifying the Genuniness of the supplying Dealers by verifying their TIN Numbers CTD Website, to ensure that they are regular dealer as burdern of Proof Lies on the Assessee.
  8. Verifying whether the Dealer is updating Online Goods Movement Forms (Like E Sugam in Karnataka) as these movements of Stock may become a major Audit Point in future.
  9. Obtaining timely Statutory Forms and submission to CTD within due dates (Both Issues and Receipts) to avoid unwanted interest and penalty.

Records maintenance and others

  1. The system of reconciliation of sales as per excise returns to VAT returns not done.
  2. The system of reconciliation of set off figures as per accounts and the figures as per VAT return not done.
  3. The system of updation of the stores ledger and the bin cards for input receipts, disposal and issue.
  4. In case of gross method of accounting purchases where tax portion is not shown separately, the method and accuracy of making monthly entries for the set off.
  5. The system of transferring the unutilized balance in the input set off account to Expenses a/c.

This listing does not propose to be a full list but could be start point of a comprehensive one. As time goes the other errors of more complexity would also surface.

Annexure- 2

Common errors under service tax:

  1. Erring on the side of caution and paying tax when the activity is not liable.[activity not a service as per definition or excluded as per the negative list or exempted unconditionally] This can lead to customer not paying once he comes to know that the same is not liable.[ possible deduction even for past periods] Another dimension is that the revenue may demand reversal of credit since activity not liable. (defendable)
  2. Utilization of CENVAT credit for the payment of tax under reverse/joint charge, which is specifically not allowed. [Especially after 1.7.2012]
  3. Credits availed for inputs not used for provision of taxable services.
  4. Wrong availment of credits on inputs by service provider executing works contract service.
  5. Non availment of eligible credits by persons engaged in hotel/restaurant services / accommodation services post 1.7.12 by following restriction which was imposed in earlier notification no.1/2006-ST where availment of credits was specifically barred.
  6. Availing CENVAT credit in respect of that part of the value of Capital Goods which represent the amount of duty on such Capital Goods which the service provider claims as depreciation u/s 32 of Income Tax Act.
  7. Availing credit of Capital Goods, which are used for office purpose.
  8. 100% credit on Capital Goods availed in the year of purchase instead of 50% as allowed under CENVAT Credit Rules, 2004, unless one is small service provider.
  9. Error in classifying goods as input instead of capital goods and thereby wrongly availing 100% credit on the same in the year of purchase.
  10. Availing credit when conditions prescribed in the exemption notification bar the same.
  11. Availing credit on common input services which are used in manufacture of exempted goods or non-taxable services. No separate accounts are maintained nor formulae prescribed under Rule 6 for reversal followed.
  12. Treating exported services as exempted services and not availing eligible credits related to same.
  13. Utilization of CENVAT credit for payment of service tax on import of services, which is not permissible under the service tax provisions.
  14. Utilization of SAD (Special Additional Duty charged under Customs provisions) credit for payment of service tax on output services, which is not permissible. The same is available only to the manufacturer.
  15. Availing credit on inputs in respect of which the benefit of Notification No 1/2011-CE, dated 01.03.2011 is availed. CENVAT Credit Rules, 2004 restricts the input on the items enumerated on the said notification.
  16. Availing credit of input which have no relationship whatsoever with the manufacture of a final product/output service.
  17. Availing credit on the basis of Xerox copies of service tax invoice.
  18. Availment of credit after 6 months from the date of Invoice
  19. Error in Distribution of Credit by ISD
  20. Claiming exemption for SEZ services even of the services are not specified services for authorized operations.
  1. CENVAT credits (input credit, input services credit) missed out due to lack of knowledge on admissibility/or as “clarified” by departmental officers.
  2. Credits reversed on oral instructions of departmental officers/audit parties without validating the same with experts.
  3. Credits on differential duty charged by the supplier by way of an invoice not being availed as inputs not received at that time. [ Confirmation that not paid consequent to demand by revenue invoking longer period of limitation]
  4. Inputs removed on payment of duty when actually the credit had not been availed on the receipt of the same materials.
  5. Paying Service tax under reverse charge on the value of service charged by the transporters other than Goods transport agency.
  6. Not availing 100% credit in respect of those capital goods which are cleared as such in the same financial year.
  7. Utilizing the Cess credits towards basic service tax payments.
  8. No proper procedure to ensure the eligibility of CENVAT credit for availment and utilization of the same.
  9. CENVAT credit availed on inputs before the receipt of the material in the premises of the service provider.
  10. Utilization of credits availed in respect of the goods received after the relevant month but before the due date of payment.
  11. Not considering the TDS amount for payment of service tax when the amount is received towards the taxable services is net of TDS amount.
  12. Non reversal of credits on inputs or capital goods which are written off in the books of account.
  13. Non reversal of CENVAT Credit availed on the input services for not making payment to the service provider within 3 months.
  14. Absence of system to classify inputs and availing credit of those input which are specifically excluded from the definition of “input” defined in Rule-2(k) of CENVAT CREDIT RULE, 2004.
  15. No proper system to ensure that no credit has been missed out while paying tax on output service.
  16. CENVAT credit missed out due to non-indication of the service tax in the invoice of the input service provider.
  17. Absence of system to ensure that the balance 50% of credit on Capital Goods of the year of purchase has been availed in the subsequent year.
  18. Frequent delays in availing the CENVAT credit necessitating the payment of tax in cash.
  19. Inquiry of instances of inordinate time gap between the bill date and the credit note.
  20. Non-availment of credit of service tax paid on services as a receiver of services like tax paid on import of services, GTA service or sponsorship services etc.
  21. Failure to obtain registration for the branches or place of providing the service. The credits relating to such branches may be denied if not registered.
  22. Failure to intimate the addition of new branches in case of centralized registration.
  23. Availing CENVAT credit of the branches without centralized registration or Input service distributor invoice.
  24. Input Credits not proportionately reduced for short payment.
  25. Failure to intimate the department for claiming the benefit of paying amount equivalent to credits attributable to exempted services under Rule 6 of CENVAT credit rules 2004.

Annexure- 3

POSSIBLE ERRORS AND DISPUTES IN CENTRAL EXCISE

Some of the Possible errors in the areas of CENVAT have been covered below:-

  • CENVAT Credit missed out due to lack of knowledge on admissibility/ as per clarification by revenue officials- Adequate updation and training to concerned personnel in the organization regarding CENVAT rules is the need of the hour.
  • Credits reversed on oral instructions of departmental officers/audit parties without validating the same with consultants- Taking legal backing for any issue is always advisable rather than following informal /oral instructions from the department.
  • CENVAT Credit availed on the input services without making the payment to the service provider within 3 months- As per Rule 7 of CCR 2004, CENVAT credit in respect of input service shall be allowed on the receipt of tax invoice provided that the payment of the full value of input service along with service tax indicated on the invoice is made within three months of the date of invoice.
  • CENVAT credit availed on inputs before the receipt of the material in the premises- Rule 4(1) ofCCR 2004 specifies the conditions for allowing CENVAT credit wherein it requires the inputs/materials to be received in the factory of the manufacturer so as to avail CENVAT credit. Availing credit without receipt of inputs into the factory shall be liable to reversal of credit and payment of interest.
  • Availing CENVAT credit of the branches without centralized registration or Input service distributor invoice- Availing credit on the invoices raised on the branches which are not registered as perSTR 1994 tantamount to availing of wrong credit which may result in future interest liability.
  • Wrong availing of CENVAT credit pertaining to associates and group companies- proper care to be taken not to avail CENVAT credit relating to invoices raised on the associates or group companies having separate excise/ service tax registration number.
  • Credits availed for inputs not used for manufacture of excisable items and non taxable services- as per Rule 6 of CCR 2004, the CENVAT credit shall not be allowed on such quantity of input used in or in relation to the manufacture of exempted goods or for provision of exempted services, or input services used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services.
  • Input Credits not proportionately reduced for rejection of inputs/ short payment for service provider- Proviso to Rule 4(7) to CCR provides that in case of any refund or raising of credit notes, the assessee shall pay an amount equal to CENVAT credit availed in respect of the amount so refunded or credited.
  • 100% credit taken in the same year instead of 50% as allowed on capital goods- as per Rule 4(2)(a)the CENVAT credit in respect of capital goods shall be taken only for an amount of 50%. Excess availment shall attract interest. However if the said CG is cleared in the same FY of receipt, whole credit shall be allowed.
  • Balance 50% of credit on capital goods of previous year not taken in the subsequent year.
  • Taking 50% credit of special CVD on capital goods (u/s- 3(5) of the Custom Tariff Act) instead of 100%.- Proviso to Rule 4(2)(a) provides that assessee is eligible to avail 100% credit of the additional duty leviable under section 3(5) of the CTA in respect of capital goods. There might be a wrong notion that any duty relating to Capital goods is allowed on to the extent of 50% in one FY.
  • Credits not availed on Capital Goods which are used in relation to manufacture of both excisable and exempted goods- Rule 6 of CCR which specifies the obligation of a manufacturer of exempted goods or provider of exempted service to maintain separate accounts for taxable and non taxable goods/ services or to avail proportionate credit for common credits apply only to ‘inputs’ and ‘input services’. CENVAT credit on capital goods is allowed fully on the above case.
  • Not demanding the excise/ tax invoices when the goods are purchased/ services are received from the dealers registered under Central Excise/ Service Tax.-
  • Not claiming the CENVAT credit on inputs used for manufacture of goods cleared for direct exports or EOU units or SEZ developers/units – Rule 6 of CCR speaks about manufacture of exempted goods/ provision of exempted service. Goods cleared for direct export, EOU units or SEZ units are not considered as ‘exempt’.
  • Credits on differential duty charged by the supplier by way of supplementary invoice not taken as the same is not accompanied by inward material movement.- Rule 9(b) of CCR 2004 provides for the same
  • Availing credit on inputs in respect of which the benefit of Notification No 1/2011-CE dated 01.03.2011 is availed.- excise duty paid in respect of those goods on which benefit of an exemption undernotification No 01/2011 dated 01.03.2011 is availed is not available for taking credit. Rule 3(1) of CCR, 2004provides the same.
  • Availing credit of those inputs/ input services which are specifically excluded from the definition as defined in Rule-2(k)/ 2(l) of CENVAT CREDIT RULE, 2004.- excluded inputs- light diesel oil, HSD, petrol, motor vehicles, goods primarily used for personal use or consumption of any employees, etc. Excluded input services- service of general insurance business, servicing, repairs and maintenance of motor vehicle being a capital goods etc.

Part IV – Report Format- Comparison

Sl. no

Old Form 3CA

New Form 3CA

Remarks

 

FORM NO. 3CA

FORM NO. 3CA

 

 

[See rule 6G(1)(a)]

See rule 6G(1)(a)

 

 

* I/We report that the statutory audit of ….[mention name and address of the assessee with permanent account number] was conducted by * me/us/M/s. …. in pursuance of the provisions of the….Act, and *I/we annex hereto a copy of * my/our/their audit report dated ….along with a copy each of –

*I / we report that the statutory audit of M/s…. (Name and address of the assessee) with Permanent Account Number) was conducted by *me / us / M/s.….in pursuance of the provisions of the…. Act, and *I/we annex hereto a copy of * my / our / their audit report dated ….along with a copy of each of:-

 

 

(a) the audited * profit and loss account/income and expenditure account for the year ended on 31st March,….;

(a) the audited *profit and loss account / income and expenditure account for the period beginning from….to ending on…

Beginning and ending of the period of PandL a/c / Income and expenditure account should be provided.

 

(b) the audited balance sheet as at 31st March,….

(b) the audited balance sheet as at…

Balance sheet date as at 31st March was removed

 

3. In *my/ our opinion and to the best of my/our information and according to explanations given to *me/us, the particulars given in the said Form no. 3CD and the annexure thereto are true and correct.

3. In *my/our opinion and to the best of *my/our information and according to the examination of books of account including other relevant documents and explanations given to *me/us, the particulars given in the said Form no. 3CD are true and correct subject to the following observations/ qualifications, if any

Insertion of words “according to examination of books of account including other relevant documents” –which increases the verification scope of the Auditor.

Observations if any should be provided.

 

** Signed

** ( Signature and stamp/ seal of the signatory)

New requirement to provide Stamp/Seal of the signatory

 

Place….name…date…address

Place…name of the signatory… date.. full address

 

 

Comparative Analysis of Old and New Form 3CB

SL. No

Old form 3CB

New form 3CB

Remarks

 

Form no 3CB

Form no 3CB

 

 

[see rule 6G (1)(b)]

[see rule 6G(1)(b)]

 

 

*I / We have examined the Balance Sheet as at

31st March…., and the *Profit and Loss Account /

Income and Expenditure Account for the year

ended on that date, attached herewith, of …..

[Mention Name and Address of the Assessee with

permanent Account Number]

1. *I / we have examined the balance sheet as on,….,and the *profit and loss account / income and Expenditure account for the period beginning from

…. to ending on….,attached herewith, of ….(Name), …. (Address), …. (Permanent Account

Number).

New requirement to provide the period beginning and to ending on

 

5. In *my/our opinion and to the best of *my /

our information and according to explanations

given to *me / us, the particulars given in the said form no. 3CD and the annexures thereto are true and correct

5. In *my/our opinion and to the best of *my / our information and according to explanations given to *me / us , the particulars given in the said form no 3 CD are true and correct subject to following observations/ qualifications, if any:

a.

b.

c.

New requirement observations/qualifications if any

 

*** signed

***( signature and stamp/seal of the signatory )

New requirement to provide stamp/seal of the signatory

 

Place…. Name :….

Date….Address….

Place … name of the signatory.. date .. full address

 

 

3. **This report has to be signed by-

(i) a chartered accountant within the meaning of

the Chartered Accountants Act, 1949 (38 of

1949); or

(ii) any person who, in relation to any State, is, by

virtue of the provisions of sub-section (2) of

section 226 of the Companies Act, 1956 (1 of

1956), entitled to be appointed to act as an

auditor of companies registered in that State; or

(iii) any person who is, by virtue of any other law,

entitled to audit the accounts of the assessee for

the relevant previous year.

3. *** this report has to be signed by a person eligible to sign the report as per the provisions of section 44AB of the income tax act 1961

New reference to Sec.

In Sec.44AB, is given

 

In sec.44AB, stipulate to get the accounts audited

by an accountant. For the purpose of sec. 44AB, the term Accountant shall have the same meaning as in the explanation below sub section (2) in Sec.288

 

Explanation in sec. 288 - In this section

“accountant “means a chartered accountant within the meaning of the Chartered accountants act , (38 of 1949), and includes , in relation to any state , any person who by virtue of the provision of sub section (2) of section 226 of the companies act ,1956 (1 of 1956), is entitled to be appointed to act as an auditor of companies registered in that state

Comparative study of Form 3CD (Old) and the New Form 3CD as notified by CBDT vide notification no: 33/2014, dated July 25, 2014

 

Contents of old form 3CD

Contents of new 3CD

 

4. whether the assessee is liable to pay indirect tax like excise duty, service tax , sales tax, customs duty , etc, if yes, please furnish the registration number or any other identification number allotted for the same

Remark: newly inserted. Purpose might be to cross verify the income with other compliances and better co- ordination

5. Previous year ended: 31st March___________ _____________

6. Previous year from ……. To ……..

Remark : amended to include the date of commencement of previous year for newly started business

Part B

Part B

(b) List of Books of account maintained. (In case Books of Account are maintained in a computer system,

mention the books of account generated by such computer system)

(b) List of Books of account maintained and the address at which the books of accounts are kept (In case Books of Account are maintained in a computer system, mention the books of account generated by such computer system. If the books of account are not kept at one location , please furnish the address of the location along with books of accounts maintained at such locations )

Remarks: all location where books of accounts are maintained are required to be furnished

(c) List of books of account examined.

(c)

List of books of account examined and nature of relevant documents examined

Remarks: along with list of books of accounts, documents verified shall also be mentioned

14. Particulars of depreciation allowable as per the Income–Tax Act, 1961 in respect of each asset or

block of assets, as the case may be, in the following form :––

18. Particulars of depreciation allowable as per the Income–Tax Act, 1961 in respect of each asset or block of assets, as the case may be, in the following form :––

(a) Description of asset/block of assets.

(a) Description of asset/block of assets.

(b) Rate of depreciation.

(b) Rate of depreciation.

(c) Actual Cost or Written Down Value, as the case may be.

(c) Actual Cost or Written Down Value, as the case may be.

(d) Additions/deductions during the year with dates; in the case of any addition of an asset, date

put to use; including adjustments on account of–

(d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of–

(i) Modified Value Added Tax Credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March 1994,

(i) central Value Added Tax Credit claimed and allowed under the Central Excise Rules,1944, in respect of assets acquired on or after 1st March 1994,

(ii) Change in Rate of Exchange of Currency, and

(ii) Change in Rate of Exchange of Currency, and

(iii) Subsidy or Grant or Reimbursement, by whatever name called.

(iii) Subsidy or Grant or Reimbursement, by whatever name called.

(e) Depreciation allowable.

(e) Depreciation allowable.

(f) written down value at the end of the year

(f) written down value at the end of the year

Remarks: modified value added tax has been replaced with central value added tax

17. Amounts debited to the Profit and Loss Account, being :–

(a)expenditure of capital nature;

(b)expenditure of personal nature;

(c)expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like,

published by a political party;

(d)expenditure incurred at clubs, ––

(i) as entrance fees and subscriptions.

(ii) as cost for club services and facilities used;

(e) (i) expenditure by way of penalty or fine

(ii) any other penalty or fine

(iii) expenditure incurred for any purpose which is an offence or which is prohibited by law

 

 

 

21. (a) please furnish the details of amounts debited to the profit and loss account, being in the nature of capital, personal, advertisement expenditure etc.

Nature

Serial no.

Particulars

Amount in Rs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditure incurred at clubs being cost for club services and facilities used

 

 

 

Expenditure by way of penalty or fine for violation of any law for the time being force

 

 

 

Expenditure by way of any other penalty or fine not covered above

 

 

 

Expenditure incurred for any purpose which is an offence or which is prohibited by law

 

 

 

 

 

 

 

 

 

 

 

 

 

Remark: nature of advertisement expenditure is not given. Expense relating to subscription and entrance fee for club is deleted. the words “not covered above” as been added the table

21. *(i) In respect of any sum referred to in clauses(a), (b), (c), (d),(e), or (f) of section 43B, the liability for which:-

26. In respect of any sum referred to in clauses(a), (b), (c), (d),(e), or (f) of section 43B, the liability for which:-

(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was-

(a) paid during the previous year;

(b) not paid during the previous year;

(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was-

(a) paid during the previous year;

(b) not paid during the previous year;

(B) was incurred in the previous year and was

 

(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

   
 
  1. Not paid on or before the aforesaid date.

* State whether Sales Tax, Customs Duty, Excise Duty or any other Indirect Tax, Cess, Import, etc. is passed through the Profit and Loss Account.

 

(B) was incurred in the previous year and was

  1. paid on or before the due date for furnishing the return of income of the previous year under section 139(1);
  2. not paid on or before the aforesaid date

(State whether sales tax, customs duty, excise duty or any other tax, levy, cess, import, etc., is passed through the profit and loss account)

Remark: No Change.

22.

  1. Amount of Modified Value Added Tax credits availed of or utilised during the previous year and its treatment in the Profit and Loss Account and treatment of outstanding Modified Value Added Tax credits in the accounts.
 
 
  1. Particulars of income or expenditure of prior period credited or debited to the Profit and Loss Account

.

27.

  1. Amount of Central Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account ant treatment of outstanding Central Value Added Tax credits in the account.
  2. Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

Remarks: No change except that MODVAT is replaced with CENVAT.

28. (A) In the case of a Trading Concern, give details of principal items of goods traded:

  1. Opening Stock;
  2. Purchases during the previous year;
  3. Sales during the previous year
  4. Closing Stock;
  5. Shortage/excess, if any
  1. In the case of a Manufacturing Concern, give quantitative details of the principal items of Raw Materials, Finished Products and By–Products :
  1. Raw Materials:
  1. Opening Stock;
  2. Purchases during the previous year;
  3. Consumption during the previous year;
  4. Sales during the previous year;
  5. Closing stock;
  6. Yield of Finished Products;
  7. Percentage of yield;
  8. Shortage/excess, if any.

*Information may be given to the extent available.

35.(A) In the case of a Trading Concern, give details of principal items of goods traded:

  1. Opening Stock;
  2. Purchases during the previous year;
  3. Sales during the previous year
  4. Closing Stock;
  5. Shortage/excess, if any
  1. In the case of a Manufacturing Concern, give quantitative details of the principal items of Raw Materials, Finished Products and By–Products :
  1. Raw Materials:
  1. Opening Stock;
  2. Purchases during the previous year;
  3. Consumption during the previous year;
  4. Sales during the previous year;
  5. Closing stock;
  6. Yield of Finished Products;
  7. Percentage of yield;
  8. Shortage/excess, if any.

Remark: Star mark and relevant explanation has been removed

30. Whether any Cost Audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)].

37. Whether any Cost Audit was carried out, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported / identified by the auditor.

Remark: Inserted of enclosing Cost Audit Report, disqualifications, disagreements etc to be reported

31. Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit.

38. Whether any audit was conducted under the Central Excise Act, 1944, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported / identified by the auditor.

Remark: Inserted of enclosing Excise Audit Report, disqualifications, disagreements etc to be reported

 

39. Whether any audit was conducted under section 72A of the Finance Act, 1994 in relation to valuation of taxable services. Finance Act, 1994 in relation to valuation of taxable services. If yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported / identified by the auditor.

Remark: Service Tax Audit remarks also to be enclosed

32. Accounting ratios with calculations as follows: –

  1. Gross Profit/Turnover;
  2. Net Profit/Turnover;
  3. Stock–in–Trade/Turnover;
  4. Material Consumed / Finished Goods produced

40.Details regarding turnover, gross profit, etc., for the previous year and preceding previous year:

Serial Number

Particulars

Previous Year

Preceding previous Year

1.

Total turnover of the assessee

   

2.

Gross profit/turnover

   

3.

Net profit/turnover

   

4.

Stock-in-trade/ turnover

   

5.

Material consumed/finished goods prodused

   

(The details required to be furnished for principal items of goods traded or manufactured or services renderd)

Remark: Preceding previous year data also to be submitted. Total turnover in the serial 1 has been added. The term “calculations” has been dropped.

 

41. Please furnish the details of demand raised or refund issued during the previous year under any tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant proceedings.

Remark: Newly inserted

 

 
 
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