Service Tax Audit in India – An Overview
Director General of Audit, has published services tax audit manual, 2010, 2010. As per the guidance, taxpayers whose annual service tax payment (including cash and cenvat) was Rs 30 million or more in the preceding financial year may be subjected to mandatory audits each year. It is preferable that an audit of all such units is done by using computer-assisted audit program (CAAP) techniques. The frequency of audits for other taxpayers would be as per the following norms:.
i. Taxpayers with service tax payments above Rs 30 million (cash+ cenvat) (mandatory units) are to be audited every year.
ii. Taxpayer with service tax payment between Rs 10 million and Rs 30 million (cash+ cenvat) to be audited once every two years.
iii. Taxpayers with service tax payments between 2.5 million and 10 million (cash + cenvat) are to be audited once every five years.
iv. Taxpayers with service tax payments up to 2.5 million (cash + cenvat) 2% of taxpayers to be audited every year.
The audit selection guidelines therefore would apply to the non-mandatory taxpayers, forming part of the discretionary workload. These taxpayers should be selected on the basis of the assessment of risk potential to the revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment. It involves the ranking of taxpayers according to quantitative indicators of risk known as a “risk parameter”. It is also suggested that the taxpayers whose returns were selected for detailed scrutiny, the taxpayers who have been selected for audit, may not be taken up for detailed scrutiny of their ST-3 returns during that year.
FOCUS OF AUDIT IN SERVICE TAX BOOKS/RECORDS
The focus of audit in service tax matters is again to be seen from the revenue’s point of view. The objective is to find out whether there has been proper and appropriate payment of service tax by an assessee.
BOOKS AND RECORDS FOR SERVICES TAX PURPOSES
It is interesting to note that the Finance Act, 1994, or the Services Tax Rules, 1994 do not prescribe any set of books or records to be maintained by the service tax assessees. The assessees are free to maintain their own books/accounts. In fact rule 5 of the services tax rules, 1994 provides that the records including computerized data as maintained by assessees in accordance with the various laws in force from time to time shall be acceptable to the Department. Accordingly, service tax assessees who are joint stock companies governed by the provisions of the Companies Act, 2013 will maintain books/ accounts as prescribed under the Companies Act, 2013. Assessees who are registered under the Co-operative Societies Act or under the Societies Registration Act will maintain books/records under the respective rules/regulations framed under the laws governing the assessees. Similarly, assesses who are registered as Trust will maintain books/accounts as required of them under the law governing the trust, if any. Assesses who are receiving foreign contributions will maintain books/records especially required of them as prescribed under the Foreign Contributions Regulation Act /rules framed thereunder. Similarly, sole traders and partnership firms will maintain accounts/books as required under the income tax /sales tax acts including work contracts and also as required under the Tax Audit rules under the Income Tax Act 1961 besides records under other tax laws and special statutes such as Insurance Laws, Banking Laws, and Rules and Regulations framed thereunder. Normally service tax assessees maintain the following records:
a) Invoice/bills showing the service charges/job work charges
b) Bank accounts
c) Purchase/Sales accounts
d) Petty cash account
e) Debit/Credit notes
f) Party’s ledger-debtors and creditors
g) Commission account
h) Accounts based on various expenses under different heads
i) Tender documents
j) Running bills accounts in the case of works contract
k) Challans and other documents evidencing transport of goods by land, rail, air and connected documents such as L/R/, R/R, airway bill, bill of entry, etc.
l) Trial Balance
m) Balance sheet along with schedules there under
n) Bills raised for services rendered
o) Contracts/agreements for various purposes such as for civil construction, manpower, supply, technical know-how/transfer, job work non-compete agreements, etc.
q) Purchase orders
r) Works orders
The above are only illustrative and not exhaustive.
Now that overall services except those in the negative list and those services specifically exempted otherwise are brought under the services tax net the books/records maintained by the service provider will vary depending upon the peculiarities of a particular service provider. For example, the records maintained by an air travel agent will be slightly different from the records maintained by consulting engineers or a maintenance/repairs services provider or a mandap keeper, or a broker. Similarly, the record maintained by the insurance company providing life/general insurance will be different from the records maintained by the consignment agent of goods. In fact, in the case of such service providers such as stock brokers, life insurance companies, general insurance companies, etc. there are special statutes governing their setup and operation and under these statutes, they are required to maintain the certain special type of records.
From the service tax point of view, for the purpose of the audit, every type of record is essential and relevant so as to ascertain whether the value of taxable service has been correctly arrived at and tax has been paid properly in addition to finding out whether any taxable services has escaped from the levy. The service tax authorities are empowered to call for any books/records or other evidence which may be germane to ascertaining the fact whether the service tax liability has been properly and appropriately discharged or not.
AUDIT UNDER NEGATIVE LIST-BASED TAXATION
a) Every assessee has to understand that the term “service” has been defined for the first time to mean any activity done for any consideration. It will also include the service portion in the execution of works contacts pertaining to movable or immovable goods. It will not include actionable claims or any transaction in money. Similarly, services, rendered by a government, services rendered by a constitutional authority/body, Member of Parliament, members of the legislative assembly, and services provided by an employee to the employer pursuant to contractual employment are not within the scope of services. However, where a person works as an independent contractor where the relationship is one of contract for service, service tax will be attracted eg., a manpower supply services provider will be under contract for service and no a contract of service. Similarly, an AMC provider who is acting as an independent contractor will be providing service under contract for service. These are liable to service tax.
b) All declared services under section 66E of the Finance Act,1994 (chapter V) will attract service tax.
c) Mega exemption notification has to be studied carefully to ensure that an assessee is entitled to the benefits of the exemption.
d) Where partial exemption from the value is given in respect of certain services vide notification no 26/2012-ST dated 20-6-2012 the assesses should avail such partial exemption as per the notification including fulfilling of conditions prescribed therein.
e) Wherever reverse charge method of taxation has been prescribed vide notification no. 30/2012-ST dated 20-6-2012, the service recipient has also to take care to pay service tax on the portion of the service for which he is liable to pay service to the government.
f) Service tax is payable on an accrual basis with effect from 1-4-2011. Since there can be differences between the date of invoice, date of rendering the service, and date of receipt of payment for the service. However, w.e.f 1-4-2011 receipt basis of taxation has been allowed by way of option to individuals and partnership firms if the aggregate value of services provided is Rs 50 lakhs or less in a financial year. Point of taxation rules has been introduced to define at what point of time service is deemed to be rendered. Understanding of these rules is very important because if there is any delay in payment by not properly appreciating these rules, interest will have to be paid.
g) Similarly, the place of provision of service rules has been notified for the purpose of
deciding the place where the service is rendered. These rules are relevant for determining the following:
i) In which jurisdiction the service provider is required to be registered?
ii) Whether the service is rendered outside India or in India and if the service is rendered outside the territory of India it is not taxable as per rules.
iii) In the case of the provision of services to SEZ unit the place of provision of service rules will apply and accordingly if the provision of service is in the SEZ unit it will not be taxed.
iv) For determining whether in a given case service is exported or not.
Therefore a very clear understanding of the Place of Provision of Services Rules is necessary.
h) Every taxable service has to be properly valued according to the valuation rules notified for this purpose. Now, there are elaborate rules prescribed for valuation
in respect of various types of services.
These rules have to be properly understood and appreciated.
i) Classification/ descriptions of service have to be properly understood because:
— It is the description or classification of service which determines whether the reverse charge method of taxation is applicable or not in a given case.
— Whether the benefit of any exemption granted can be availed or not depends upon on description/classification of the service.
— Whether partial exemption from value can be availed or not depends upon the description/classification of the service.
j) Payment of service tax is to be done quarterly in the case of individual, sole trading concern and partnership firms.
k) Returns have to be filled on time indicating correct particulars therein.
l) Proper records have to be maintained by the assessees so that the same can be produced during inspection, audit so as to justify the assessees stand.
m) All confirmed payment of service tax has either to be paid or shall be agitated in appeal proceedings.
If there are any mistakes apparent on record in any order passed by any authority the same has to be rectified by making an application in that behalf.
Thus service tax assesses have to have a good grasp of the provision of service tax law contained in the Act/Rules notification issued by the Government. Circular issued by the Board also help in understanding the department’s view on a particular aspect though circular are binding on the departmental officers and not binding on the assessees. A fair knowledge of the law has laid down in various Tribunal Rules, High Court and Supreme Court will also help in proper compliance with the law and giving explanation during the audit by the officers attached to the department.
Preparedness of assesses for service tax audit
All service tax assesses should tend to be well prepared for facing the audit by ensuring the following:-
a) Keeping their books/records up to date and tidy with supporting documents.
b) Ensuring that they are registered for all taxable services being provided by them whether in their capacity as service provider or in their capacity as service receiver.
c) Where service tax registration has not been obtained for any category of service the same should be applied for and the existing registrations should be got amended suitably.
d) Whether service provider has ceased to provide any service he should have applied for cancelling of service tax registration.
e) Proper records must be maintained for various invoices issued for service tax purposes.
f) Generally service tax invoices should be running on serial number for the whole year and only one series of invoice should be maintained normally.
g) Proof of deposit of service tax in the form of challan generated on the computer or deposited in the bank must be kept properly on the file.
h) All service tax has to be properly prepared and filed and kept on record.
i) A review of all transaction other than goods must be undertaken to see whether any of those transaction attracts service tax. Normally activities on which excise duty or VAT has been paid do not attract service tax.
j) All payment made under foreign exchange should be scrutinized to see whether any payment related to service received form non-resident in which case reverse charge method of taxation will be applicable.
k) All receipt of foreign exchange may be scrutinized to see whether any receipt is for service rendered to non-resident which are normally not taxable being treated as export of service.
l) In the case of works contract proper valuation has to be done as per rules.
m) All debit/credit notes issued must be examined to see to service tax implication flowing therefore.
n) CENVAT credit records should be kept up to date.
o) CENVAT credit should be taken only on eligible inputs/eligible input services and eligible capital goods.
p) Utilization of services tax credit must be in accordance with the CENVAT credit rules 2004.
Generally well before the commencement of the audit by the department a thorough review has to be undertaken by the assesses to get well prepared to meet the queries that may be raised by the audit team by focusing inter alia on the above aspects. The list above is not exhaustive but only illustrative.
AUDIT OF DECLARED SERVICES
Declared service is one which is covered by section 66E. The object is to remove any confusion or doubts with regards to the taxability of these services.
VALUATION OF BUNDLED SERVICES
The concept of bundled services has been introduced simultaneously with the introduction of Negative list based taxation with effect from 1-7-2012. Bundled service has been defined in the Explanation to Section 66F of the Finance Act, 1994 (chapter V) to mean the bundle of provision of various services wherein an element of one service is combined with the element or elements of provision of any other service or services.
AUDIT OF MEGA EXEMPTIONS FROM SERVICE TAX
Mega Exemption form tax has been granted under Notification No.25/2012-ST,dated 20-6-2012,under the Negative List based service taxation scheme. Various tax exemptions have been compendiously collated under one Notification No. 25/2012 ST,dated 20-6-2012 which is popularly known as Mega Exemption in view of the size of the notification being very big and large. The Mega Exemption notification covers a variety of services. Some of these services are also subject to certain conditions.
Audit of Small Scale Exemption facility
Availing of Small Scale Exemption up to Rs. 1 million under ,dated 20-6-2012
Audit will look into the following aspects while examining the records of assesses claiming Small Scale Exemption:-
a) Whether aggregate value of services have not exceeded Rs. 1 million in the financial year preceding the financial year?
b) Whether the service provider is/is not providing the service under brand name or trade name of another person?
c) Whether the person liable to pay service tax under reverse charge method is not availing the benefit of exemption?
d) Whether the service provider has opted not to avail exemption, and if so, whether he has refrained from withdrawing from that option during the financial year?
e) Whether during the period of availing exemption the service provider has not availed CENVAT credit of the service tax paid on any input services?
f) Whether service provider has not availed credit on capital goods received in the premises during the period when he was availing SSI exemption?
g) Whether the CENVAT credit availed by the service provider was only in respect the period after crossing the SSI exemption limit or not?
h) In case the service providers opts to avail exemption in succeeding financial year
(having chosen to pay service tax in the preceding financial year so):-
i. Whether while exercising such option to avail exemption he has paid an amount equal to CENVAT credit taken by him in respect of any inputs lying in stock or process on the date on which he opts to availing such exemption?
ii. Whether he reversed the balance CENVAT credit if any in his books.
Whether the exemption which has been availed by the service provider covers the taxable services provided from more than one premises from where the service are provided and the values have been aggregated and such aggregate value does not exceed Rs. 1 million in the preceding financial year? Aggregate value for this purpose refers to total value of services charged in the first consecutive invoices issued during the financial year but does not include value charged towards wholly exempted service.
In many cases, it is found that small scale service providers are not aware of the scope of the small scale exemption under Notification No. 33/2012-ST, dated 20-6-2012 and they commit mistakes/error out of ignorance or deliberately by-
a) Not properly disclosing the value of the taxable services:
b) By not aggregating the value of taxable services provided from different premises:
c) By availing exemption separately or each category of service provided by them;
d) By suppressing the facts of providing service under other brand name;
e) By availing credit in the succeeding financial year even where the value of taxable services provided in the preceding financial year exceeds Rs. 1 million ;
f) Sometimes, the person claiming the service under reverse charge method also avails wrongly small scale exemption which is not permissible.
Audit will look into all the above aspects.
AUDIT OF SERVICES UNDER REVERSE CHARGE METHOD
Reverse charge method of taxation refers to a situation where the service recipient has been made liable to pay service tax to the government in respect of services received by him. At present in terms of Notification No. 30/2012ST, dated 20-6-2012, w.e.f. 1-7-2012, 11 categories of services has been notified for the purpose of reverse charge method of taxation.
Accordingly the taxable services:-
i. Provided or agreed to be provided by an insurance agent to any person carrying on the insurance business;
ii. Provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is,-
(a) any factory registered under or governed by the Factories Act, 1948;
(b) any society registered under the Societies Registration Act,1860 (21 of 1860) or under any other law for the time being in force in any part of India;
(c) any co-operative society established by or under any law;
(d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made there under;
(e) any body corporate established, by or under any law; or
(f) any partnership firm whether registered or not under any law including association of persons;
iii. Provided or agreed to be provided by way of sponsorship to any body corporate or partnership firm located in the taxable territory;
(iv) Provided or agreed to be provided by,-
A. An arbitral tribunal, or
B. An individual advocate or a firm of advocates by way of support services, or
C. Government or local authority by way of support servicers excluding,-
(1) renting or immovable property, and
(2) services specified in sub-clauses (i),(ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994,
To any business entity located in the taxable territory;
(v) provided or agreed to be provided by way or renting of a motor vehicle designed to carry passengers to any person who is not in the similar line of business or supply of manpower for any purpose or service portion in execution of works contract by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory;
(B) provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory.