business audit

8/12/2019 Business Audit

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VAT AUDIT MANUAL

VAT audit manual

Maharashtra STD October 20071


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DISCLAIM!

1. This is a manual of procedure. It doesn't replace the Act, Rules or

Notifications.

2. Any future amendment to the Act, Rules or Notifications may requirechanges in the procedures. The manual should be read accordingly.

. Any Trade or !epartmental "ircular issued after the publication of this

manual may modify the procedure.

#. The manual is intended for the internal use of the !epartment. Nothing

from the manual should be quoted in any statutory order, notice or

intimation to the dealers or other persons.

Co"#ri$ht Notice%

This manual is the "ro"ert# o& the Sales Ta' De"artment o& (o)ernment

o& Maharashtra and ma# not be re"roduced * co"ied* stored or sold or

made use &or an# commercial "ur"oses +ithout the e'"licit +ritten

"ermission o& The Commissioner o& Sales Ta'

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C,A-T! . / AC1(!OUND TO VAT COM-LIANC

Cha"ter Descri"tion -a$e Nos

1.1 The scope of this manual $ $

1.2 The role of %AT audit $ &

1. lements essential to a %AT compliance system & (

1.# )b*ecti+es of %AT audit ( 1

C,A-T! 2 3 AUDITO!S -O4!S AND !S-ONSIILITIS

2.1 Auditors po-ers under the %ATA 22 11 11

2.2 )+erall Responsibilities 11 12

2. )ther functions and roles of +arious officials 12 1/

C,A-T! 5 3 CLASSI6ICATION O6 AUDITS

.1 %AT audit classification 10 1$.2 Ad+isory +isits 1$ 1$

C,A-T! 3 ST!UCTU!D A--!OAC, TO AUDIT

#.1 eneral 1& 1&

#.2 The structured approach to audit 1& 1(

#. Audit organiation and staffing 1( 21

#.# 3election of audit +isits 21 2/

#./ anagement of audit acti+ity 2/ 2$

#.0 Allocation of time to audit cases 2& 2&

#.$ "ontrol of audit cases 2& 2(#.& Targets 2( 2(

C,A-T! 8 3 UND!TA1IN( T, AUDIT

/.1 Introduction

/.2 Noteboo4s

/. uidelines for 4eeping good noteboo4s #

/.# 5reparation for the audit +isit # /

/./ 5re6+isit chec4s / 0

/.0 7se of mar46up ratios $ $

/.$ Inter+ie-ing a dealer on an audit +isit $ &

/.& 3tructuring the inter+ie- & #

/.( 8asic questions at the inter+ie- # #1

/.1 7se of audit cross6chec4ing system #1 #2

/.11 "onducting %AT audit

/.11.1 Auditing of inputs

#2

##

#0

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/.11.2 Auditing of outputs

/.11. 7se of mar46up, cash reconciliation and cash flo-tests

/.11.# 9amination of annual accounts

/.11./ Accounts audited by accountants/.11.0 Auditing of special focus areas

##

##

#/

#/#0

/.12 5otential %AT ris4s

/.12.1. !isaggregation

/.12.2. Absence of %AT dealer records/.12.. :ailure to produce ta9 in+oices

/.12.#. :ailure to produce commercial e+idence of e9ports;

inter6state trade/.12./. :ailure of %AT dealer to attend appointment for audit

/.12.0. :ailure to register for %AT

#0

#0

#$#$

#&

#(

#(

#(

/.1 "losing the audit +isit

/.1.1. :actors to be considered in closing the audit +isit/.1.2. 5rocedure for closing the audit +isit

#(

#(/

/2

:lo- chart /

C,A-T! 9 3 !6UND AUDITS

0.1 Note /# /#

C,A-T! 7 3 -OST AUDIT CONT!OLS

$.1 Introduction // //

$.2 Action by the auditor // /0

$. Action by the ne9t highest authority /0 /$

$.# "ontrol of audit acti+ities /$ /$

$./ 5ost Audit


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C,A-T! < 3 MANA(MNT !-O!TIN(

(.1 Introduction 0 0

(.2 %AT -or4 return 0 0

(. "lassification of %AT errors and e+asions 0 0#

C,A-T! .0 3!(IST!S 6O! USINSS AUDIT SCTION

1 Introduction 0/ 0/

1.1 "ontrol Register >bar 1.? 0/ 0/

1.2 !ay 8oo4 of 8usiness Audit and Assessment >bar 2? 00 00

1. "ross "hec4 Register >bar ? 0$ 0$

1.# :ile mo+ement register >bar #? 0& 0&

1./ Audit not underta4en register >bar6/? 0& 0&

1.0 "riteria analysis register >bar 0? 0( 0(

1.$ The description of the abo+e Registers $ $

C,A-T! .. 3T, INS-CTION O6 !CO!DS

11.1 Introduction $1 $1

11.2 "o+erage $1 $1

11. Reporting and "ompliance $1 $1

C,A-T! .2 3COMMNT ON !CO!D 6ILIN(

12. "omment $2 $2

C,A-T! .5 3U-DATIN( O6 MANUAL

1. 3chedule $ $

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Maharashtra STD October 2007/


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A--NDICS

A55N!I@ A :)R3 73! IN %AT A7!IT

:orm Audit 1 6 %AT auditor -ee4ly programme:orm Audit 1.16!ealers' 5rofileB 5re6+isit "hec4

:orm Audit 1.26 5reliminary or !es4 re+ie-

:orm Audit 2 6 "onfirmation of audit appointment:orm audit 2.1 Authorisation by the C"

:orm audit 2.2 !uties and responsibilities of the dealer during

the course of audit.

:orm Audit 6 7rgent ; routine cross6chec4ing form:orm Audit # 6 Notification of audits that are not underta4en

:orm Audit / 6 3ummary of business acti+ities and records

:orm Audit /.( Interim Audit +isit Report:orm Audit 0 6 Audit +isit report

:orm Audit $ 6 :ormat of Audit :indings

A55N!I@ 8 DLTD

A55N!I@ " IN57T3 "D"E


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C,A-T! .

AC1(!OUND TO VAT COM-LIANC

.. The sco"e o& this manual

a? This manual is intended to assist the auditor to carry out an audit by pro+iding abasic structure under -hich a %AT audit should be conducted. This -ill enablethe auditor to identify areas -here %AT legally due has been under6declared.

b? The role of %AT audit and the %AT auditor are completely different to that ofthe internal audit department. There are some brief guidelines attached at

Appendi9 E -hich set out an international best practice role for an internal audit

department in a ta9 authority.

.2 The role o& VAT audit

a? The ob*ecti+e of a %AT audit is to close the gap bet-een the ta9 declared by

%AT dealer and the ta9 legally due. 7sing a ris4 based audit selection system,

the 3ales Ta9 !epartment >3T!? should be able to fulfill the dual purpose ofma9imiing re+enue collection and ensuring +oluntary compliance by pro+iding

a reasonable chance that defaulters -ill be identified and undeclared ta9, interest

and penalties are collected.

b? The %AT audit is an integral part of a %AT compliance ; self6assessment

system. It is important to note that, the role of %AT Audit is to underta4e

business in+estigation at dealerHs place of business -ith prior intimation to the

%AT dealer. The %AT auditor is not e9pected to e9ercise po-ers relating toenforcement, +i, search or seiure. Do-e+er, -here+er necessary, %AT

auditor has to see4 help of In+estigation team so that the potential e+idence isnot destroyed.

c? The aim of %AT audit is to encourage the highest possible le+el of +oluntarycompliance using a system of self6assessment. The %AT dealer calculates his

o-n liability and ma4es his payment of the ta9 declared as due -hile the 3T!

re+ie-s the self6assessment subsequently by means of a %AT audit.

d? A self6assessment system relies for its effecti+eness on a number of integrated

components They are

%AT dealers maintaining proper boo4s of account and records, if

appropriate, as prescribed by the


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3imple, understandable and effecti+e procedures and forms so that a

%AT dealer -ho -ants to comply can do so -ithout undue cost

ffecti+e penalties for non6compliance -hich are enforced by the 3T!

3imple and effecti+e controls -hich reduce the scope for fraud

5rompt and effecti+e action against %AT dealers -ho ha+e not filed%AT returns and ; or -ho ha+e not paid the ta9 declared or assessed.

.5 lements essential to a VAT com"liance s#stem

a? Registration of %AT dealers

This pro+ides the basis for control of %AT dealers. It identifies those dealers

-ho ha+e an obligation to account for %AT and brings them under the control

of the administration. :ailure to register at the appropriate time is dealt -ith in

the rele+ant pro+isions of the aharashtra %alue Added Ta9 Act 22

>%ATA 22?.

b? %AT return

The %AT return is the most important form in %AT administration as it

pro+ides the basis for the audit of the %AT dealer and the means for collectingthe ta9. It is essential that the dealer is using the correct %AT return for his

business and the filing of those %AT returns is strictly enforced and the ta9

declared is collected. :ailure to ta4e action in these areas renders %AT audits

ineffecti+e.

c? Eeeping boo4s of account and records

As %AT is le+ied by reference to the financial transactions of the business,

boo4s of account and records must be 4ept by dealers to enable 3T! to chec4

and confirm that the registered dealers ha+e complied -ith their legalobligations to maintain proper accounts. !ealers must retain their records for a

minimumperiod of fi+e years from the e9piry of the year to -hich they relate,

see Rule 0&.

d? Ta9 in+oices

The ta9 in+oice is a crucial document in the operation and control of a %ATsystem. The ta9 in+oice establishes the %AT liability of the seller of ta9able

goods and most importantly is also the authority for a buyer to claim a credit for

the ta9 paid on inputs, -ithout ta9 in+oices effecti+e compliance cannot beachie+ed. Ta9 in+oices pro+ide an audit trail for dealers in+ol+ed in both the

sale and purchase of ta9able goods. The %ATA 22 s. &0 defines the

requirements and conditions related to the issue of ta9 in+oices.

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e? Access to boo4s, records and documents

:or effecti+e +erification of %AT returns, 3T! auditors require access to the

boo4s and records of all dealers. )rdinarily, the %AT dealer is required to 4eep

his accounts, registers and documents at the place or places of businessspecified in his registration certificate, unless agreed other-ise by the

"ommissioner.

:urther, in terms of the pro+isions of s. 0#>1?, %AT auditor may require the

%AT dealer to ma4e a+ailable any accounts, registers, documents or furnish any

information relating to his business, as may be necessary for +erification of

%AT returns.

If need be, %AT auditor can ta4e copies or e9tracts of accounts, registers or

documents as may be necessary. %AT auditors can also authenticate theaccounts ; records ; documents e+idencing the transactions by putting their

signature so as to ensure that the records ; e+idence is not destroyed or altered.

!etails of accounts ; records ; documents authenticated should be recorded inthe Note 8oo4.

3ome %AT dealers -ill attempt to hide records, -hich may contain e+idence of

%AT e+asion. In such a case, %AT auditor may consider see4ing help of theIn+estigation team so that search can be carried out for detecting hidden records.

The %ATA 22 s.0# pro+ides for po-ers of access to premises, seiure of

records, and the po-er to copy and seie boo4s, -hich can be used byappropriately empo-ered officials. 5enalties are also specified for a failure to

fulfill these obligations.

. Ob=ecti)es o& VAT audit

a? The o+erall aim is to chec4 the correct amount of ta9 is collected and impro+ecompliance by dealers. To achie+e this ob*ecti+e, auditors should be required to

"onfirm the dealer is correctly registered


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nsure that any unsatisfactory features disco+ered on an earlier +isit ha+ebeen corrected.

nsure that return and other statutory filings are timely done by dealers.

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C,A-T! 2

AUDITO!S -O4!S* L(AL -!OVISIONS AND

!S-ONSIILITIS

2. -o+ers under the MVATA 2002 relatin$ to "roduction and ins"ection o&

accounts and documents and search o& "remises%

a? 3ection 0# of the %ATA 22 empo-ers the "ommissioner to enter business

premises at all reasonable times to inspect accounts, registers and documents

related to purchases, sales, deli+ery and stoc4s of goods.

b? It further empo-ers the "ommissioner to enter and search any place of business

of any dealer or any other place -here the "ommissioner has reason to belie+ethe dealer 4eeps, or is 4eeping, any accounts register or documents of his

business or stoc4s of goods relating to his business.

c? If the "ommissioner has reason to belie+e any dealer has e+aded or isattempting to e+ade any ta9 due from him, the "ommissioner may seie such

accounts, registers or documents from the dealer as may be necessary.

d? 3ection 1 of the %ATA 22 empo-ers the "ommissioners to delegate such

po-ers and perform such duties as necessary to Additional "ommissioner, Coint

"ommissioner, senior !eputy "ommissioners, !eputy "ommissioners,Assistant "ommissioners, 3ales Ta9 )fficers and other )fficers and persons.

e? %AT auditor -ill ha+e po-ers as may be delegated by the "ommissioner.Da+ing regard to the recommendation that, In+estigation function -ithin a %AT

system should be separate from %AT audit functionJ the "ommissioner maydecide not to delegate the po-ers to %AT auditors -ith regard to in+estigation,

enforcement, search or seiure. Do-e+er, -here+er necessary, %AT auditorshould see4 help of In+estigation team for carrying out effecti+e and purpose

oriented audit. "ertain audit cases can also be referred for In+estigation >Refer

Appendi9 I for further information?.

f? "urrently, the po-ers under section 0#>? and 0>#? aren't delegated to the

officers other than the officers -or4ing in the In+estigation =ing.

g? The +arious sections rules and circulars -hich are mainly rele+ant to the

8usiness Audit 3ections -or4ing are compiled in Appendi9 KGL.

22 O)erall !es"onsibilities%

a? Auditors authoried to conduct audit should adhere to the instructions contained

in this manual.

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b? The auditor should identify himself and sho- his authoriation to the %AT

dealer before commencing his audit.

c? The auditor should be impartial and apply the la- and Rules in a uniform

manner.

d? The auditor should ensure that any information obtained in the course of that

audit relating to the %AT dealer is treated in strict confidence.

e? The auditor should ensure that in the areas co+ered on the audit +isit, ta9 has

been properly accounted for, declared and discharged under the pro+isions of

the %ATA 22.

f? The auditor should ensure that the %AT dealer is treated in a courteous manner

and is pro+ided -ith the opportunity to respond to queries raised by the auditor.

g? The %AT dealer should be pro+ided -ith a full and proper e9planation of any

under declaration of ta9 identified.

h? =here there is a lac4 of cooperation, failure to pro+ide information or any

unusual circumstances, the auditor should consider about referring the case to

In+estigation 3ection.

25 !es"onsibilities o& )arious o&&icials in the audit branch shall also include

&ollo+in$ &unctions and roles

a> Additional Commissioner o& Sales Ta' VAT35

To be Administrati+e head of the 8usiness Audit branch in umbai.

To be in6charge for compilation of !) of the 3tate and 5olicy decisions on8usiness Audit.

To cause to generate, allocate and distribute the cases for business audit8ranch in umbai !i+ision and mofussil areas.

To Appro+e post6facto specific audits.

To grant pre6Audit permission for Audit +isits proposed by Auditors based

on mar4et information

To Achie+e %AT re+enue target and target of number of audits in the

8usiness audit 8ranch.

To e+aluate re+enue ris4 criteria for audit and ma4e necessary changes asper the results of criteria selected earlier.

Appro+e the e9tension of time alloted to !eputy "ommissioner for

completion of each audit case.

To communicate -ith Ta9 Intelligence 7nit.

To communicate -ith other branches of the 3ales Ta9 !epartments

b> ?oint Commissioner o& Sales Ta'* usiness Audit

)+erall administration and control of 8usiness Audit section.

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3uper+ision of all subordinate officers B staff..

Issue authoriation letters to !eputy "ommissioners for sending it to dealers

ad+ising therein that indicated official has been authoried to conduct audit

in the dealers' case alloted to them.

Inputs on pre6+isit preparation, guidance B closure of cases allocated to the

!eputy "ommissioners.

:ollo- up and achie+ement of %AT re+enue target of the section.

Authoriation of specific audits based on information generated throughaudit -ith post6facto appro+al by Additional "3T %at and if through local

information, then -ith pre6+isit appro+al of Additional "3T %at in caseof umbai. In case of matters related -ith mofussil, such appro+als shall be

gi+en by Additional "3T of respecti+e geographical ones.

3uper+ision of business audit programme.

To ensure that all notified audit +isits are completed and reported.

"onduct quarterly staff meetings on ris4 areas and audit techniques. Guarterly select one case from those out of !eputy "ommissioner ha+ing no

under ; o+er declaration for detailed scrutiny.

Inspection and re+ie- of audit units.

Appro+e the e9tension of time alloted to Asst."ommissioner ; 3ales Ta9)fficers for completion of audit.

+aluate Re+enue ris4 criteria.

"ommunicate -ith fraud in+estigation cell to maintain cohesion .

To 4eep liaison -ith other branches.

To maintain cohesion -ithin the di+ision.

3pecial attendance to ine9perienced staff or -ea4 performers.

onitor and impro+e staff performance.

Re+ie- of cases as per section 2/.

Any other -or4 as directed by the superior.

c> De"ut# Commissioner o& Sales Ta'* usiness Audit

Recei+e letter from Coint "ommissioner for being authoried for Audit and

send it -ith confirmation letter to dealer. Issuing of authoriation letters in the cases allocated to members of his audit

unit. Receipt B allocation of cases to Assistant "ommissioners >A"? and 3ales

Ta9 )fficers >3T)?.

Issuing of confirmation letters to the dealers in o-n cases. Inputs on pre6+isit preparation, guidance B closure of cases allocated to A",

3T).

3ubmit pre6+isit preparation for audit to Coint "ommissioner in o-n cases,outline strategy and get inputs in o-n cases.

"onduct of audit in o-n cases. 5reparation B submission of interim ; final audit report to C". Intimating the findings of audit to dealer. If the dealer doesn't not agree -ith the findings in stipulated time, issue

Assessment notice B complete assessment.

ducate the dealer -here+er required.

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)+erall super+ision of o-n audit unit. "onsolidation B 3ubmission of !emi6)fficial>!)? and other statements of

the unit. Reaching the re+enue and audit targets of self B the unit as a -hole. 3election of specific audit cases based on information recei+ed and

submission to C". To segregate the papers to be sent to the central registry and to the local

registry. Re+ie- audit results achie+ed and reasons for under6 declarations of Audit

unit.

Guarterly select one case from those out of Assistant "ommissioner and

3ales ta9 )fficer ha+ing no under ; o+er declaration for detailed scrutiny. Any other -or4 as directed by the superior

d> Assistant Commissioner o& Sales Ta'* usiness Audit

Recei+e letter from !eputy "ommissioner for being authorised for Audit.

Issue confirmation letters for audit in cases allocated to him along -ith

authorisation letter.

:ollo- up of the audit cases after they are fi9ed,

3ubmit pre6+isit preparation of cases, outline strategy and ta4e inputs from

!"

"onduct of audit in o-n cases

5reparation B submission of interim ; final audit report

Intimating the findings of audit to dealer

If dealer not agreeing -ith the findings, issue Assessment notice B complete

assessment,

ducate the dealer -here+er required

3ubmission of !emi6)fficial >!)? and other statement to the !eputy

"ommissioner.

Re+enue and audit target completion of self.

To segregate the papers to be sent to the central registry and to the local

registry.

Any other -or4 as directed by the superior

e> Sales Ta' O&&icer* usiness Audit

Recei+e letter from !eputy "ommissioner for being authorised for Audit.

Issue confirmation letters for audit in cases allocated to him along -ith

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:ollo- up of the audit cases after they are fi9ed.

"onduct of audit.

%erification of boo4s and audit of business.

5reparation B submission of interim ; final audit report.

Ad+ising the dealer to file re+ised returns.

If dealer not agreeing -ith the findings, issue assessment notice B complete

assessment.

ducate the dealer -here+er required.

3ubmission of !emi6)fficial >!)? statement to !eputy "ommissioner.

Re+enue and audit target completion of self.

To segregate the papers to be sent to the central registry and to the local

registry.

Any other -or4 as directed by the superior Authority.

&> Sales Ta' Ins"ector* usiness Audit

"ollection of information ; 5reparation of dealer profile

5reparation of pre6+isit report etting the files and details from the di+ision offices and other branches

-here+er a+ailable

:ollo- up dealer for confirmation of audit scheduled date

To ser+e the appointment letters ; notices ; orders if such are returned un6ser+ed.

Delp officer in +erification of dealers details ; record

Read and correct the statements, letters prepared by cler4s

5ut up and follo- up cross chec4.

3ee that the requisite chec4 list of acti+ities to be carried out at dealers 5)8are completed.

5reparation of -ee4ly audit program

Rearrange the +isits -here they ha+en't ta4en place in first instance

To gi+e information to cler4 for !) and other statements

To follo- up for payments -here dealer agrees for re+ised returns

To carry out audit as B -hen directed


$> Ta' Assistant ; Cler@* usiness Audit

Can assist the auditor in ca"acit# o& ta' assistant in the audit at dealers

"remises as and +hen reuired b# his o&&icer 5reparation and certification of registers

Receipt and entry of files in registers

etting the files and details from the -ards ; di+isions or other branches

5utting up of letters of allocation, confirmation

3ubmission and for-arding of 7)R

Typing and putting up of letters and communications

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5reparation of proceedings for file mo+ement.

Ta4ing relati+e entries of under declarations in prescribed registers

5reparation and submission of monthly statements and other statements

"ustodian of files


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C,A-T! 5

CLASSI6ICATION O6 AUDIT

5.VAT audits can be di)ided into 5 main cate$ories

a? eneral audit

b? Refund audit

c? 3pecific audit

i. (eneral audit These audits form the ma*ority of the audits to be completed by3T! and the ob*ecti+e of general audits should be to pro+ide broad audit co+erage

of all %AT dealers -ithin / years +ith additional audits &or larger, more

comple9 %AT dealers and those -ith identified under6declaration ris4s. Theselection of %AT dealers for general audit is defined later in this audit manual.

ii. !e&und audits% the guidelines for these audits are set out in a separate manual.The said manual be referred as and -hen necessary in cases of refund audit

iii. S"eci&ic audit 3pecific audits include

audits resulting from the receipt of urgent references, see the section on cross6

chec4ing >these should ta4e priority?

late registrations

cancellation of registration -here large amounts of re+enue are deemed to beat ris4

audits emanating from credible information regarding suspected ma*or ta9e+asion from intelligence sources

audits resulting from the receipt of routine references -here the dealer is not

registered for %AT, see the section on cross6chec4ing later in this manual.

audits resulting from e9isting audits, -here the auditor is of +ie- that there ispossibility of ta9 ris4, e+en if the dealer is registered. These cases shall beauthorised by Coint "ommissioner and need post audit appro+al of the

Additional "ommissioner of 3ales Ta9, %AT . In case of mofussil audit

cases such appro+al shall be gi+en by Coint "ommissioner in charge -ith postfacto appro+al of onal Additional "ommissioner

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audits resulting out of mar4et6related information from +arious sources

recei+ed by any auditing official or by *oint "ommissioner. These Audit +isits

shall need pre6audit permission by Additional "ommissioner of 3ales Ta9>%AT Adm ? for umbai and Additional "ommissioner of 3ales Ta9 of

respecti+e one for mofussil area.

52Ad)isor# )isits

)ne of the ob*ecti+es of %AT audit is to educate the dealer and gi+e him anopportunity to as4 questions -hich the auditor either ans-ers on the +isit or

pro+ide the dealer -ith -ritten ad+ice after see4ing guidance at the office.

These +isits are not general audit +isits, ho-e+er, they should be incorporated asspecific audits. %isits to the large dealers and dealers allocated to


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C,A-T!

ST!UCTU!D A--!OAC, TO AUDIT

4 (eneral%a? The le+el of audit acti+ity and frequency of audit -ill be decided by the staff

resources a+ailable related to the %AT registered dealer population. Do-e+er,it -ill al-ays be necessary to ensure that the a+ailable staff resources are

deployed to achie+e the t-in ob*ecti+es of ma9imiing both re+enue collection

and +oluntary compliance by %AT dealers.

b? The achie+ement of these ob*ecti+es can produce a conflict, for the targeting of

high ris4 dealers should ma9imie re+enue collection, -hereas broad auditco+erage is necessary to achie+e ma9imum +oluntary compliance. A balance,

therefore, has to be struc4 bet-een the deployment of audit resources, both to

collect re+enue and to pro+ide -ide basic audit co+erage. This is to be achie+ed

by selecting cases pertaining to specific annual ta9 throughput as mentioned in

para #.0>a? and deploying the +arious categories of officers to co+er thesedealers based on the throughput.

4 2 The structured a""roach to audit%a? =or4 must be planned in such a -ay so that an audit ta4es full account of

a+ailable information, assesses the action required and is carried out

systematically. The auditor should routinely

plan the audit programme

arrange the appointment -ith the dealer

carry out the pre6+isit ; audit preparation

perform a detailed and structured initial inter+ie- -ith the dealer

record the information obtained from the dealer in the inter+ie-, and

subsequently from the dealerHs records, in the auditor noteboo4

assess the information and identify potential ris4s, these -ill help the auditorto decide the chec4s to be applied -hen carrying out the audit of the records

e9amine business acti+ities and records, and test and +erify, -here possible,

the information found and -here not possible, question the dealer for

clarification

record the chec4s made and any results in the auditor noteboo4

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conduct a final inter+ie- -ith the dealer, this should attempt to resol+e any

issues disco+ered during the audit and also highlight any discrepancies found

issue an assessment for any under6declaration of %AT after follo-ingprescribed process, -here the dealer has not been able to pro+ide a

satisfactory e9planation and also notify the dealer of any o+er6declaration by

ad+ising him to file appropriate forms and returns , if not already filed.

record the -or4 performed in the auditor noteboo4 and subsequent auditreport

b? A structured approach to the audit ensures that

6or the auditor%

time is spent effecti+ely -hen e9amining the dealers records

-or4 is focused on areas of ris4

the auditor de+elops a professional approach to his -or4 and from this

uniform professional approach, 3T! de+elops its credibility -ith the dealer

population

the confidence of auditors is de+eloped

6or the dealer%

the audit is seen as an opportunity to de+elop a relationship -ith 3T! and

enable him to meet his legal obligations

is able to resol+e any uncertainties regarding his %AT liabilities in asatisfactory manner

there is a formal and transparent -ay of recording -hat has been underta4enon the audit and the dealer has a permanent record of any under6declarations

and has the opportunity to challenge the auditorHs findings

4 3 Audit or$aniBation and sta&&in$%a? %AT audits should be carried out in large ta9payer units >Normally, Refund audits -ould be handled by Refund Audit

3ection?

VAT audit manual



21/75

eneral and 3pecific Audit

c? The allocation of staff numbers to each team should broadly follo- the

-or4load percentage set out in this manual. In other -ords, &M for general,

and 2M for specific audits. Refund Audit has its o-n separate allocation.

d? The Additional "ommissioner )f 3ales Ta9 >%AT A!? should be directly

responsible for o+erseeing the -or4 of the %AT offices >8usiness Audit8ranch? in umbai. De shall cause to generate the Audit cases through

aha+i4as for the 8usiness Audit 3ections in umbai and in mofussil areas

and for communicating the same. De shall be responsible for the compilation of!emi6official statements and the policy matters regarding 8usiness Audit for

the 3tate. In case of offussil , the Coint "ommissioner in charge of the %AT

Administration shall be responsible for o+erseeing the 8usiness Audit. De shall

be also responsible for a gi+ing sanctions for specific audits -ith post factoappro+al from onal additional "ommissioner.

e? The !eputy commissioners, assistant commissioners and 3T)Hs should be

supported by 3ales Ta9 Inspectors >3TIHs? and there should be a number ofclerical support staff -ho may also -or4 as Ta9 Assistant.

f? In section offices, the more comple9 %AT audits should be carried out by the

!" -ith support from the A" and designated 3T)Hs or 3TIs' as may be

appropriate.

g? Audit of other large dealers should be carried out by the A".

h? The less complicated smaller %AT audits should be carried out by 3T)Hs.

i? "omposition audits and audits resulting from references -here the selling dealeris not registered, should be carried out by 3T)Hs and 3TIHs. =hereas, in case ofspecific audits ha+ing bearing on large scale re+enue the same can be carried

out by the !"s or A"s.

*? In umbai %AT 8usiness Audit section and mofussil offices, it is desirablethat %AT dealers should be audited at least once during a fi+e6year period -ith

the larger dealers audited once a year.

4? !ue to the number of composition dealers, it may not be possible to adhere to

the principle of recei+ing an audit e+ery fi+e years. Therefore, it may be

necessary to select the higher ris4 composition dealers based on turno+er,compliance and percei+ed ris4.

l? The a+erage number of audits per month to be completed by each official of8usiness Audit are reported in para #.& belo-. These targets may ho-e+er be

changed from time to time depending upon actual results

VAT audit manual



22/75

m? The Kaha+i4asL should generate and communicate the allocation of cases at

least one month prior to the completion of earlier tranche of cases. This -ill

facilitate the planning of audit +isits after considering +arious issues li4e pre6+isit chec4s, ad*ournment of +isits on account of the una+ailability of the dealer

or the officer on a particular date due to any reason, issuance of confirmation

letter, etc. eneration and allocation of cases through Kaha+i4asL shall befacilitated by the office of Additional "ommissioner of 3ales Ta9 %at Adm .

4 4 Selection o& audit )isits%a? In the initial #ears o& the VAT % Till the time, the aha+i4as system is fully

and completely operational and the audit criteria are e+ol+ed for generating

general audit cases, the cases shall be selected from the database of the dealers

by applying the criteria decided by a designated committee of "3T, Additional"3T Adm %at , Coint "ommissioners of 8usiness Audit sections and any other

members as may be nominated by "3T. These criteria may be changed from

time to time. The random selection shall also be a criteria for selection of audit.

Do-e+er, such cases are to be limited to ma9imum 2M of the total generalaudits. Apart from these

i. =here significant credible information is recei+ed, including urgent

references from other audits, concerning the possibility of e+asion, an audit

should be carried out at the earliest opportunity. These shall also include the

specific audits mentioned in first para of >i? in part >b? belo-

ii. !ealers, -ho ha+e consistently failed to file %AT returns >other than

composition dealers? and ha+e been issued -ith e96parte assessment>s?,should recei+e an audit -here it is considered there is a significant re+enue

ris4.

iii. The third category -ould be of those dealers -hich are selected by applying

certain audit criteria as mentioned abo+e.

b> Subseuent #ears o& audit

i S"eci&ic audits

These audits may include those -hich are generated by applying

specific criteria or trade or area, or a dealer, or those audits -hich areunderta4en in response to certain specific information generated through

mar4et or through audit +isits of the auditors. The selection of specificaudits can also be made manually by the head of the audit office.

Do-e+er the specific audit should not normally e9ceed 2 M of the

a+ailable audit capacity.

VAT audit manual



23/75

The cases in -hich In+estigation 8ranch has conducted +isits, business

audit should be ta4en compulsorily in such cases for the ne9t years .

The cases may be selected by auditor for specific audit being the casesgenerated through any audit +isit underta4en. The sanction of these

specific Audits should be gi+en by the concerned Coint "ommissioner of

3ales Ta9 -ith post6facto appro+al by the Additional "3T >%AT6? for

umbai and of the Additional "3T of respecti+e eographical one formofussil The specific audit cases -hich are generated through mar4et

related intelligence the pre+isit appro+al is to be ta4en from theAdditional "3T %AT Adm for umbai and from respecti+e onal

Additional "3T in case of mofussil

ii (eneral audits

The selection of general audits should be based on the criteria set out

belo-. The highest number of points equates to a higher le+el of deemed

ris4 and therefore priority for audit. 2 M of the general audit cases shallbe generated through random selection method from the total list of %at

dealers, after e9cluding the cases already selected for audit for that

particular year.

After a particular criteria is applied and list is generated of general

Audit, the results of the criteria should be tabulated in register namedK8AR 0L. :or cases selected through random selection the criteria shall

be random selection.

The criteria are not permanent, but can be changed from time to time

after e+aluating the results consolidated from 8AR 0.

C!IT!IA

input ta9 plus output ta9?

Abo+e Rs. 1 la4hs in the last 12 months 0 points

8et-een Rs. la4hs and Rs. 1 la4hs in the last 12 months #

points

8et-een Rs. 1 la4h and Rs. la4hs in the last 12 months points

8elo- Rs. 1 la4h in the last 12 months 2 points

"ompliance

VAT audit manual



24/75

o !ealers -ho ha+e recei+ed an assessment for an under6declaration of

ta9 on a %AT return -here the amount e9ceeds Rs. 1 la4h or are

mar4ed K5))RL on an ad+isory +isit # points

o !ealers -ho ha+e recei+ed an assessment for an under6declaration of

ta9 on a %AT return -here the amount is belo- Rs. 1 la4h

points

"omple9ity of %AT dealer business

o !ealer -hose business in+ol+es international e9ports; 3 2

points

o !ealer -ho holds a certificate of entitlement under a pac4age

scheme of incenti+es 2 points

o !ealer -hose business in+ol+es

International importer

8ranches -ithin the state of aharashtra

Inter6state 8ranch transfer and consignment sales

3ales to other states

5urchases from other states

=or4s contracts

9empt goods

16 acti+ities / points

6/ acti+ities $ points

In e9cess of / acti+ities 1 points

ar46up

o =here the mar46up is O #M belo- the a+erage for the acti+ity;commodity code # points

o =here the mar46up is bet-een 2M6#M belo- the a+erage for the

acti+ity; commodity code points

o =here the mar46up is 1M62M belo- the a+erage for the acti+ity;

commodity code 2 pointsVAT audit manual



25/75


26/75

chec4s enumerated in refund audit manual along -ith their business audit

and after issuance of the audit findings or filing of /1 or re+ised returns in

consonance -ith audit findings, the matter be referred to refund auditbranch along -ith the final findings of Audit for subsequent action i.e.

rant of refund. The names of such dealers along -ith specified details are

to be communicated e+ery month through the office of the Coint "3T to theRefund Audit branch in the prescribed D0 :ormat of statement

The cases -hich are allotted to %AT A!6? shall also be responsible for

the policy matters related to 8usiness Audit and generating the general audit casesfor umbai as -ell as ofussil areas

c? :or ofussil di+isions, the aha+i4as computer system -ill select a percentage of

the audit -or4load in a selected time period.. This -ill be based on the number of%AT dealers, the audit staff a+ailability and the need to audit all %AT dealers once

in a fi+e6year cycle. The dealers -ith the highest number of points -ill be selected

for audit.

d? There is ability for the Assistant "ommissioner >A"? and !eputy "ommissioner

>!"? audit to manually select dealerHs files for audit based on local 4no-ledge,intelligence or the need to audit for a specific audit, for e9ample an urgent

reference. This manual selection is only to be used -ith a +ie- to auditing high6ris4

%AT dealers and for selecting specific audits. The Coint "ommissioner >C"? audit

should authorie these audits. Do-e+er, the post6facto appro+al should be ta4enfrom Additional "3T >%AT6A!? in such situations in umbai and that of

respecti+e Additional "ommissioner of that particular di+ision in cases of mofussil

areas. Do-e+er for audits of cases based on the mar4et related information, suchappro+al should be ta4en from the respecti+e Additional "ommissioner of 3ales

Ta9 prior to conduction of audit.

e? )nce the audit selection has been made, the audits must be completed unless the

authority of !" or the C", as the case may be, is obtained for non6completion of the

audit, see :orm Audit #, Appendi9 A. In case of delay in completion of the auditspara #.0>e? and #.$ >a? may be referred for e9tension procedure.

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f? The C" audit is responsible for the management of %AT audits in his section and

!" Audit is responsible for the management of %AT Audit in his Audit unit.

g? The Coint "3T as -ell as the !eputy "3T should ensure that the authoriation

letters are issued to the auditors along -ith the list of the cases allotted to them

through aha+i4as or other-ise. This shall ensure proper planning of auditprogram

h? Auditors planning audit +isits should complete :orm Audit 1J see Appendi9 A,-hen ma4ing audit appointments on office days. The final program on :orm Audit

1 should be passed to his immediate 3uperior not later than the last office day for

the preceding -ee4. The details of :orm Audit 1 should be entered into the

computer audit system before passing on to the ne9t authority. In case of change inthe audit program li4e changing the dealer to be +isited for any reason, the same be

intimated to the immediate superior before going for the changed +isit.

i? The draft *ob descriptions for the audit positions in 3T! are set out in the current

draft of the proposed 3T! organiational chart and staffing allocations.

*? The *ob descriptions indicate the functional role and managerial responsibility of

each position -ithin the audit function.>outlined in "hapter 2 of this anual?

4? The follo-ing management acti+ities should be conducted

Coint "ommissioner

1. nsure the audit programs are satisfactorily completed.

2. To maintain control register for the cases allocated to his section .

3. To re+ie- o+erall audit results achie+ed and the reasons of under6

declarations to focus the acti+ity to ma9imie re+enue collection.

4. "onduct quarterly staff meetings to e9change +ie-s on ris4 areas andaudit techniques.

5. Guarterly select one audit case of deputy "ommissioner -here there -as nounder6declaration ; o+er6declaration for detailed scrutiny

0. Appro+e the e9tension of time alloted for audit cases allocated to Assistant

"ommissioners ; 3ales Ta9 )fficers.

!eputy "ommissioner

1. nsure the audit program is satisfactorily completed

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28/75

2. Re+ie- audit results achie+ed and the reasons for under6declarations to

focus audit acti+ity to ma9imie re+enue collection.

. Guarterly select one completed audit +isit -here no under6declaration; o+er6

declaration -as detected by A"Hs or 3T)s' for detailed scrutiny

#. "onduct quarterly staff meetings to e9change +ie-s on ris4 areas and audit

techniques

Assistant "ommissioner

1. nsure the audit program is satisfactorily completed

3ales Ta9 )fficer

1. nsure the team audit program is completed

l? The follo-ing table depicts the structure and hierarchy for reporting, file

allocation, closure of Audit and submission of !emi6official Reporting statements

VAT audit manual


Reports

to

Files al-located

by

Reviewsprogress ofaudit and

closes filesof

SubmitsD.O. To

CompilesD.O. Of

Designa-

tion

AdditionalCommission-

er VAT 3

Commission-er of Sales

TaxN.A. N.A.

Commissionerof Sales Tax

State along withthat of MumbaiBusiness Audit

sections

oint Com-missioner

Addl. Com-missioner

VAT 3N.A.

!e"ut# Com-missioner

AdditionalCommissioner

VAT 3All Audit $nits


oint Com-missioner

Addl.Commis-

sioner

Assist. Comm.% ST&

oint Commis-sioner

Audit $nit

Assistant

Commission-er


!e"ut#

Commis-sioner

None!e"ut# Com-

missioner &wn

Sales Tax&fficer


!e"ut#Commis-

sionerNone


&wn

Sales Tax 'n-s"ector

(es"ecti)e&fficer

None None None None

Cler*s(es"ecti)e

&fficerNone

NoneNone None


29/75

4 6 Allocation o& time to audit casesa? =hen planning allocation of time for audits, the follo-ing time should be allo-ed

for the audit of %AT dealers.

%AT dealers -ith annual ta9 throughput >input ta9 P output ta9? e9ceedingRs.1 la4hs not e9ceeding / days.

%AT dealers -ith ta9 annual throughput >input ta9 P output ta9? bet-een

Rs.2 la4hs 1 la4hs not e9ceeding days.

%AT dealers -ith annual ta9 throughput >input ta9 P output ta9? belo- Rs.2la4hs not e9ceeding 2 days.

b? It is also to be seen that the allocated audit cases should be completed -ithin a

period of three months from the date of allocation.

c? Ta9 throughput should be ta4en as the output ta9 declared on the %AT return

together -ith the set6off >input ta9? claimed on the %AT return.

d? :or the first 2 years, a monthly a+erage of ta9 throughput should be used to

establish this criterion.

e? The time limits specified for audits in >a? and >b? abo+e should not be e9ceeded. In

matter of the cases allocated to the 3ales ta9 officers and the Assistant

commissioners the time limits specified can be e9ceeded -ith the -ritten authorityof the C", -hen there is e+idence that significant additional re+enue is li4ely to be

generated, or there is e+idence of possible e+asion or there is a +alid reason for thedelay in action. In case of the deputy "ommissioners the time limits can bee9ceeded -ith the -ritten authority of the C" under similar conditions mentioned

abo+e. The reasons for the delay may be recorded in A7!IT :)R /.( -hich is to

be submitted to superior authority and the same can be used for see4ing thepermission for e9tension.

f? The ma9imum time allocation should include preparation for the +isit, time spent atthe premises of the dealer and post6+isit action e9cluding the assessments -hich

may ta4e longer time.

g? ffecti+e %AT audit is best achie+ed by the use of short, sharp, targeted +isits-hich depend on thorough +isit preparation to be effecti+e.

7 Control o& audit cases%

a? It needs to be ensured that the Auditing officials complete their allocated physical

quota of Audit %isits in the time stipulated under para #.&, -ithin three months ofthe communication of the allocated cases. Any case not completed in the audit

VAT audit manual



30/75

month should be carried for-ard in priority order to the ne9t month or, alternati+ely

reported -ith the reason for the inability to complete the audit. In case the delay is

more than three months then the permission be sought by follo-ing the procedureset out in #.0 >e? abo+e.

b? The allocation of audit cases should be recorded on a computeried listing -ith thedate of allocation, the date of commencement of audit and the date of finaliation.

c? The authority of the C" or as the case may, of !" should be obtained on :ormAudit #, see Appendi9 A, before an audit case is accepted for non6completion.

d? The C" or as the case may be !" should monitor the allocation, completion and

standard of all audits.

: Tar$ets% The auditors are generally and on a+erage, e9pected to complete

follo-ing targets in the Audit 8ranch. These targets can be changed in futuredepending upon the actual results accomplished.

a> -h#sical Tar$ets%

De"ut# Commissioners % Audit )isits "er month

Assistant Commissioners % : Audit )isits "er month

Sales Ta' O&&icer % .0 Audit )isits "er month

b> 6inancial Tar$ets %

"urrently, the :inancial target based on the cost of the staff in the four business

Audit 3ections in umbai multiplied by the factor of 1, is set to Rs. /& crores

per annum for these 8usiness Audit sections of umbai. This may be suitablydi+ided amongst the sections and units to arri+e at the unit -ise targets. The targets

for the ofussil areas should li4e-ise be decided. It has also been discussed and

decided that as non filing of returns is also a type of e+asion and the credit ofpayments made by such non filers -ho file returns after audit may be gi+en to the

auditor. The amount of ta9, interest and penalty -hich is finally assessed by the

Auditor by passing the Assessment order shall also qualify for the achie+ement of

target. 3imilarly in matters -here the cases ha+e been referred to the enforcementbranch, indicating therein the amount reco+erable the same amount shall qualify for

inclusion in the targets of the referring auditor.

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C,A-T! 8

UND!TA1IN( T, AUDIT

8. Introduction

a? The %AT audit is one of the most important lin4s in the chain of the %ATadministration. It is the opportunity to interact -ith the dealer and more

importantly chec4 the self6assessed %AT returns the dealer has submitted.

b? If %AT audit is seen to be ineffecti+e, dealer non6compliance by -ay of under6

reporting ta9 due -ill gro- and ta9 e+asion -ill become a ma*or problem in

re+enue collection.

c? This chapter defines in some detail the action to be ta4en to perform effecti+e

%AT audits.

82 Noteboo@s

a? Noteboo4s are pi+otal to the audit system. A suggested layout for an auditnoteboo4 is set out belo- -ith e9ample te9t in italics

6ront co)er o& noteboo@

VAT AUDIT NOTOO1

Auditor nameQM HowardQQQQQQNoteboo4 number QQQQ1QQQQQ...

!ate ta4en into useQQQQ4 May 2005Q

!ate ta4en out of useQQQ22 August 2005

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Inside co)er o& noteboo@ Inde'>

!ate of +isit !ealer name 5age number>s?

4 May 2005 Gangadhar Ltd 1-6

5 May 2005 Kamal Ltd 7-10

Main "a$es o& noteboo@

5age 1.

!ate 1 May 2005

!ealer nameGangadhar Ltd

!ealer address 12 Kemps orner! Mum"a#

VAT audit manual



33/75

b? :urther recommended guidelines for 4eeping noteboo4s are set out belo- under

Kguidelines for 4eeping good noteboo4sL.

c? Eeeping good noteboo4s is an essential component of an effecti+e %AT audit. If

the auditor is to recollect -hat he has done at an audit, it is not sufficient to-rite up the notes at a later stage. This is a bad habit and should be discouraged.

The distractions that occur at the office often mean that notes of a +isit are not-ritten until days after the +isit.

d? The recollection of facts and, in particular, figures, is substantially diminished

after a fe- hours let alone a fe- days. )nce this practice is adopted it soon

becomes a routine and the process and purpose of good notes is lost.

e? If dealers are not happy -ith an auditor ta4ing notes it should be e9plained that

the notes are part of the audit process and ha+e to be -ritten in order that theauditor recalls -hat -as chec4ed on a specific +isit.

f? There is a natural a+ersion by some dealers and they are uneasy about auditorsta4ing notes. If all auditors ma4e good notes at their +isits then dealers -ill

gradually become used to this process and soon ta4e it for granted.

g? The follo-ing points highlight some of the reasons -hy good notes are soimportant to the audit +isit

They pro+ide an accurate recollection of e+ents and facts

It pro+ides information, not only for the auditor, but for other people, including

management and any subsequent in+estigation

As outlined abo+e, they can be the main e+idence in starting a fraud

in+estigation and can form part of the e+idence that assists in successful

penalties being le+ied against the dealer

It pro+ides a record of -hat -as said bet-een the dealer and the auditor in

ans-er to the auditorHs questions

It can assist in pre+enting allegations of K-rong6doingL or corruption -hen theauditor is in the habit of 4eeping good notes in a -ell organied noteboo4.

h? The importance of good noteboo4s should not be under6estimated. anyauditors could find themsel+es being as4ed about a +isit they may ha+e

underta4en some months or years before. It becomes +ery embarrassing for an

auditor if he has to admit that his notes are either non6e9istent or lac4ing in

detail.

i? The auditorHs noteboo4 should be completely confidential and should not be

sho-n or copied to the dealer. The only e9ception is the record of inter+ie-VAT audit manual



34/75

-hich can be sho-n to the dealer in order to obtain his agreement that the

recorded inter+ie-s, and his ans-ers, are accurate.

85 (uidelines &or @ee"in$ $ood noteboo@s

a? Noteboo4s are only as good as the effort that is put into maintaining them. The

process of note ta4ing is important and needs the auditor to consider -hat he isas4ing and -hat ans-ers are gi+en in return.

b? )n an audit the auditor should prepare a series of fundamental questions that all

dealers should be as4ed. The ans-ers to these questions should be noted +ery

clearly in order that there is no misunderstanding in the ans-ers gi+en.

c? It is important before using any form of noteboo4 that the follo-ing points are

considered

The noteboo4 is bound ma4ing it difficult for pages to become loose and

drop out

The pages should be indi+idually numbered

A list of basic questions should be stuc4 at the front of the boo4 to act as

an aide6memoir >see later?

All entries in the boo4 are to be made in in4

d? =hen the abo+e points ha+e been considered, the auditor should get into aroutine -hen -riting up his noteboo4 at the dealerHs premises. The follo-ing

points should be obser+ed

7se the prepared basic questions as the start point for the inter+ie- andall other questions should come from these ans-ers

3tart each +isit -ith the dealers details, date, -here the +isit too4 place,the time it started and subsequently finished and -ho -as inter+ie-ed

=rite all entries neatly as it may be some time until they are referred to,remember other people may need to read them

e? If auditorHs +isit a dealer in teams of t-o, one auditor should as4 the mainquestions and the other -rite the ans-ers. This can be re+ersed on the ne9t +isit

so both auditors get used to both as4ing and noting the questions;ans-ers. The

auditor ta4ing the notes may also thin4 of other questions once the inter+ie-ingauditor has finished.

VAT audit manual



35/75

f? Ne+er, under any circumstances, remo+e pages from the noteboo4. If there are

mista4es, lea+e them in the boo4 and cross them out so the original error can be

seen alongside the ne- ans-er or point.

g? Record precisely -hat has been chec4ed, nothing more and nothing less. It is

often tempting to -rite details of things that ha+e not been chec4ed in detail.This should be a+oided as it could be an important issue at a later stage and

therefore embarrassing if the auditor is unable to gi+e pertinent detail.

h? Record any problems, in particular anything that appears fraudulent. This note

could be important e+idence at a later stage.

i? Record transactions for cross6chec4ing >this is discussed in detail later in themanual?

*? Record the dealers replies to ans-ers accurately

8 -re"aration &or the Audit Visit%

a? The head of the di+isional %AT office should pass the %AT dealer files selected

for audit to the auditors so that +isit preparation can commence. The

information can also be accessed by the official on the maha+i4as.

b? =hen planning audit +isits, account should be ta4en of the time allocation

defined earlier in this manual and the +isits planned -ithin that time6scale.

c? Audit +isits should be carried out on #;/ -or4ing days of the -ee4 and the other

day>s? should be office days for the planning of audit +isits, report -riting, the

resolution of queries and issue of assessments.

d? Ideally, all audit staff should attend the office on the same day to allo- for the

discussion of the problems identified in the past -ee4 and to de+elop team-or4.Do-e+er, the head of the audit di+ision should hold regular staff meetings -ith

all audit staff, at least once in a quarter, to identify audit problems, e9change

ideas and plan future audits.

e? In the case of general and audits resulting from urgent references, the auditor

should contact the authorised person listed in the file and ma4e an appointment

for the audit +isit.

f? This appointment should be made at least one -ee4 in ad+ance and the %AT

dealer ad+ised to ha+e all the boo4s, accounts and records a+ailable, and theappointment confirmed by posting or deli+ering :orm Audit 2. The list of

documents and the boo4s the dealer should 4eep ready for the audit should also

be sent -ith form Audit 2 > see Appendi9 A?. This form should be prepared in

duplicate and the original sent to the dealer -ith a duplicate placed in the dealerfile. The auditor should ensure that the authoriation letter in form 2.1 issued by

his superior authority and the duties and responsibilities in Audit form 2.2 is

VAT audit manual



36/75

sent along -ith the confirmation letter to the dealer. If any e9tra documents and

statements are to be prepared by dealer, the same are to be be informed to the

dealer

g? The audit +isit should normally be carried out at the dealerHs place of business.

If it is conducted at any other notified premises, a +isit must be made to thebusiness premises to establish the credibility of the business and the nature of

the acti+ities underta4en.

h? 8efore the +isit, the %AT dealer file should be re+ie-ed in detail, chec4ed for

outstanding references, copies of any %AT returns ; Re+ised %AT returns and

the re+enue ris4 areas should be identified. A plan of the areas to be chec4ed

should be de+eloped at this time.

i? ach -ee4, the auditor should prepare the computer :orm Audit 1 in triplicate.

T-o copies should be passed to the immediate 3uperior, to be used to chec4 thecompletion of audit reports and for on-ard communication to the Coint

commissioners office. In case of !eputy commissioners the program shall be in

duplicate, of -hich one copy -ill be for-arded to *oint commissioners office.The auditor should retain the other copy for his o-n record6 4eeping purposes.

In case the program of audit +isit is changed due to non a+ailability of the

dealer or any other reasons, and some other dealer is to be +isited then the same

can be done under prior information to the immediate superior authority. Audit+isits should not be made -ithout the prior intimation to the immediate superior.

88 -re )isit chec@s

a? It is essential the auditor considers the dealers business before he arri+es for the

audit. This -ill impro+e the confidence of the auditor -hen he establishes some

4no-ledge of the business and the trade that he -or4s -ithin.

b? In the same -ay that preparing basic questions gi+es a more professional imageof the auditor, time spent loo4ing at the o+erall credibility before the audit -ill

help establish -hat the auditor needs to e9amine on his +isit.

c? :or e9ample, if the sales or purchases of the dealer ha+e been fluctuating theauditor should try and establish the reason. It may be that the dealer has

seasonal +ariations in his business, ho-e+er, it could indicate that the %AT

figures are being manipulated.

d? It is also -orth consulting colleagues -ho ha+e +isited similar businesses and

establishing -hat the trends could be and -hat possible problems may beencountered on the audit.

e? It is +aluable to gather any information, that is legally a+ailable, from other

o+ernment departments before the +isit, for e9ample details of the dealerHsimports and e9ports, -hich -ill assist in establishing the credibility of the

business.

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f? eneral chec4s on the input to output ratio can be chec4ed to other businesses

in the same trade to see if they are credible. =hilst these do not pro+eunderpayment or fraud they can gi+e the auditor an indication of ho- the

business is performing and -hether or not it appears credible.

g? The auditor should consider the ris4 areas associated -ith particular dealers and

plan his +isit accordingly. :or e9ample, a restaurant -ill recei+e large amountsof cash and the auditor should consider e9amining the cash controls at the +isit.

h? The auditor could consider loo4ing at the business before his +isit to establish

-hat normally happens -hen an official of 3T! is not present. De can then

establish if there are any differences on his +isit. :or e9ample, are there morecash registers being used -hen he is not there, the amount of staff and the

general le+el of trade can all assist in establishing an understanding of the

business before the +isit ta4es place. It can also unco+er potential areas ofunder6declaration or fraud.

i? =hen constructing an inter+ie-, in con*unction -ith the basic inter+ie-questions outlined later in this manual, the auditor should also consider

supplementary questions that are specific to the type of business he is to +isit.

*? 8efore contacting the dealer establish -hat records should be a+ailable at the+isit. If the dealer has not been as4ed for certain documents, he can blame the

auditor for not specifying -hat -as required.

4? :orm $#, -here a+ailable, should be consulted and ris4 areas from this form

considered.

l? If it is not feasible to send a letter outlining -hat records should be madea+ailable, the auditor should ma4e a list of -hat he needs in his noteboo4 and

use this as a reminder -hen he telephones the dealer to ma4e an appointment.This -ill a+oid any uncertainty o+er -hat -as requested and the auditor then

has a note to refer to at the +isit.

m? To assist the auditor prepare for the audit there are sector notes attached atAppendi9 ) -hich highlight some higher ris4 trade sectors -here international

best practice %AT audit guidelines are set out.

n? The standardied formats for the dealer profile and 5re6+isit chec4s are pro+ided

in :orm no.1.1 and :orm no.1.2 respecti+ely. These formats should be filled ,

ris4 areas identified and should be discussed -ith the immediate super+isoryauthority before conducting of Audit. This is e9pected to help in identification

of the main ris4 areas.

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89 Use o& mar@3u" ratios% It is e9pected that in course of time the information about

the mar4 up ratios of the +arious trades and industries shall be a+ailable on aha+i4as for

comparing -ith the mar4 ups sho-n by the dealer. =hen such information is a+ailable

a? A+erage mar46up ratios for the past t-el+e months period should be produced

by the computer for each combined trade category ; commodity code. Inaddition, the mar46up ratio for the particular return should also be a+ailable.

b? The auditor should e9amine the data pro+ided for the ta9 periods and identifyany ta9 periods -here there are -ide +ariations from the normal pattern of

mar46ups or -here the mar46up for the ta9 period is in e9cess of 1M belo- the

a+erage for the particular category ; commodity code.

c? ar46up ratios should be analysed carefully and only those related to specific

acti+ities and commodities ha+e a +alue in selecting ta9 periods and ris4 areas

for audit. :or e9ample

A %AT dealer selling motor +ehicles and spares -ould pro+ide

meaningful data from the ratio for comparison purpose

A general store or a departmental store selling a -ide +ariety of goods

-ould not pro+ide any reliable mar46up ratio data.

87 Inter)ie+in$ a dealer on an audit )isit

a? The purpose of inter+ie-ing the dealer is to obtain information about his

business and the accounting records. :or this reason it is essential that theinter+ie- be conducted -ith the dealer and not a representati+e.

b? In some large businesses this may not be practical, as the directorHs may ha+edelegated responsibility for the accounts to another person. Do-e+er, -here

practical the business o-ner should be inter+ie-ed to ascertain the -or4ings of

the business and if he does not 4eep the records, then the appropriate personshould also be inter+ie-ed on this matter.

c? If the person 4eeping the records is purely a boo44eeper, then it is important to

establish -ho supplies the information that he -rites into the records.

d? This could be +ery important at a later stage if there is an allegation of fraud as

the boo44eeper can only enter into the records the figures that ha+e been

supplied to him.

e? 3ome e9amples of basic questions are set out later in this chapter and should beused for e+ery audit. 3upplementary questions -ill follo- from these and can be

tailored to the particular type of business that is being audited.

f? It is important to as4 basic questions as a matter of routine as dealers -ill

become used to this and it also gi+es the auditor confidence in his inter+ie-ing

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s4ills. An auditor -ho is prepared for his inter+ie- -ill appear more

professional to the dealer and therefore command more respect.

g? If the auditor presents his questioning in a random unstructured manner he -ill

not only miss as4ing +ital questions but furthermore, he -ill appear

unprofessional in front of the dealer.

h? The inter+ie- should be conducted in a rela9ed manner. It is not aninterrogation and if this is ho- it is presented to the dealer he -ill undoubtedlybe guarded in his ans-ers. A rela9ed structured inter+ie- -ill encourage the

dealer to discus his business and consequently produce the ans-ers the auditor

requires.

i? The auditor should not, ho-e+er, accept a +ague ans-er to a specific question.

If the dealer appears unsure of something, the question should be as4ed again in

a different -ay.

8: Structurin$ the inter)ie+

a? The inter+ie- -ith the %AT dealer should flo- logically through the follo-ing

headings

1. 5ersonal details of the inter+ie-ee and his business

2. Accounting structure

. %AT 4no-ledge

#. Eno-ledge of %AT obligations

b? It is important not to as4 the %AT dealer KclosedL questions. If, for e9ample, the

auditor is trying to establish -hat ban4 accounts the dealer is using for thebusiness, the follo-ing e9amples of questions -ould produce different ans-ers

1. Do- many ban4 accounts do you use for the business

2. Fou ha+e a ban4 account for the business

c? The first question is as4ing the %AT dealer to tell the auditor ho- manyaccounts he has for the business. In the second question, the auditor is telling

the %AT dealer that he has a ban4 account for the business and he -ill probably

say KyesL.

d? The latter does not establish -hat the correct position is in relation to the

business ban4 accounts. If the auditor subsequently finds other ban4 accounts, it

might lead him to belie+e that the %AT dealer has been e+asi+e -ith his ans-er.

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e? This -ould be the case in the first e9ample as the auditor has as4ed the correct

question. The second e9ample -ould lea+e the %AT dealer in the position that

he could correctly say that the auditor ne+er as4ed him ho- many ban4accounts he used for the business. De has said that he has a ban4 account, but he

has not been as4ed ho- many.

f? The questions auditors should be as4ing should be structured to gain

information. It is therefore better to begin the questions -ith an KopenL style

4ho

4h#

4hen

4hat

4here

4hich

,o+

g? Guestions started in this -ay -ill encourage the %AT dealer to tal4 and theauditor -ill probably get ans-ers to other questions -hen he gi+es his ans-ers.

h? K"losedL questions are usually ans-ered -ith a KyesL or KnoL and do not furtherthe inter+ie-.

i? If there are t-o auditors at the inter+ie-, the auditor -riting the notes of theinter+ie- should listen carefully to the questions and ans-ers and ensure that herecords them correctly.

*? It is important to sho- an interest in the %AT dealer and his business as this-ill also encourage him to tal4 about his business and any problems he has

encountered. This, in turn, might indicate areas -here the auditor could find

under6declared ta9 if the dealer has not applied the %AT rules correctly

4? Guestioning should not be rushed as more can be gained by tal4ing to the %AT

dealer than loo4ing at the records and not understanding ho- the business

-or4s.

l? The accounts -ill only sho- the auditor -hat the %AT dealer -ants him to see

and -hat has been declared, any abnormalities -ill be highlighted from theinter+ie-.

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m? The %AT dealer should also be allo-ed to as4 questions and clarify things he

does not understand. This -ill gain his confidence and ascertain if he has any

problems -ith %AT as it applies to his business. A good inter+ie- -ill

STALIS, T, NO!MAL

USTION T, ANO!MAL

8< asic uestions

a? The follo-ing are e9amples of basic questions that should be used as a template

for inter+ie-s -ith dealers

=hat are the %AT dealer contact details

=hat are his responsibilities in the business

=ho is the accountant

=hat is the accounting system >in full?

=hat boo4s and records are 4ept >in full?

)ther records 4ept >for additional credibility chec4s?

=ho completes the records

=hat are the main business acti+ities

=hat are the other business acti+ities

=hat are the principal outputs

=hat are the principal inputs

=ho are the main customers

=ho are the main suppliers

=ho puts the figures on the %AT returns

If not the %AT dealer, does that person recei+e the information from the

dealer

!oes he understand %AT as it applies to his business

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!oes the %AT dealer understand that all sales must be declared on the

%AT return

!oes the %AT dealer understand that all purchases must be genuine

Are all sales and purchases correctly declared on the %AT returns

Are all the %AT returns correct

!oes he understand that it is an offence to render false %AT returns

8.0 Use o& audit cross3chec@in$ s#stem%

a? The chec4ing of one %AT dealers input ta9 claim to the selling %AT dealerHs

output ta9 is a +ital control in %AT audit. anipulation of ta9 in+oices and

false ta9 in+oices are a ma*or source of fraud and e+asion.

b? A cross6chec4ing system should be used to counter this practice. This system

pro+ides that auditors can refer information from original input ta9 in+oices forcross6chec4ing at the %AT dealer issuing the in+oice. :or this it has no- beendecided that one cross6chec4 section be created at umbai under Additional

"ommissioner of 3ales Ta9 %AT6A! to handle the cross chec4s from both

the refund audit and 8usiness audit sections in umbai. All the cross chec4soriginating from 8usiness Audit office should be referred to this cross chec4

unit for further processing. The specific registers are to be maintained for

4eeping the trac4 of the cross chec4 memos issued >Register 8AR6?

c? This -ill ensure that the ta9 being claimed as an input credit has been accounted

for and paid by the seller.

d? The information required should be recorded in the audit noteboo4, -ithout the

4no-ledge of the %AT dealer, in case the %AT dealers are in collusion to

defraud the ta9 department.

e? :orm Audit , see Appendi9 A, should be completed in the %AT office and

for-arded to the "ross chec4 section. )utput ta9 declared by the seller shouldbe chec4ed against the :orm Audit details in the course of a %AT audit. This

form should be prepared in duplicate, the original sent to the cross chec4 section

and the duplicate filed in the dealer folder.

f? There are t-o categories of referrals

i. 7RNT 6

Relating to suspected fraud or e+asion or transactions in+ol+ing anamount of ta9 in e9cess of Rs.1 la4h.

These references require a response -ithin 1# days

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ii. R)7TIN

A selection should be made

1. =here the amount of ta9 e9ceeds Rs.2/,;6 on one or more in+oices

and the auditor requires e+idence that output ta9 has been properly

accounted for by the seller in relation to the input ta9.

2. =here purchases of a +alue e9ceeding Rs.2/,;6 on one or more

in+oices or repeated purchases of a lesser +alue are identified and no%AT has been charged and the TIN of the dealer is not reflected on

the in+oice, a reference should be used to identify dealers -ho ha+e an

obligation to register for %AT.

. In the case of the identification of a multiple number of transactions

-ithout %AT being charged by a particular seller or being inclusi+e of

ta9, all the transactions from that particular seller should be included

on the reference.

#. These routine references require a response -ithin a period of 12-or4ing days > as per cross chec4 manual? from the date of receipt.

The references should be chec4ed in the course of general audits.

=here references are outstanding after three years, a specific audit

should be carried out.

g? This system requires the creation of separate records in 8usiness audit section

as -ell as in cross chec4 section to record the issue of references and the receiptof references.

h? The records should be monitored on a -ee4ly basis by C" of di+isional office toensure that the system is functioning effecti+ely.

i? The records should be used to ensure responses are recei+ed and that time limits

are met.

*? The system should be used selecti+ely by auditors, but auditors should be

encouraged to use routine references on a regular basis -ith a requirement toissue a minimum of 2 routine references on each audit +isit.

4? "losing of audit proceedings should not be 4ept pending till +erification of allcross chec4s is completed. Instead, non6compliance should be closely follo-ed

up and consequential action, if any, should be initiated thereafter.

8.. Conductin$ VAT audit%

a? All %AT audits should start -ith the performance of basic chec4s, -hich are

mandatory. These include

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"hec4 that the %AT certificate is displayed

"arry out an initial inter+ie- -ith the dealer. "hec4 if there are anychanges to the registration details

"hec4 the %AT registration particulars to ensure the details on the

register are correct. nsure the acti+ity code and commodity code arecorrectly allocated.

"omplete or confirm and update the information required on the :ormAudit /, see Appendi9 A.

"hec4 the %AT returns filed since the last audit +isit -ith reference to

the dealerHs summary of input;output;net ta9 for each ta9 period.

Record any changes in the %AT dealerHs business acti+ities, accounting

systems, %AT acti+ities, imports, e9ports, ta96free and e9empt sales, etc.

Resol+e -ith the dealer any outstanding matters e.g. late submission of

returns ; late payment; matters left o+er from the pre+ious +isit;correspondence.

a4e sufficient arithmetical chec4s on the records of sales and purchases

until satisfied that they are accurately maintained. 7n*ustified e9cessi+e

arithmetical chec4ing is a -aste of time

Attempt to reconcile the records on the %AT returns filed -ith thedealerHs certified annual accounts, -here a full year accounts ha+e been

finalised. stablish -here a dealer has a legal obligation to ha+e accountsaudited by an accountant, that the time limits for producing theseaccounts ha+e been met.

Inspect the business premises ; factory ; -arehouse etc to establish theequipment ; capital goods in use and the outputs produced by the dealer.

b? )n completion of the basic chec4s the auditor should proceed to audit inputs

and outputs and supplementary chec4s.

c? All auditing chec4s should be completed on the basis of test6chec4ing andsampling techniques. Ris4 areas of o+er claims of input ta9 or under6declaration

of output ta9 should ha+e been identified prior to the +isit. The test chec4sshould commence in the ris4 areas by selecting a particular ta9 period.

d? If the results are satisfactory, the auditor should mo+e on to the ne9t area for

testingJ if unsatisfactory, the chec4s should be e9tended to identify the full and

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accurate e9tent of any ta9 under6declaration so that an assessment is soundly

based, and -ill stand the test of re+ie- ; appeal.

e? If an o+er6declaration of ta9 is identified, it should be quantified if this can be

accomplished -ithout undue effort, other-ise the dealer should be ad+ised, and

told to calculate the o+er6payment and for-ard his ; her calculations to theAuditor. The auditor should then conduct the audit ensuring therein that all the

processes for the refund audit are also completed. Thereafter coming toconclusion that there is o+er declaration of ta9es in that particular financial year,the auditor should issue prescribed letter of audit findings to the dealer by

follo-ing the prescribed procedure ad+ising him to file re+ised returns and form

/1. In case the dealer files such re+ised return and applies in form /1 to

refund audit branch, the copy of audit findings and re+ised return filed by thedealer should be sent to refund audit branch. The refund audit branch has

already been ad+ised to issue the refund on the basis of findings by the auditor

-ithout again going through the audit process. The later actions are to be carriedout by Refund audit branch.

8... Auditin$ o& in"uts%

a? 8usiness purchases >inputs? pro+ide the logical starting point for a %AT audit.

Identification of the inputs to a business should pro+ide the pointers to e9pected

outputs.

b? Appendi9 " pro+ides a summary of the chec4s to be used -hen auditing input

records and accounts. The sampling techniques described abo+e should be usedin applying these audit chec4s.

c? The audit cross6reference system should be used to +erify suspicious ta9

in+oices, chec4 on large input ta9 claims, and confirm that sellers of significant,quantities and +alue of goods -ithout a charge of %AT are not liable for %AT

registration.

8..2 Auditin$ o& out"uts%

a? Appendi9 ! pro+ides a summary of the chec4s to be used -hen auditing output

records and accounts. The sampling techniques described abo+e should be

applied in completing these audit chec4s.

b? "hec4s should be completed on references recei+ed under the audit cross6

reference system set out abo+e.

8..5 Use o& mar@3u"* cash reconciliation and cash &lo+ tests

a? =here e9amination of the dealer records gi+es rise to suspicion that the outputta9 may be under6declared, the auditor should consider using the techniques set

out in Appendices


46/75

8.. 'amination o& annual accounts%

a? =hen re+ie-ing the %AT dealer records, if applicable, the annual accountsshould be consulted to establish -hether there are areas in the %AT records

-hich should recei+e more in6depth chec4. ore guidance is set out in

Appendi9 .

8..8 Accounts audited b# accountants

a? The %ATA 22 requires %AT dealers -hose turno+er e9ceeds Rs. # la4hs

and those holding prescribed licenses to obtain a certificate on :orm $# from a

chartered accountant.

b? In umbai the furnishing of this form should be monitored in Returns branch

along -ith their regular returns follo- up. The list of the names of dealers

-hose audit reports in form $# are recei+ed by returns branch should beprepared on computer along -ith the other details li4e TIN, the date of receipt,

and year for -hich the audit is done >in form dd;mm;yy to dd;mm;yy?. This list

along -ith the forms recei+ed should then be for-arded to the 8usiness Audit 1and a receipt of the hando+er be obtained. T-o ne- officers are e9pected to be

appointed to scrutinise the findings gi+en by the auditors in these audit reports.

They are to propose actions on the findings. These findings can then be ta4en up

by the committee of the *oint commissioners and "3T for audit criteria and astrategy for auditing these matters can be e+ol+ed. )n the e9piry of the last date

of filing of $#, the returns branch shall cause to generate a defaulters list

through ADA%IEA3 based on the comparison of the turno+ers as returned bythe dealer and a+ailable in aha+i4as. Resultant defaulting dealers shall be

follo-ed up for the filing of $# recei+ed by the return 8ranch and action ta4en

to enforce the filing of the form as set out in the la-. These forms after the

action of the scrutiny officers should then be stored date -ise after entering thestorage location against the name of the dealer in the list.

c? In other offices the form should be accepted and filed in the %AT dealer folder.

No follo- up action should be ta4en -ith regard to non6filers from the business

audit branch as this -ould di+ert +aluable audit resources from their main

function.

d? This list of the $# recei+ed should be a+ailable for +ie-ing to the auditing

officials. This -ill help official to access any form of any particular dealer. Theform $# of the dealer , if a+ailable should be gi+en to the officer before audit if

the dealer is chosen for audit. The forms should be scrutinied -hen preparing

for a %AT audit +isit, as part of the pre6audit preparation, and used to target ris4areas for audit.

e? )n the audit +isit :orm $# should be used as a method of +erifying the

accounts produced by the %AT dealer.

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8..9 Auditin$ o& s"ecial &ocus areas%

a? There are areas of %AT upon -hich the auditor may require to focus, inparticular

=or4s contracts

Incenti+es

!eduction of ta9 at source

ntry ta9

"omposition

3et6off on stoc4 held as on the appointed day


48/75

3eparate stoc4 records must e9ist for each business.d? =here the abo+e conditions are not fully met the business acti+ities should be

treated as a single entity and registration effected in accordance -ith theregistration instructions.

e? The sharing of business premises -ithout clearly defined separate operationalareas should not, in itself, preclude treatment as a separate business for %AT

registration.

f? Any %AT registration decision made in accordance -ith these instructions is

appealable by the ta9payer.

8.22 Absence o& VAT dealer records

a? This constitutes an offence under 3ection $#>? >o? of the %ATA 22 -ith a

penalty of Rs.1 a day, on con+iction, for continuing offenses.

b? The auditor should calculate the output ta9 due from the best information

a+ailable. 8an4ing records or gross ta4ings details should be used to calculatethe ta9 due and only inputs for -hich a ta9 in+oice can be produced should be

allo-ed as creditable input ta9.

c? The auditor should not attempt to reconstruct the %AT dealerHs records, butshould ad+ise him of the ta9 calculated due on the information a+ailable.

d? The %AT dealer should be ad+ised that a second audit +isit -ould be carried outon a specified date not more than 1/ days after the date of audit.

e? An assessment should be issued for the sum calculated if the records are nota+ailable on the second +isit. If the %AT dealer produces the records on t

business audit

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