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 audit each year. It is preferable that audit of all such units is done by using computer assisted audit program (CAAP) techniques. The frequently of audit for other taxpayers would be as per following norms:.

  • Taxpayers with service tax payment above Rs 30 million (cash+ cenvat) (mandatory units) to be audited every year.
  • Taxpayer with service tax payment between Rs 10 million and Rs 30 million (cash+ cenvat) to be audited once every two years.
  • Taxpayers with service tax payment between 2.5 million and 10 million (cash + cenvat) to be audited once every five year.
  • Taxpayers with service tax payment 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 discretionary workload. These taxpayers should be selected on the basis of 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 an 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 maintained their own books/accounts. In fact rule 5 of the services tax rules, 1994 provides that the records including computerized data as maintained by an 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 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. Assessees who are receiving foreign contributions will maintain books/records specially 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: