VAT Audit Manual Maharashtra STD October 2007

VAT AUDIT MANUAL
VAT audit manual Maharashtra STD October 2007
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 require changes 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'
C,A-T ! . / 0AC1(!OUND TO VAT COM-LIANC

Cha"ter 1.1 1.2 1. 1.# Descri"tion The scope of this manual The role of %AT audit 'lements essential to a %AT compliance system )b*ecti+es of %AT audit -a$e Nos2 $ $ & ( $ & ( 1,
C,A-T ! 2 3 AUDITO!S -O4 !S AND ! S-ONSI0ILITI S

2.1 2.2 2. Auditors po-ers under the .%ATA 2,,2 )+erall Responsibilities )ther functions and roles of +arious officials 11 11 12 11 12 1/
C,A-T ! 5 3 CLASSI6ICATION O6 AUDITS

.1 .2 %AT audit classification Ad+isory +isits 10 1$ 1$ 1$
C,A-T ! 7 3 ST!UCTU! D A--!OAC, TO AUDIT

#.1 #.2 #. #.# #./ #.0 #.$ #.& 1eneral The structured approach to audit Audit organi2ation and staffing 3election of audit +isits .anagement of audit acti+ity Allocation of time to audit cases "ontrol of audit cases Targets 1& 1& 1( 21 2/ 2& 2& 2( 1& 1( 21 2/ 2$ 2& 2( 2(
C,A-T ! 8 3 UND !TA1IN( T, AUDIT

/.1 /.2 /. /.# /./ /.0 /.$ /.& /.( /.1, /.11 Introduction Noteboo4s 1uidelines for 4eeping good noteboo4s 5reparation for the audit +isit 5re6+isit chec4s 7se of mar46up ratios Inter+ie-ing a dealer on an audit +isit 3tructuring the inter+ie8asic questions at the inter+ie7se of audit cross6chec4ing system "onducting %AT audit /.11.1 Auditing of inputs
, , # / $ $ & #, #1 #2 ##
, # / 0 $ & #, #1 #2 #0
/.11.2 Auditing of outputs /.11. 7se of mar46up, cash reconciliation and cash flotests /.11.# '9amination of annual accounts /.11./ Accounts audited by accountants /.11.0 Auditing of special focus areas /.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 /.1 "losing the audit +isit /.1 .1. :actors to be considered in closing the audit +isit /.1 .2. 5rocedure for closing the audit +isit :lo- chart
## ## #/ #/ #0 #0 #0 #$ #$ #& #( #( #( #( /, / /2 #(
C,A-T ! 9 3 ! 6UND AUDITS

0.1 Note /# /#
C,A-T ! 7 3 -OST AUDIT CONT!OLS

$.1 $.2 $. $.# $./ Introduction Action by the auditor Action by the ne9t highest authority "ontrol of audit acti+ities 5ost Audit <earnings 6 8usiness Audit 8ulletin // // /0 /$ /$ // /0 /$ /$ /$
C,A-T ! : 3 AUDIT CAS S 4, ! -OT NTIAL 6!AUD ; VASION IS SUS- CT D

&.1 &.2 &. &.# &./ Introduction The role of the auditor in fraud in+estigation. Identification of fraud by auditors "lassification and )rgani2ation of :raud In+estigation 5rocess for "ommunication -ith In+estigation =ing # /& /& 0, 01 01 /& 0, 01 01 02
C,A-T ! < 3 MANA( M NT ! -O!TIN(

(.1 (.2 (. Introduction %AT -or4 return "lassification of %AT errors and e+asions 0 0 0 0 0 0#
C,A-T ! .0
1, 1,.1 1,.2 1,. 1,.# 1,./ 1,.0 1,.$
3! (IST !S 6O! 0USIN SS AUDIT S CTION

0/ 0/ 00 0$ 0& 0& 0( $, 0/ 0/ 00 0$ 0& 0& 0( $,
Introduction "ontrol Register >bar 1.? !ay 8oo4 of 8usiness Audit and Assessment >bar 2? "ross "hec4 Register >bar ? :ile mo+ement register >bar #? Audit not underta4en register >bar6/? "riteria analysis register >bar 0? The description of the abo+e Registers
C,A-T ! ..
11.1 11.2 11.
3T, INS- CTION O6 ! CO!DS

$1 $1 $1 $1 $1 $1
Introduction "o+erage Reporting and "ompliance
C,A-T ! .2
12.,
3COMM NT ON ! CO!D 6ILIN(

$2 $2
"omment
C,A-T ! .5
1 . 3chedule
3U-DATIN( O6 MANUAL
$ $
A-- NDIC S
A55'N!I@ A A :)R.3 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 D L T D IN57T3 "D'"E<I3T )7T57T3 "D'"E<I3T ANN7A< A"")7NT3 35'"IA< :)"73 AR'A3 A33'33.'NT3 5R)"'!7R'3 >amndd? .)NTD<F R'5)RT )N 7N!'R6!'"<ARATI)N3 3TAT'.'NT ): 35'"I:I" AN! 1'N'RA< A7!IT %I3IT3 ").5<'T'! D L T D 3TAT'.'NT ): A7!IT A33'33.'NT3 AN! 7N!'R!'"<ARATI)N3 3TAT'.'NT ): R'")%'RI'3 5'N!IN1 =ITD 873IN'33 A7!IT <I3T ): !'A<'R3 :I<IN1 R'T7RN3 ; R'%I3'! R'T7RN3 3TAT'.'NT T) 8' 3'NT T) R':7N! A7!IT 8RAN"D R':'RRA< ): A7!IT "A3'3 :)R IN%'3TI1ATI)N I<<73TRATI)N3 ): %AT '%A3I)N3 TD' R)<' ): INT'RNA< A7!IT IN 3T! .ARE675 '@'R"I3'3 "A3D R'")N"I<IATI)N '@'R"I3'3 "A3D :<)= T'3T3 TRA!' 3'"T)R N)T'3 5'NA<TF 3D)=6"A73' N)TI"'3 <I3T ): R'<'%'NT 5R)%I3I)N3 ): A"T R7<'3, N)TI:I"ATI)N3 AN! "IR"7<AR3 873IN'33 A7!IT 87<<'TIN A88R'%ATI)N3 0
A55'N!I@ A 8 A55'N!I@ A " A55'N!I@ A ! A55'N!I@ A' A55'N!I@ A : A55'N!I@ A 1 A55'N!I@ A D A55'N!I@ A D1 A55'N!I@ A D2 A55'N!I@ A D A55'N!I@ A D# A55'N!I@ A D/ A55'N!I@ 66D0 A55'N!I@ A I A55'N!I@ A C A55'N!I@ A E A55'N!I@ A < A55'N!I@ A . A55'N!I@ A N A55'N!I@ A ) A55'N!I@ 6 5 A55'N!I@ 6 G A55'N!I@ 6R A55'N!I@ 63
C,A-T ! .
0AC1(!OUND TO VAT COM-LIANC

.2. The sco"e o& this manual a? This manual is intended to assist the auditor to carry out an audit by pro+iding a basic structure under -hich a %AT audit should be conducted. This -ill enable the 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 of the 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. .22 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 of ma9imi2ing 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 to enforcement, +i2, search or sei2ure. Do-e+er, -here+er necessary, %AT auditor has to see4 help of In+estigation team so that the potential e+idence is not destroyed. c? The aim of %AT audit is to encourage the highest possible le+el of +oluntary compliance 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 componentsI They areI %AT dealers maintaining proper boo4s of account and records, if appropriate, as prescribed by the <a- and or Rules An effecti+e ta9payer education campaign so that %AT dealers are a-are of their obligations. $
.25
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.
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 2,,2 >.%ATA 2,,2?. 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 collecting the 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 legal obligations to maintain proper accounts. !ealers must retain their records for a minimum period 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 %AT system. 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 be achie+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 2,,2 s. &0 defines the requirements and conditions related to the issue of ta9 in+oices.
&
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 business specified 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 the accounts ; 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 in the 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 the In+estigation team so that search can be carried out for detecting hidden records. The .%ATA 2,,2 s.0# pro+ides for po-ers of access to premises, sei2ure of records, and the po-er to copy and sei2e boo4s, -hich can be used by appropriately empo-ered officials. 5enalties are also specified for a failure to fulfill these obligations. .27 Ob=ecti)es o& VAT audit a? The o+erall aim is to chec4 the correct amount of ta9 is collected and impro+e compliance by dealers. To achie+e this ob*ecti+e, auditors should be required toI "onfirm the dealer is correctly registered <ist the acti+ities underta4en by the business Note the accounting records used by the dealer 'nsure the records correctly reflect the business acti+ities of the dealer Assess the le+el of ris4 posed by the dealer to the %AT regime and identify the appropriate counter measures 'ducate the dealer and gi+e the dealer the opportunity to as4 questions -hich the auditor either ans-ers on the +isit or see4s guidance at the office and pro+ides the dealer -ith -ritten ad+ice. (
'nsure that any unsatisfactory features disco+ered on an earlier +isit ha+e been corrected. 'nsure that return and other statutory filings are timely done by dealers.
1,
C,A-T ! 2
AUDITO!S -O4 !S* L (AL -!OVISIONS AND ! S-ONSI0ILITI S

22. -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 2,,2 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+e the 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 is attempting to e+ade any ta9 due from him, the "ommissioner may sei2e such accounts, registers or documents from the dealer as may be necessary. d? 3ection 1, of the .%ATA 2,,2 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 may decide not to delegate the po-ers to %AT auditors -ith regard to in+estigation, enforcement, search or sei2ure. Do-e+er, -here+er necessary, %AT auditor should 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. 222 O)erall !es"onsibilities% a? Auditors authori2ed 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 authori2ation 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 2,,2. 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. 225 a>

!es"onsibilities o& )arious o&&icials in the audit branch shall also include &ollo+in$ &unctions and roles 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 on 8usiness Audit. To cause to generate, allocate and distribute the cases for business audit 8ranch 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 as per 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 ?oint Commissioner o& Sales Ta'* 0usiness Audit )+erall administration and control of 8usiness Audit section. 12
b>
3uper+ision of all subordinate officers B staff.. Issue authori2ation letters to !eputy "ommissioners for sending it to dealers ad+ising therein that indicated official has been authori2ed 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. Authori2ation of specific audits based on information generated through audit -ith post6facto appro+al by Additional "3T %at and if through local information, then -ith pre6+isit appro+al of Additional "3T %at in case of .umbai. In case of matters related -ith mofussil, such appro+als shall be gi+en by Additional "3T of respecti+e geographical 2ones. 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. De"ut# Commissioner o& Sales Ta'* 0usiness Audit
c>
Recei+e letter from Coint "ommissioner for being authori2ed for Audit and send it -ith confirmation letter to dealer. Issuing of authori2ation 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. 1
)+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 Assistant Commissioner o& Sales Ta'* 0usiness Audit
d>
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* 0usiness Audit Recei+e letter from !eputy "ommissioner for being authorised for Audit. Issue confirmation letters for audit in cases allocated to him along -ith authori2ation letter. VAT audit manual 1# Maharashtra STD October 2007
: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. &> $> Sales Ta' Ins"ector* 0usiness Audit "ollection of information ; 5reparation of dealer profile 5reparation of pre6+isit report 1etting the files and details from the di+ision offices and other branches -here+er a+ailable :ollo- up dealer for confirmation of audit scheduled date To ser+e the appointment letters ; notices ; orders if such are returned un6 ser+ed. Delp officer in +erification of dealers details ; record Read and correct the statements, letters prepared by cler4s 5ut up and follo- up cross chec4. 3ee that the requisite chec4 list of acti+ities to be carried out at dealers 5)8 are completed. 5reparation of -ee4ly audit program Rearrange the +isits -here they ha+en't ta4en place in first instance To gi+e information to cler4 for !) and other statements To follo- up for payments -here dealer agrees for re+ised returns To carry out audit as B -hen directed Any other -or4 as directed by the superior Ta' Assistant ; Cler@* 0usiness Audit
Can assist the auditor in ca"acit# o& ta' assistant in the audit at dealers "remises as and +hen reAuired b# his o&&icer 5reparation and certification of registers Receipt and entry of files in registers 1etting the files and details from the -ards ; di+isions or other branches 5utting up of letters of allocation, confirmation 3ubmission and for-arding of 7)R Typing and putting up of letters and communications 5ut up .onthly statements VAT audit manual 1/ Maharashtra STD October 2007
5reparation of proceedings for file mo+ement. Ta4ing relati+e entries of under declarations in prescribed registers 5reparation and submission of monthly statements and other statements "ustodian of files Any other -or4 as directed by the superior
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C,A-T ! 5
CLASSI6ICATION O6 AUDIT
52.2VAT audits can be di)ided into 5 main cate$oriesI a? 1eneral audit b? Refund audit c? 3pecific audit i. (eneral auditI These audits form the ma*ority of the audits to be completed by 3T! 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. The selection 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 auditI 3pecific audits includeI
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 be at ris4 audits emanating from credible information regarding suspected ma*or ta9 e+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 is possibility of ta9 ris4, e+en if the dealer is registered. These cases shall be authorised 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 post facto appro+al of 2onal Additional "ommissioner
1$
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 2one for mofussil area.
5222Ad)isor# )isits
)ne of the ob*ecti+es of %AT audit is to educate the dealer and gi+e him an opportunity 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 as specific audits. %isits to the large dealers and dealers allocated to <T7 should be completed to encourage compliance -here significant re+enue is li4ely to be in+ol+ed.
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C,A-T ! 7
ST!UCTU! D A--!OAC, TO AUDIT

4.1.(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 ma9imi2ing 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 ma9imi2e re+enue collection, -hereas broad audit co+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 these dealers 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 routinelyI 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 auditor to 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
1(
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-ing prescribed 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 audit report b? A structured approach to the audit ensures thatI 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 a satisfactory manner there is a formal and transparent -ay of recording -hat has been underta4en on 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 ><T7Hs?, .umbai %AT office and di+isional offices. b? It is recommended that the audit function -ithin each office should ha+e separate teams to deal -ith the follo-ing auditsI Refund audit >Normally, Refund audits -ould be handled by Refund Audit 3ection? 2,
1eneral 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 2,M 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 Audit 8ranch? 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 facto appro+al from 2onal 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 of clerical 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 dealer is not registered, should be carried out by 3T)Hs and 3TIHs. =hereas, in case of specific 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 desirable that %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 of 8usiness Audit are reported in para #.& belo-. These targets may ho-e+er be changed from time to time depending upon actual results
21
m? The K.aha+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. 1eneration and allocation of cases through K.aha+i4asL shall be facilitated 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 2,M of the total general audits. 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? beloii. !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> SubseAuent #ears o& audit i2 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 are underta4en in response to certain specific information generated through mar4et or through audit +isits of the auditors. The selection of specific audits 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.
22
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 cases generated 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 1eographical 2one for mofussil2 The specific audit cases -hich are generated through mar4et related intelligence the pre+isit appro+al is to be ta4en from the Additional "3T %AT Adm for .umbai and from respecti+e 2onal Additional "3T in case of mofussil
ii2
(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 shall be 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 named K8AR 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 <e+el of ta9 throughput >input ta9 plus output ta9? Abo+e Rs. 1, la4hs in the last 12 months A 0, points 8et-een Rs. points la4hs and Rs. 1, la4hs in the last 12 months A #,
8et-een Rs. 1 la4h and Rs.
la4hs in the last 12 months A , points
8elo- Rs. 1 la4h in the last 12 months A 2, points "ompliance
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 A #, 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 A , points "omple9ity of %AT dealer business o !ealer -hose business in+ol+es international e9ports; 3'N A 2, points o !ealer -ho holds a certificate of entitlement under a pac4age scheme of incenti+es A 2, points o !ealer -hose business in+ol+esI 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 .ar46up
o
16 acti+ities A / points 6/ acti+ities A $ points In e9cess of / acti+ities A 1, points
=here the mar46up is O #,M belo- the a+erage for the acti+ity; commodity code A #, points =here the mar46up is bet-een 2,M6#,M belo- the a+erage for the acti+ity; commodity code A , points =here the mar46up is 1,M62,M belo- the a+erage for the acti+ity; commodity code A 2, points 2# 2007
o
VAT audit manual Maharashtra STD October
!ate of the last audit +isit o .ore than years A #, points years A 1, points
o 8et-een 1 year and
o 8elo- 1 year A , points <egal entity o 5roprietor A 2, points o 5artnership A 1/ points o 5ri+ate <td "o., A 1, points o 5ublic sector and 5ublic <td "o. A $ points o )thers A / points o 1o+ernment department A , points
Criteria <e+el of ta9 throughput "ompliance "omple9ity of %AT dealer business .ar46up !ate of the last audit +isit <egal entity 8usiness Acti+ity T)TA< c>
Ma'imum "oints 0, #, /, #, #, 2, /, ,,
The cases +hich are not to be audited% In cases -hich are allotted to 8usiness Audit section, but -herein the dealer has already submitted the form number /,1, the 8usiness Audit for that financial year is to be carried out by the refund audit section. The business Audit section should not carry out Audit of such case in that year. In cases -here a dealer has been selected for business audit and during audit by 8usiness audit section, the case results in refund to the dealer, the auditor in the business audit branch should complete the audit by applying all 2/
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 audit branch along -ith the final findings of Audit for subsequent action i.e. 1rant 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 the Refund Audit branch in the prescribed D0 :ormat of statement The cases -hich are allotted to <T7 are not to be audited by 8usiness audit branch 4.5.Mana$ement o& audit acti)it#% a? The o+erall management of the %AT audit section is responsibility of the Additional "ommissioner 3ales Ta9 >%AT A!.6 ?. De -ill be responsible to the "ommissioner of 3ales Ta9 for the %AT audit plan and achie+ing the %AT audit re+enue target. In the mofussil areas the Coint "ommissioner %AT Administration shall be responsible for the o+erall management of the %AT in the respecti+e 1eographical !i+ision. b? Additional "ommissioner 3ales Ta9 >%AT A!.6 ? shall also be responsible for the policy matters related to 8usiness Audit and generating the general audit cases for .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 authori2e these audits. Do-e+er, the post6facto appro+al should be ta4en from 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, such appro+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 audits para #.0>e? and #.$ >a? may be referred for e9tension procedure.
20
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 authori2ation 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 audit program 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 in the 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! organi2ational 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 conductedI Coint "ommissionerI 1. 'nsure the audit programs are satisfactorily completed.
2. To maintain control register for the cases allocated to his section . 3. 4.
To re+ie- o+erall audit results achie+ed and the reasons of under6 declarations to focus the acti+ity to ma9imi2e re+enue collection. "onduct quarterly staff meetings to e9change +ie-s on ris4 areas and audit techniques. under6declaration ; o+er6declaration for detailed scrutiny
5. Guarterly select one audit case of deputy "ommissioner -here there -as no
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
2$
2. Re+ie- audit results achie+ed and the reasons for under6declarations to focus audit acti+ity to ma9imi2e 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 Files allocated by Reviews progress of audit and closes files of
Reports to Designation
Additional Commissioner VAT 3 oint Commissioner !e"ut# Commissioner Assistant Commissioner Sales Tax &fficer Sales Tax 'ns"ector Cler*s Commissioner of Sales Tax Addl. Commissioner VAT 3 oint Commissioner !e"ut# Commissioner !e"ut# Commissioner (es"ecti)e &fficer (es"ecti)e &fficer
Submits D.O. To
Compiles D.O. Of
N.A.
N.A.
Commissioner of Sales Tax Additional Commissioner VAT 3 oint Commissioner !e"ut# Commissioner !e"ut# Commissioner None None
State along with that of Mumbai Business Audit sections All Audit $nits Audit $nit &wn &wn
N.A. Addl. Commissioner !e"ut# Commissioner !e"ut# Commissioner None None
!e"ut# Commissioner Assist. Comm. % ST& None None
None None
None None
2&
4.6.Allocation o& time to audit cases a? =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? e9ceeding Rs.1, la4hs not e9ceeding / days. %AT dealers -ith ta9 annual throughput >input ta9 P output ta9? bet-een Rs.2 la4hs A 1, la4hs not e9ceeding days. %AT dealers -ith annual ta9 throughput >input ta9 P output ta9? belo- Rs.2 la4hs 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 authority of 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 the delay in action. In case of the deputy "ommissioners the time limits can be e9ceeded -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 the permission for e9tension. f? The ma9imum time allocation should include preparation for the +isit, time spent at the 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. 7272 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 of the communication of the allocated cases. Any case not completed in the audit
2(
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 procedure set out in #.0 >e? abo+e. b? The allocation of audit cases should be recorded on a computeri2ed listing -ith the date of allocation, the date of commencement of audit and the date of finali2ation. c? The authority of the C" or as the case may, of !" should be obtained on :orm Audit #, 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. 72: 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 future depending upon the actual results accomplished. a> -h#sical Tar$ets% % % % 7 Audit )isits "er month2 : Audit )isits "er month2 .0 Audit )isits "er month2
De"ut# Commissioners Assistant Commissioners Sales Ta' O&&icer b> 6inancial Tar$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 suitably di+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 of payments 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 enforcement branch, indicating therein the amount reco+erable the same amount shall qualify for inclusion in the targets of the referring auditor.
C,A-T ! 8
UND !TA1IN( T, AUDIT

82.2 IntroductionI a? The %AT audit is one of the most important lin4s in the chain of the %AT administration. 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. 822 Noteboo@s a? Noteboo4s are pi+otal to the audit system. A suggested layout for an audit noteboo4 is set out belo- -ith e9ample te9t in italicsI 6ront co)er o& noteboo@
VAT AUDIT NOT 0OO1
Auditor nameQM HowardQQQQQQ Noteboo4 number QQQQ1QQQQQ... !ate ta4en into useQQQQ4 May 2005Q !ate ta4en out of useQQQ22 August 2005
Inside co)er o& noteboo@ CInde'> !ate of +isit !ealer name 4 May 2005 Gangadhar Ltd 5 May 2005 Kamal Ltd
5age number>s? 1-6 7-10
Main "a$es o& noteboo@ 5age 1. !ateI 1 May 2005 !ealer nameI Gangadhar Ltd !ealer addressI 12 Kemps orner! Mum"a#
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 the auditor recalls -hat -as chec4ed on a specific +isit. f? There is a natural a+ersion by some dealers and they are uneasy about auditors ta4ing 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 so important to the audit +isitI

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 the auditor is in the habit of 4eeping good notes in a -ell organi2ed noteboo4.
h? The importance of good noteboo4s should not be under6estimated. .any auditors 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+ieVAT audit manual Maharashtra STD October 2007
-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. 825 (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 is as4ing 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 consideredI 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 a routine -hen -riting up his noteboo4 at the dealerHs premises. The follo-ing points should be obser+edI 7se the prepared basic questions as the start point for the inter+ie- and all 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 main questions 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-ing auditor has finished.
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 the manual? *? Record the dealers replies to ans-ers accurately 827 -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 the appointment 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 dealer file. The auditor should ensure that the authori2ation letter in form 2.1 issued by his superior authority and the duties and responsibilities in Audit form 2.2 is
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 the business 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 the completion 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. 828 -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 image of 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 the auditor 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 be encountered on the audit. e? It is +aluable to gather any information, that is legally a+ailable, from other 1o+ernment departments before the +isit, for e9ample details of the dealerHs imports and e9ports, -hich -ill assist in establishing the credibility of the business.
f? 1eneral 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+e underpayment 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 amounts of 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 more cash 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 of under6declaration or fraud. i? =hen constructing an inter+ie-, in con*unction -ith the basic inter+iequestions 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 made a+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 at Appendi9 ) -hich highlight some higher ris4 trade sectors -here international best practice %AT audit guidelines are set out. n? The standardi2ed 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+isory authority before conducting of Audit. This is e9pected to help in identification of the main ris4 areas.
829 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. In addition, 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 identify any 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 1,M 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 e9ampleI 827 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.
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 the inter+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+e delegated 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 person should 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 be used 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 an interrogation and if this is ho- it is presented to the dealer he -ill undoubtedly be 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. 82: Structurin$ the inter)ie+ a? The inter+ie- -ith the %AT dealer should flo- logically through the follo-ing headingsI 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 the business, the follo-ing e9amples of questions -ould produce different ans-ersI 1. Do- many ban4 accounts do you use for the businessR 2. Fou ha+e a ban4 account for the businessR c? The first question is as4ing the %AT dealer to tell the auditor ho- many accounts 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.
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 ban4 accounts 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 styleI 4ho 4h# 4hen 4hat 4here 4hich ,o+
g? Guestions started in this -ay -ill encourage the %AT dealer to tal4 and the auditor -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 further the inter+ie-. i? If there are t-o auditors at the inter+ie-, the auditor -riting the notes of the inter+ie- should listen carefully to the questions and ans-ers and ensure that he records 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 the inter+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- -illI 82< STA0LIS, T, NO!MAL DU STION T, A0NO!MAL
0asic Auestions a? The follo-ing are e9amples of basic questions that should be used as a template for inter+ie-s -ith dealersI =hat are the %AT dealer contact detailsR =hat are his responsibilities in the businessR =ho is the accountantR =hat is the accounting system >in full?R =hat boo4s and records are 4ept >in full?R )ther records 4ept >for additional credibility chec4s? =ho completes the recordsR =hat are the main business acti+itiesR =hat are the other business acti+itiesR =hat are the principal outputsR =hat are the principal inputsR =ho are the main customersR =ho are the main suppliersR =ho puts the figures on the %AT returnsR If not the %AT dealer, does that person recei+e the information from the dealerR !oes he understand %AT as it applies to his businessR
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82.0
!oes the %AT dealer understand that all sales must be declared on the %AT returnR !oes the %AT dealer understand that all purchases must be genuineR Are all sales and purchases correctly declared on the %AT returnsR Are all the %AT returns correctR !oes he understand that it is an offence to render false %AT returnsR
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 for cross6chec4ing at the %AT dealer issuing the in+oice. :or this it has no- been decided 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 chec4s originating 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 should be 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 referralsI i. 7R1'NT 6 Relating to suspected fraud or e+asion or transactions in+ol+ing an amount of ta9 in e9cess of Rs.1 la4h. These references require a response -ithin 1# days #2
ii. R)7TIN' A A selection should be madeI 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 receipt of references. h? The records should be monitored on a -ee4ly basis by C" of di+isional office to ensure 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 to issue a minimum of 2 routine references on each audit +isit. 4? "losing of audit proceedings should not be 4ept pending till +erification of all cross chec4s is completed. Instead, non6compliance should be closely follo-ed up and consequential action, if any, should be initiated thereafter. 82.. Conductin$ VAT audit% a? All %AT audits should start -ith the performance of basic chec4s, -hich are mandatory. These includeI
"hec4 that the %AT certificate is displayed "arry out an initial inter+ie- -ith the dealer. "hec4 if there are any changes 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 are correctly allocated. "omplete or confirm and update the information required on the :orm Audit /, 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 A 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 the dealerHs certified annual accounts, -here a full year accounts ha+e been finalised. 'stablish -here a dealer has a legal obligation to ha+e accounts audited by an accountant, that the time limits for producing these accounts ha+e been met. Inspect the business premises ; factory ; -arehouse etc to establish the equipment ; 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 and sampling 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 chec4s should 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 the Auditor. The auditor should then conduct the audit ensuring therein that all the processes for the refund audit are also completed. Thereafter coming to conclusion 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 the dealer 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 carried out by Refund audit branch. 82..2. 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 used in 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. 82..22 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. 82..25 Use o& mar@3u"* cash reconciliation and cash &lo+ tests a? =here e9amination of the dealer records gi+es rise to suspicion that the output ta9 may be under6declared, the auditor should consider using the techniques set out in Appendices <6N
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82..27 'amination o& annual accounts% a? =hen re+ie-ing the %AT dealer records, if applicable, the annual accounts should 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 '. 82..28 Accounts audited b# accountants a? The .%ATA 2,,2 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 be prepared 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 1 and 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 a strategy 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 by the 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 the storage 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. The form $,# 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 scrutini2ed -hen preparing for a %AT audit +isit, as part of the pre6audit preparation, and used to target ris4 areas for audit. e? )n the audit +isit :orm $,# should be used as a method of +erifying the accounts produced by the %AT dealer.
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82..29 Auditin$ o& s"ecial &ocus areas% a? There are areas of %AT upon -hich the auditor may require to focus, in particularI =or4s contracts Incenti+es !eduction of ta9 at source 'ntry ta9 "omposition 3et6off on stoc4 held as on the appointed day <easing.
b? These issues and the re+enue ris4s they pose are e9amined in more detail in Appendi9 :. 82.2 -otential VAT ris@s% 82.22.2 Disa$$re$ation% a? This is a particular ris4 in the conte9t of business acti+ities in India. If a business can be split into separate entities for particular aspects of the business the turno+er for each part of the business can be maintained belo- the %AT registration threshold and the liability to %AT a+oided. b? It is important that the follo-ing chec4s are applied to ensure disaggregation of a business is not used as a means to a+oid accounting for and payment of %AT. c? 8usinesses -ith common o-ners, -hich claim to be separate entities for %AT registration purposes, should be chec4ed in the follo-ing aspects. To satisfy the status as a separate business, these conditions must be metI )-ners ; responsible persons for each acti+ity must be clearly defined. 3eparate ban4 accounts must be in use. 3eparate accounts for purchases and sales must be maintained for each business acti+ity.
3eparate stoc4 for each business must be maintained and be clearly identifiable. VAT audit manual #$ Maharashtra STD October 2007
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 the registration instructions. e? The sharing of business premises -ithout clearly defined separate operational areas 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. 82.2222 Absence o& VAT dealer records I a? This constitutes an offence under 3ection $#> ? >o? of the .%ATA 2,,2 -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 calculate the 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, but should 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 out on 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 not a+ailable on the second +isit. If the %AT dealer produces the records on the second +isit, the assessment should be recalculated based on the information produced if those records are found to be acceptable. f? A letter or sho- cause notice as the case may be, should be issued to the %AT dealer ad+ising him that if the required records are not maintained or produced in future, he -ill render himself liable to prosecution. 82.2252 6ailure to "roduce ta' in)oices% a? =here input ta9 credit has been claimed in any return and the %AT dealer is unable to produce a ta9 in+oice at the time of audit +isit and e+en after communicating the audit result for non a+ailable Ta9 in+oices, fails to file re+ised return thereby reducing the said input ta9 credits for -hich the ta9 in+oices are not a+ailable,a sho- cause notice on :orm ,2 should be issued.
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b? If, after 1/ days, the dealer has not responded to :orm ,2 an assessment on :orm , should be issued for the ta9 and interest after follo-ing due procedure. c? =here there are numerous such instances, consideration should be gi+en to secure any e+idence of potential e+asion. 82.227 6ailure to "roduce commercial e)idence o& e'"ort ; inter3state trade% a? =here e9emption has been claimed for the e9portation of goods internationally or to another state, and the defined e+idence including , customs and transport documents, order from foreign supplier, sale document and letters of credit are not a+ailable, the auditor should specify the documents required and allo- the %AT dealer 1/ days to produce them at the %AT office. A sho- cause notice on :orm ,2 should be issued. :or K"L and KDL form declarations separate time frames ha+e been pro+ided -hich is mentioned belo-. b? If the documents are not produced, the sales for -hich e9emption has been claimed should be classified at the appropriate rate, -here the classification of the goods can be established, and ta9 calculated at that rate and :orm , issued. c? In cases -here the liability cannot be established, ta9 should be calculated at 12./M. An assessment in :orm , should be issued. d? =here there are numerous such instances, consideration should be gi+en to secure any e+idence of potential e+asion. e? =here+er it is noticed that the dealer does not ha+e the declarations for interstate sales and has not filed re+ised returns thereby accepting the liability for such sales or is not ready to file the re+ised returns, the assessments for raising the liabilities are to be carried out. f? It has been decided considering the legal pro+isions that, -hile assessing such cases the dealer is not to be granted any more time to produce pending declarations for the interstate sales transactions falling in the return periods bet-een 16#62,,/ to 16 62,,0. g? It has also been decided considering the legal pro+isions that the dealer may be gi+en time of one month, from the date of +isit to the dealer, to produce the pending declarations supporting the interstate sales transactions falling under period 16#62,,0 to 16 62,,$. In case of failure of the dealer to produce the declarations in gi+en time or filing of re+ised returns disclosing such liability, assessments are to be carried out and the dues to be raised.
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82.228. 6ailure o& VAT dealer to attend an a""ointment &or a VAT audit% a? If a %AT dealer fails to 4eep an agreed appointment for a %AT audit -ithout reasonable cause and the audit +isit has to be aborted, this should be regarded as an offence under 3ection $# of the .%ATA 2,,2. b? The %AT dealer should be contacted and a fresh appointment made. :or this reappointment letter should to issued in prescribed form. c? The %AT dealer should be gi+en a -ritten -arning that a liability to prosecution has occurred under 3ection $# of the .%ATA 2,,2. d? If the %AT dealer fails to 4eep the second appointment, the facts should be brought to the notice of the Coint "ommissioner or the !eputy "ommissioner -ith a +ie- to pursuing puniti+e action. e? Thereafter the auditor can +isit the dealer -ithout ta4ing his prior appointment and may complete the audit on basis of the boo4s and records a+ailable. 82.2292 6ailure to re$ister &or VAT =here routine references or intelligence indicate that a dealer may be liable for %AT registration, In+estigation section should designate an 3T) ; 3TI to carry out an inspection +isit to +erify the dealerHs turno+er and establish if there is a liability for a %AT registration.
82.5
Closin$ the audit )isit 82.52. 6actors to be considered in closin$ the audit )isit a? 3uspicion of fraud :ollo- the procedures outlined later in this manual.
b? Ta9 under6declared, but no suspicion of fraud Ta9 under6declared >input ta9 o+er declaration or output ta9 under6 declaration? not e9ceeding Rs./,,;6 in total A no action required. Ta9 under6declared e9ceeds Rs./,,;6 and full facts a+ailable. !iscuss the discrepancies -ith the %AT dealer and attempt to obtain his agreement to the amount. Ta9 under6declared -here full information or documentation is not a+ailable. Ad+ise the %AT dealer of the amount of the assessment unless the information or documentation is produced by means of issue of :orm /,
,2. If the documents are not produced and the %AT dealer does not respond to :orm ,2, assess the ta9 and interest and issue :orm , . 3ee Appendi9 1. c? No discrepancies Ad+ise dealer of the audit result and deal -ith any queries he may ha+e. It should be confirmed to the %AT dealer that this does not signify his %AT accounts are accepted as accurate up to a certain date, but only that no discrepancies -ere found in the areas chec4ed.
82.5222 -rocedure &or closin$ the audit )isit% a? As the audit progresses, the auditor should list all discrepancies as they are disco+ered for discussion -ith the %AT dealer at the end of the audit. If there appear to be ma*or problems -ith the accounts, the issues may ha+e to be discussed -ith the %AT dealer during the audit. b? At the end of the +isit and before lea+ing the %AT dealers premises the auditor should re+ie- the -or4 done against the original audit strategy. c? The ob*ecti+e should be to ensure that all points originally intended to be co+ered ha+e been completed, to see if anything remains to be clarified and to identify -hether anything ne- has emerged -hich has not been follo-ed up. d? A re+ie- of the +iability of the business should be made. This can be done on the basis of information gathered during the audit and, if a+ailable, the annual accounts of the business. e? The purpose of this re+ie- is to assess -hether a going concern is li4ely to become ban4rupt >sole proprietor? or go into liquidation >pri+ate or public incorporated company?. There are t-o re+enue concernsI At the time of any default, a large amount of ta9 is outstanding -hich, if prompt action is not ta4en to secure it, may be lost. 3toc4 and assets of an insol+ent business may be sold off -ithout the appropriate ta9 being accounted for. :or this reason a brief note should be made of stoc4s and assets held.
f? The auditor should discuss -ith the %AT dealer the -hole range of his %AT acti+ities. The auditor should dra- attention to any lac4 of compliance, and offer ad+ice to assist the %AT dealer. g? The auditor should attempt to close the +isit in a constructi+e and positi+e manner. The auditor should lea+e the %AT dealer -ith a list of all discrepancies, and detailed e9planations of the errors, -hich ha+e been found.
/1
h? It is good practice at the end of e+ery audit to conduct a final inter+ie- -ith the %AT dealer. In all cases this -ill be a matter of courtesy on departure, ho-e+er, it should be the time -hen any outstanding matters are discussed and finalised, for e9ampleI 7ncertainties by the dealer about the operation of the ta9 system Remaining points for clarification 3ee4ing rectification of aspects of accounting -hich are considered unsatisfactory from a re+enue +ie-point '9plaining the findings of the audit including the amount of additional ta9 payable by the dealer. The dealer should be informed that in case he is in agreement -ith the findings, he can discharge the additional ta9 liability by filing re+ised returns and paying the ta9 payable as per the said return. In case of disagreement on findings of audit, the dealer should be informed that an assessment -ill be issued by follo-ing the procedure as outlined in >m? belo-.
i? If there is a need to resol+e any uncertainties at the %AT office, the auditor should summari2e these before closing the +isit, and be sure to contact the %AT dealer -ithin 1, days to clarify the matter. *? Any findings gi+en by the auditor should be confirmed by letter in prescribed format form audit $, -hich should be copied to the dealer file and the issue recorded on :orm Audit /.( at the time of final audit report, see Appendi9 A. 4? This establishes a point in time that the dealer has been directed on a particular issue and future failure to comply could result in action being ta4en against him. l? The auditor should e9plain to the %AT dealer that any interest resulting from the discrepancies identified -ould be strictly in accordance -ith the .%ATA 2,,2. m? =here the dealer is not in agreement -ith the audit findings, the auditor should e9plain the action that -ill follo-, for e9ample, a sho- cause notice on :orm ,2 -ill be issued -ithin a -ee4. The dealer -ill ha+e 1/ days to respond to :orm ,2, any representations -ill be ta4en into account and an assessment order :orm , -ill be issued for the ta9 and interest. 8efore passing the assessment order the -or4ing of the ta9es , its basis and copy of the draft order should be for-arded to the immediately superior authority for their information and perusal, at least 1, days before the passing of order. After passing of order 5ayment is required -ithin a further , days. The reco+ery is to be follo-ed by the auditor for the ne9t 0, days for getting the dues paid. The dues reco+ered are to be duly entered in the registers prescribed and after 0, days the un6
/2
reco+ered amount has to be transferred to the reco+ery 8ranch for further reco+ery action. n? The %AT dealer should be ad+ised of his rights and obligations -ith respect to items in dispute. o? The flo- chart set out belo- defines the procedures to be follo-ed during an auditI
6lo+ chart settin$ out the normal "rocedures to be &ollo+ed on audit )isits%
VAT AUDIT
Arri+e at dealerHs premises 6 introductions 6 '9plain purpose of +isit 6 "arry out inter+ie- of dealer; basic chec4s
Retrie+e records to be e9amined from dealer Arrange -or4 area for access to records and contact person to assist "arry out additional chec4s -here necessary Audit selected figures;return
Are thereI 6 !iscrepancies in the return 3 !eficiencies in systemR
3elect Additional Areas
No
"losure
Fes
<ist them !o they ha+e re+enue significanceR
Fes
Fes
Is it possible fraudR
!iscuss and resol+e -ith %AT dealer

!ocument e+idence
"losure
"losure
No Fes
!o NoI need to e9tend auditR
No !iscuss and resol+e Fes Are there any contentious issuesR No )btain copies of source documents
Closure
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C,A-T ! 9
! 6UND AUDITS
92. NoteI A separate manual has been prescribed for Refund Audits. The case -herein the dealer has already filed application in form /,1, the audit is to be conducted by the refund audit branch for -hole of the year. The cases -hich are selected for business audit and as a result of audit it is found that the dealer stands to get a refund, that is the case results in o+er declaration, in such cases the auditor -hile carrying out the business audit shall also apply the procedure prescribed for the refund audit in refund audit manual for carrying out the refund audit and thereafter completing the procedure and coming to the conclusion in the matter should gi+e such findings in audit form $. The dealer may be ad+ised to file the re+ised return and on such filing the dealer may file the prescribed form /,1 -ith the refund audit authorities. The refund audit branch , ho-e+er may gi+e the refund on basis of the findings of the Auditor issued to dealer in form Audit form $. The refund audit branch need not again carry out the Audit as prescribed in their manual. The auditor of business audit branches at end of each month should for-ard to his immediate superior authority a statement in form D0 stating their in the list of dealers ,their o+er6declarations, the date of findings in form $, date of filing of re+ised return and a copy of findings in form $ issued to the dealer. These statements should be consolidated at section le+el by the office of Coint commissioner and then for-arded to the office of the Coint "ommissioner of 3ales Ta9 Refund Audit 8ranch.
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C,A-T ! 7
-OST AUDIT CONT!OLS

72.2 Introduction% a? The essential elements of post audit action should be toI 7pdate the summary of business acti+ities and records on :orm Audit /, >see Appendi9 A? "omplete the interim +isit report in form Audit &orm 82<* after each +isit to the dealer and pass the file to immediate superior authority. 3pecifically note any amendments to the acti+ity ; commodity code and any changes to the business acti+ities. In the case of %at Assessments the instructions are set out in Appendi9 1. Issue form audit $ to the dealer after due consultation -ith immediate superior authority. Note on :orm Audit 0 the appropriate code for the under6declaration as set out in Appendi9 D. 5repare and issue :orms Audit . 5ass the %AT dealer file for re+ie- by the immediate superior authority along -ith :inal %isit report on :orm Audit 0. If any potential assessment falls -ithin the criteria for referral to the in+estigation section, see Appendi9 I, action should be ta4en as set out.
7222
Action b# auditor a? In case of cases -here an audit +isit has been made and further +isits are to be made to the same dealer at different dates before concluding the audit, the auditor should al-ays file the interim +isit report in &orm audit 82<* prepare :orms Audit from his noteboo4, not later than the first office day follo-ing the date of the +isit. In the report the auditor should gi+e outline of the happenings during the +isit and identify core issues. :or each such +isit the second and then third interim report in the same form needs to be filed and submitted to the immediate super+ising authority. If the audit +isit is concluded , then complete +isit report on :orm Audit 0 has to be filed and :orm Audit / is to be updated.
b? The auditor should re+ie- the -or4 completed on the +isit and ensure that all the appropriate action has been ta4en. VAT audit manual /0 Maharashtra STD October 2007
c? Any uncertainties should be resol+ed -ith the %AT dealer, and any issues not settled on the +isit should be decided by reference to the immediate 3uper+ising authority and any decisions notified to the %AT dealer -ithin 1, days of the +isit. !ecisions should be recorded on :orm Audit 0. d? =here an under6declaration or o+er declaration has been identified, the amount of ta9 must be calculated and the reasons defined. In such case of the amount of under declaration or o+er6declaration accepted by the auditor should be notified to the dealer in Audit form $. In case -here the dealer challenges the under declaration notified, the assessment is to be underta4en .The auditor should, in all cases -herein assessment order is to be passed in form , , submit for information to his immediate super+isor, the file of the dealer along -ith -or4ing of ta9es, and the draft of the proposed assessment order in form , . These should be submitted at least ten days before the actual passing of the assessment order. e? The ne9t higher authority should go through the sho- cause notice ; assessment before the assessment notice or o+er declaration forms are issued by the auditor. f? The basis of all calculations should be pro+ided on :orm Audit 0. The e9planation of any assessment or notice of under declaration should be pro+ided to the dealer on the re+erse of :orms ,2 and , . g? Areas of ris4 for follo- up action on the ne9t +isit should be highlighted on :orm Audit 0. 7252 Action b# the ne't hi$hest authorit#% a? The immediate super+ising authority should retain copies of all auditorsH -ee4ly +isiting -or4 programmes >:orm Audit 1?. The Coint "ommissioner shall retain the copies of all auditors +isit programmes. b? :orms Audit 1 should be used as a control document to ensure that all notified audit +isits are completed and reported. c? "hec4s should be carried out to ensure the +isit -as completed on the specified date and the length of the +isit is appropriate. d? All +isits resulting in the issue of an assessment ; o+er6declaration >that is issuance of :orms ,2, and , ? should be fully chec4ed by the ne9t highest authority >immediate super+ising authority? including arithmetical chec4s. e? !iscrepancies identified should be resol+ed -ith the auditor and :orms Audit 0 certified by the ne9t highest le+el. f? All +isit reports should be chec4ed by the ne9t highest authority. As defined earlier there should be detailed scrutiny of 1 +isit report per quarter -here no under ; o+er6declaration has been identified.
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g? The scrutiny should include but not be limited toI "omparison bet-een :orm Audit 0 -ith particular attention paid to the allocation of the appropriate acti+ity ; commodity code A chec4 on the description of purchases and sales to establish that the correct liability has been declared Re+ie- the dealer file to ensure identified ris4s ; cross6chec4s ha+e been dealt -ith on the +isit "hec4 that appropriate action has been ta4en -here discrepancies ha+e been identified "hec4 that findings gi+en ha+e been confirmed in -riting and recorded in the dealer file
h? 3pecial attention should be paid to reports from ine9perienced staff or auditors -hose -or4 performance gi+es cause for concern. i? It is important all auditors ensure assessments are soundly based and calculations are accurate. 7272 Control o& audit acti)ities a? The Additional "ommissioner %AT A!. is responsible for the o+erall management of %AT audit -ithin the state. De should, -ith the co6operation of his management team, de+ise an audit program -ith t-in ob*ecti+es. :irstly, collecting ma9imum re+enue through ris4 focused audits and secondly, achie+ing ma9imum +oluntary compliance by broad based audit co+erage. b? 5erformance of the %AT program should be monitored by a management information system >.I3?, see A""endices ,* ,.* ,5* ,7* ,8* ,9 . $./ -ost audit learnin$s30usiness Audit 0ulletin%3 It is desirable that the methods of ta9 e+asion employed by the dealers should be 4no-n to the auditors. Therefore a system of 8usiness Audit 8ulletin is being implemented. It -ill sho-case the specialist techniques deployed by the auditors -hile detecting under6declaration and peculiar modus operandi used by dealers to sub+ert the ta9 liability. 3uch cases shall be selected by the C"s -hile going through the reports submitted by !"s and by !"s -hile going through the cases submitted by A"s and 3T)s. The report submitting auditor should thereafter prepare a synopses of the case in an indicati+e format -hich is pro+ided in A""endi' E!E2
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C,A-T ! :
AUDIT CAS S 4, ! -OT NTIAL 6!AUD; VASION IS SUS- CT D

:2.2 Introduction% a? The in+estigation of fraud is a +ital element in the administration of %AT. The purpose behind a %AT fraud in+estigation is to deter %AT dealers from 4no-ingly ma4ing fraudulent %AT returns. b? A distinction is to be dra-n bet-een innocent errors made on %AT returns and false declarations made -ith the intent to defraud. c? If it cannot be pro+ed that there -as fraudulent intent on the part of the %AT dealer then the action to be ta4en is outside the scope of this chapter. d? The follo-ing cases should be regarded as an illustrati+e list of e+idence of fraud. :222 7se of false ta9 in+oices Alteration ; amendment of ta9 in+oices Tampering -ith;misuse of statutory forms such as -ay bills, "6forms etc 3uppression of ta9able turno+ers;material information such as not disclosing place of business ; godo-n :alse claim of e9ports :alse description and false classification of goods
The role o& the auditor in &raud in)esti$ation a? The main role of the auditor is to +isit dealers and audit their %AT returns. b? Auditors are, ho-e+er, an important and integral part of the fraud in+estigation process. The three 4ey elements of the auditors responsibilities are toI i. identi&# a potential fraud ii. Auanti&# the fraud in order to gi+e the in+estigators an idea of -hat re+enue has possibly been e+aded iii. contain the situation -hen at the dealers premises
/(
c? "onsidering the fact that the %AT auditors may not be delegated all the po-ers to enable them carry out search, sei2ure etc. 8eing so, -here+er necessary, %AT auditor has to -or4 on fraud in+estigation cases in association -ith the In+estigation team. The role of %AT auditor discussed hereinafter -ith regard to fraud in+estigation should be read accordingly. d? There are a fe- -ays in -hich an auditor can deal -ith a potential fraud -hen it comes to deciding ho- to contain the situation. 8efore loo4ing at these, it is important to consider -hat needs to be achie+ed -hen containing the potential fraud. e? The auditor may ha+e identified a potential fraud and the quantification could be relati+ely straightfor-ard. =hen it comes to containing the matter, the auditor is trying to preser+e e+idence of the commission of a possible offence -ithout the dealer realising that he has been disco+ered. f? The auditor must ma4e a decision based on -hether or not the dealer has been alerted to the suspicions of the auditor. g? There is no real -ay of e9plaining if the dealer is a-are, ho-e+er, e9perience has sho-n that -hen faced -ith this problem the auditor -ill 4no- by the dealerHs reaction. h? In the scenario -here the auditor is suspicious that the dealer may be committing fraud and that the the ta9 amount in+ol+ed may not e9ceed Rs./ <acs and the auditor deems it unnecessary to uplifting of the records >through in+estigation officers ? at that stage, in such cases, in order to demonstrate the identification and quantification of the suspected fraud at the office, the auditor can only rely on his notes in the absence of the dealer records. In such cases the auditor may also ta4e e9tracts of the boo4s or the copies of the documents and may get them authenticated by the dealer to be true. i? The importance of good notes -ere dealt -ith in an earlier section, ho-e+er, in the conte9t of fraud recognition, good notes are essential as potential e+idence in case the original records are destroyed. *? If the dealer destroys the records because he fears the auditor has disco+ered the fraud, then the notes that the auditor ma4es of the transactions -hich supported the %AT return may be the only -ay of penalising the dealer for alleged fraud. 4? It should also be remembered that the dealer -ill ha+e submitted a %AT return and he should ha+e records and in+oices in order to substantiate -hat -as -ritten on the return.
0,
l? If the auditor notes the suspicious transactions and the purchase and sales figures -hich made up the %AT return that is in question, this could be the e+idence that helps pro+e a fraud has ta4en place. :25 Identi&ication o& &raud b# auditors%
The purpose of %AT audit should be to identify discrepancies and deficiencies in the %AT dealerHs records and ensure that the full amount of %AT due has been recorded and paid on each return. Da+ing identified an error, the auditor should attempt to establish -hether it -as innocently made, or made deliberately -ith the intention of reducing the ta9 to be paid. If the %AT dealer is unable to offer a reasonable e9planation for any error, the auditor should attempt to gather any e+idence to suggest an intention on behalf of the %AT dealer to defraud the 3T! of the %AT due. The auditor should approach this tas4 by see4ing to establish the %AT dealerHs normal operational and accounting methods and then see4 an e9planation for any +ariations from normal business procedures. =here the e9planations offered are uncon+incing, there must be a suspicion that a fraud could ha+e been committed. =hen an auditor disco+ers a potential fraud or e+asion the guidelines in Appendi9 I should be follo-ed. In all other cases -here there are grounds for suspecting fraud, the auditor should ta4e possession of the rele+ant documents and any e+idence, if this is practical and -ithdra- from the audit ad+ising the %AT dealer that there is a need to loo4 further at his records and chec4 them bac4 at the office. As noted abo+e, no indication should be gi+en that fraud is suspected, or that anything serious is -rong, so that the %AT dealer does not see4 to destroy e+idence -hile the case is being re+ie-ed. The types of %AT fraud are too +aried for a definiti+e list to be pro+ided, but Appendi9 C details the more common types of fraud -hich ha+e been detected in %AT systems. The appendi9 also specifies the counter measures that could be employed by administrators. The list is not e9hausti+e, and is for guidance only to create a-areness of possible %AT frauds. There should be a list of %AT frauds >-here an intention to defraud e9ists? and e+asions >-ere an error is considered to be a mista4e? completed B 01
regularly updated by each office. The central in+estigation unit should regularly disseminate information and trends concerning %AT frauds. :27 Classi&ication and or$anisation o& &raud in)esti$ation% a? The in+estigation of fraud ma4es significant demands upon staff resources and is rarely cost effecti+e -hen compared to the collection of re+enues, penalties and interest. b? The +alue of fraud in+estigation is to encourage and engender +oluntary compliance by %AT dealers by pro+iding a reasonable prospect that fraudulent %AT dealers -ill be detected, in+estigated and prosecuted in the courts, or sub*ected to financial penalties. c? To achie+e this ob*ecti+e the aim is to gain ma9imum publicity for the successful conclusion of ma*or fraud cases. d? "ases -here fraudulent intent can be pro+ed, but the re+enue at ris4 is less than the guidelines in Appendi9 I should be dealt -ith by the %AT auditor and an assessment issued for the additional ta9, penalty and interest due. e? "ases -here fraudulent intent can be pro+ed, and the re+enue in+ol+ed is -ithin the guidelines set out in Appendi9 I and cases of deliberate manipulation, should be handed o+er to the in+estigation unit. f? The dealer file should be noted -ith a record of the fraud and the associated ris4s on :orm 0. g? The C" should be consulted at an early stage of any potential in+estigation and in association -ith specialist in+estigation agencies, any e+idence gathered by the auditors should be scrutini2ed to establish -hether there is, prima6facie, a case for in+estigation Any in+estigation authorised should be underta4en by specialist in+estigators in line -ith the guidelines in Appendi9 I. h? All %AT auditors ha+e a responsibility to detect and identify fraud and should recei+e audit training to achie+e this ob*ecti+e. i? The in+estigation of %AT fraud requires special s4ills and in6depth training is normally to be underta4en in the regions by a specialist fraud in+estigation team.
:28
-rocess &or Communication +ith In)esti$ation 4in$% a? !uring the course of any audit, if the auditor is of the opinion that the search and sei2ure is required to be carried out , then the case may be handed o+er to
02
the In+estigation. :urther the control of the matter of in+estigation -ill shift to the In+estigation 8ranch. b? In such cases -here search and sei2ure is felt to be necessary, auditor should inform his concerned Coint "ommissioner, -ho thereafter should contact the *oint "ommissioner of 3ales ta9 of the 3pecified In+estigation =ing. It ihas been decided that the first t-o 3ections I and II of the 8usiness Audit in .umbai should contact In+estigation KALand the ne9t t-o sections III and I% should contact In+estigation K8Lin such situations. In case of the 8usiness Audit in .ofussil areas, the respecti+e .ofussil Coint "ommissioner of in+estigation -ing may be informed , -ho'll thereafter depute the in+estigation officers for the further course of action. c? In cases -here the audit has been initiated by the auditor, but the auditor as -ell as the concerned Coint "oomissioner are of opinion that the matter needs thorough in+estigation and that further e+idence is needed to be collected , then the concerned may in consultaion -ith the Additional "ommissioner of 3ales ta9 %AT A!. for-ard such case to In+estigation section. Thereafter the in+estigation section shall deal -ith such cases. d? The Ta9 Intelligence 7nit -hich is separetely established , -ill liasion -ith other 1o+ernment departmental authorities or Agencies other than the 3ales Ta9 !epartment for collection of ta9 related or fraud related intelligence. This -ill be the nodal agency for such tas4.
C,A-T ! <
MANA( M NT ! -O!TIN(
<2.2 Introduction% a? The compilation of an audit programme -ill depend on the number of registered %AT dealers and the ris4 associated -ith those %AT dealers. b? The programme -ill be ris46based, dependent on the need to enforce return filing, collect ta9 under6declared, monitor refund claims on a ris4 basis, and effecti+ely control the largest %AT dealers. c? The de+elopment of an ongoing audit programme -ill be dependent on accurate and timely management information. d? Audit management information -ill perform the follo-ing functionsI 6 <222 .onitor the progress of audit acti+ity >3tatement D, D1,D ,D#,D/,D0? Record fraud and e+asion trends to pre+ent re+enue lea4age and ma9imi2e collections. .onitor staff performance to impro+e the standard of audit acti+ity .onitor the audit program to ensure broad co+erage resulting in impro+ed +oluntary compliance 5ro+ide the basis for future audit planning.>Register 8AR 0?
VAT +or@ return% a? '9amples of audit -or4 reports and under6declaration classification are pro+ided at Appendi9 D, D16D . This should pro+ide the basis for the o+erall management of %AT audit. b? These reports should be generated by the computer on a monthly basis through 8usiness Audit module of .ADA%IEA3 system. Till the time the said business audit module on .aha+i4as is in place, such statements can be generated on a spreadsheet on the standalone computers pro+ided to the officials.
<252
Classi&ication o& VAT errors and e)asions%
All %AT under6payments identified by auditors should be classified on a numeric basis to assist the management of fraud and e+asion trends. A simple classification basis is pro+ided at Appendi9 D. 0#
The purpose of this classification of under6declaration trends should be to pro+ide management -ith information, to enable resources to be targeted to-ards audit acti+ity, -hich should ma9imi2e re+enue collection, and encourage %AT dealer +oluntary compliance. At the same time, the measure of the le+els of under6declaration detected should pro+ide some indication of the effecti+eness of the le+el of +oluntary compliance, and the effecti+eness of audit action.
0/
C,A-T ! .0 ! (IST !S 6O! 0USIN SS AUDIT 0!ANC,
Till the time the .aha+i4as is fully de+eloped and operational, the 8usiness Audit module is implemented and is ready to generate all types of .I3, follo-ing registers are to be necessarily maintained. These are also to be entered on the standalone computers .
10.1 CONTROL REGISTER (BAR 1.)
S(.N& +
!AT5 &: (5C5'6T ,
S&$(C5 &: A$!'T 3
C&!5 &: .C. -
C&NT(&7 (5;'ST5( N$MB5( .
A77&CAT5! T& <C&!5 &: A$!'T &::'C5(= /
NAM5 &: !5A75(
(.C. N&
T'N
(5S$7T &: A$!'T <+- 65('&! &: No $N!5( $N!5(declaration> ,- !5C7A(AT'& !5C7A(AT'& $nderdeclarat N? N <in (s= ion> 3&V5(!5C7A o)erdeclaratio (AT'&N n= +3 +3 A ++ TA4
!AT5 &: !AT5 &: (5T$(N? $N!5($N!5(!AT5 &: 'SS$5 &: (5V'S5! !5C7A(AT'& !5C7A(AT'& A.&. :&(M 33, (5T$(N N <in (s= N <in (s= <!!?MM?88= <!!?MM?88= :'75! <!!?MM?88= +, +3 ++. +/ 'NT5(5ST 65NA7T8
C&!5 &: 'SS$5S 'NV&7V5! +0
!AT5 &: C7&S$(5 <!!?MM?88= +1
(5MA(9S +2
00
1 .! D"# $OO% OF $&S'()SS "&D'T "(D "SS)SS*)(T +$"R !,
S( N&.
65('&! &: C&NT(&7 !AT5 &: $N!5(NAM5 &: (5;'ST5( ASS5SSM5 T'N?(.C.N& !5C7A(AT'& T@5 !5A75( N$MB5( NT &(5!5( NS , 3 . /
;T& &: SA75S AS 65( (5T$(NS (S. 0
;T& &: SA75S AS 65( A$!'T (S 1
TA4 6A'! A'T@ (5T$(NS <(S.= MVAT 2
TA4 6A'! A'T@ (5T$(NS <(S.= CST +3
$N!5(!5C7 $N!5(!5C7 $N!5(!5C7 'N6$T TA4 A(AT'&N < 'N A(AT'&N< 'N A(AT'&N< 'N C7A'M5! (S.= (S.= (S.= (S. ++ MVAT +, 'NT5(5ST 65NA7T8 under MVAT under MVAT +3 +-
$N!5(!5C7 $N!5(!5C7 $N!5(!5C7 !AT5 &: A(AT'&N < 'N A(AT'&N< 'N A(AT'&N< 'N (5V'S5! (S.= (S.= (S.= (5T$(N 'NT5(5ST 65NA7T8 CST !!?MM?88 under CST under CST +. +/ +0 +1
(5MA(9S
+2
0$
10.3 cross check register (BAR 3)
Sr.No. 1
Outward No. 2
Control Reg ster Num!er 3
Name " Name " Name " 'es gnat o #$N No. o% #$N No. o% n o% (ud t t&e 'ealer *endor O%% )er 4 5 6
Nature o% (mount o% #ransa)t o #ransa)t o n n 7 8
Result o% Cross+ C&e)k 9
Remarks 10
0&
10.4 fi e !o"e!e#t register (BAR 4)

Sr. 'ate No. 1 2 Control Reg ster Num!er 3 Name o% t&e 'ealer 4 Send #o 5 S gn 6 Remarks 7
10.$ A%&it #ot %#&ert'ke# Register (BAR($)

Sr. No . 1 Control Reg ster Num!er 2 Reason %or na! l t, to undertake an aud t 5
Name o% t&e 'ealer w&ose aud t )ould not undertaken 3
#$N NO. 4
-erm ss on Soug&t (longw t& 'ate 6
0(
10.) CRITERIA ANAL*SIS REGISTER (BAR ))
C&NT(&7 S( C&NT(&7 (5;'ST5( N$MB5( (5;'ST5( N$MB5( N$MB5(
T&TA7 N$MB5( &: CAS5S CAS5S ('S9 65(TA'N'N; 'NV&7V'N; C('T5(A T& ('S9 $N!5(N$MB5( C('T5('A !5C7A(AT'&NS
:(&M + ,
T& 3 . /
T&TA7 AM&$NT &: $N!5(S$CC5SS (AT5 <'N &$T6$T (AT5 !5C7A(AT'&NS N$MB5( &: CAS5 'N (s?CAS5 !5T5CT5! <'N 65( +33 S575CT5!= (S.=
$,
10.+ The &escri,tio# of '-o"e registers. Control !e$isterC0A!3.>% All cases recei+ed for audit need to be necessarily included in this register. "ontrol register is to be maintained as a core document at the )ffice )f Coint "ommissioner of the concerned 8usiness Audit section. This register is also to be maintained by each auditor to 4eep trac4 of the cases alloted to him. This register at C" office is to be updated from time to time on basis of other statements. >quarterly or monthly ? Da# 0oo@ O& Audit And AssessmentC0A!32> This register is to be maintained by each auditor to report the results of audit and assessments. This should be the source documents for the statements to be sent to Returns 8ranch,Refund 8ranch,Reco+ery 8ranch.
Cross Chec@ re$ister C0A!35>% This register is to be maintained by each auditor.The cross6chec4s in :orm are to be issued on the ne9t day of audit +isit. The cross chec4s issued should immediately be entered in register , thereafter re ,it is to be updated -ith the results of cross6chec4 regularly. 6ile Mo)ement !e$ister C0A!37>% This register is to be maintained by each auditor and its super+ising authority. This should include the control number of file -heree+er applicable and e+en the 7)Rs if they are sent in a file. Audit Not underta@en re$ister C0A!38> % This register is to be maintained by each auditor. As and -hen the e+entuality of audit not underta4en ta4es place, it is to be recorded in this register. These are to be later on entered in the control register by the audit head as -ell as by the office of the C" Criteria Anal#sis !e$ister C0A!39> % This register is to be maintained by each auditor. The results of this register are to be considered for e+aluating the results of the +arious Audit criteria to the super+ising authority for the purposes of e+aluating the gi+en criterion by the designated authority as and -hen required. This e+aluation should be done biannually.
$1
C,A-T ! .. T, INS- CTION O6 ! CO!DS

..2. Introduction% It is ad+isable that all the prescribed registered are maintained and the processes are carried out. :or this purpose the Coint "ommissioner super+ising each section shall conduct once in e+ery year the inspection of all audit units under him and the !eputy "ommissioner shall conduct inspection of his audit unit. ..22 Co)era$e% The inspection shall co+er follo-ing aspects,
the maintenance of the registers prescribed. The test chec4 of the communications issued for communicating audit results to reco+ery or returns branch. The procedure for the maintenance of the audit file records. The pendency of the assessments and audits and the reasons therefore The -or4 sheets of the Inspectors and of the ta9 audit assistants ; cler4s
..25
!e"ortin$ and com"liance The Inspecting Authority shall cause a report of such inspection be drafted outlining therein such discrepancies and shortcomings as may be obser+ed or noticed during the inspection. These shortcomings or discrepancies need to be e9plained and a reply to be filed by the officer in6charge of inspected unit -ithin a month of receipt of such report
$2
Cha"ter .22 Comment on record &ilin$ s#stem2

It is e9pected that the auditors shall de+elop the list of minimum documentation -hich need to be 4ept on record. The decision -ill also depend on the requirements for the purpose of the internal or 3TRA audit -hich shall be carried out in the cases -here the assessments are to be carried out.
Cha"ter .52 !es"onsibilit# and date &or u"datin$ the manual

The current manual is to be functional from 1st No+ember 2,,$.
Any changes -hich are sought to be incorporated in the manual need to be discussed and submitted under the signature of at least four auditors, or under the signature of *oint commissioner or higher authorities and may be for-arded to the team in charge of manual. These changes shall then be discussed and submitted in a *oint meeting of the business audit sections and decided. The accepted changes may be submitted before the Authorities of the "3T and core group and thereafter may be included in the audit manual in the ne9t +ersion.
The ne9t audit manual +ersion may include the processes -hich are felt to be needed for the effecti+e functioning of officials and staff and such may be based on the e9perience and the actual issues e9perienced in the field. The ne9t phase of the updating -ill be in .arch 2,,&.
$#
$/

VAT Audit Manual Maharashtra STD October 2007

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VAT AUDIT MANUAL

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

C,A-T ! . / 0AC1(!OUND TO VAT COM-LIANC

C,A-T ! 2 3 AUDITO!S -O4 !S AND ! S-ONSI0ILITI S

C,A-T ! 5 3 CLASSI6ICATION O6 AUDITS

C,A-T ! 7 3 ST!UCTU! D A--!OAC, TO AUDIT

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

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

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

C,A-T ! : 3 AUDIT CAS S 4, ! -OT NTIAL 6!AUD ; VASION IS SUS- CT D

VAT audit manual Maharashtra STD October 2007

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

3! (IST !S 6O! 0USIN SS AUDIT S CTION

3T, INS- CTION O6 ! CO!DS

Introduction "o+erage Reporting and "ompliance

3COMM NT ON ! CO!D 6ILIN(

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

0AC1(!OUND TO VAT COM-LIANC

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

AUDITO!S -O4 !S* L (AL -!OVISIONS AND ! S-ONSI0ILITI S

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

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

VAT audit manual Maharashtra STD October 2007

1eneral and 3pecific Audit

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

8et-een Rs. 1 la4h and Rs.

la4hs in the last 12 months A , points

8elo- Rs. 1 la4h in the last 12 months A 2, points "ompliance

VAT audit manual Maharashtra STD October 2007

16 acti+ities A / points 6/ acti+ities A $ points In e9cess of / acti+ities A 1, points

o 8et-een 1 year and

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

!eputy "ommissioner 1. 'nsure the audit program is satisfactorily completed

VAT audit manual Maharashtra STD October 2007

N.A. Addl. Commissioner !e"ut# Commissioner !e"ut# Commissioner None None

!e"ut# Commissioner Assist. Comm. % ST& None None

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

UND !TA1IN( T, AUDIT

VAT AUDIT NOT 0OO1

VAT audit manual Maharashtra STD October 2007

5age number>s? 1-6 7-10

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

VAT audit manual Maharashtra STD October 2007

3eparate stoc4 records must e9ist for each business.