Audit under the KVAT Act, 2003 - kstpi.orgkstpi.org/Temp2/images/ACTION POINTS FOR KVAT AUDIT...

AN EDUCATIVE MATERIAL PREPARED BY

KARNATAKA STATE TAX PRACTITIONERS ASSOCIATION ® IN COORDINATION WITH

ACADEMIC COMMITTEE OF BALLARI, TUMAKURU,BELAGAVI & SHIVAMOGGA DIST., UNITS

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ACTION POINTS TO ENSURE QUALITY AUDIT UNDER

THE KVAT ACT & RULES TO BE REPORTED IN

FORM VAT 240 FOR THE FINANCIAL YEAR 2014-15

PREAMBLE

1. Every registered dealer (other than companies) whose total turnover

during the year exceeds one hundred Lakh rupees (one Crore) shall have

his accounts audited by a CHARTERED ACCOUNTANT or a COST

ACCOUNTANT or a TAX PRACTITIONER (for Tax Practitioner 3

years after enrollment) and such dealer shall electronically submit (E-file)

a image of such audited statement of accounts, copy of Profit & Loss A/c

and Balance sheet and any other related documents within nine months

after the end of the relevant year (i.e., on or before 31st December 2015 for

the F.Y.2014-15) in the Commercial Tax Department web-site (through

Dealer`s login only).

2. Every registered dealer who is a company as defined under the Companies

Act, 1956 or a company incorporated out side India and whose total

turnover during the year exceeds one hundred Lakh rupees shall have

his accounts audited by a CHARTERED ACCOUNTANT or a COST

ACCOUNTANT and such dealer shall electronically submit (E-file) a

image of such audited statement of accounts, copy of Profit & Loss A/c

and Balance sheet and any other related documents within nine months

after the end of the relevant year (i.e., on or before 31st December 2015) in

the Commercial Tax Department web-site (through Dealer`s login only).

3. As per Section 86 of KVAT Act, 2003 though SEVEN CLASS of persons

including (1) Advocates (2) Enrolled/Registered Tax Practitioners (3)

Chartered Accountants (4) Cost & Management Accountants and (5)

Company Secretaries are authorized to REPRESENT the dealers but,

among them only THREE CLASS of professionals (Tax Practitioners,

Chartered Accountants, Cost & Management Accountants) are authorized

to conduct AUDIT and issue certificate.

CONSEQUENCE OF NON COMPLIANCE

Any dealer who fails to submit within the time prescribed a copy of the audited

statement of accounts shall be liable to pay a penalty of Rs.5,000/- and a further

penalty of Rs.50/- per day for so long as the failure to submit the report.




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WHAT ARE THE OBJECTIVES OF KVAT AUDIT ? The main purpose of carrying out the Audit under the provisions of Section 31 of

the KVAT Act, 2003 read with Rule 33 & 34 of the KVAT Rules, 2005 are:

To verify the system of self-assessment as per the provisions of law and

scrutiny of returns (considering latest revised returns) / statements filed by the

dealer will be ensured;

To verify and ensure whether the books of accounts and other records are

maintained in accordance with rule 33 of KVAT Rules, 2005;

To facilitate the VAT authority to obtain proper and correct information about

the dealer; To bring to light any deviations of the dealer while complying with

the provisions in the Act;

Verify whether the dealer has uploaded the details of purchases / sales in the

notified website and compare the same with the returns and books of accounts;

Verify whether all the statutory forms both under KVAT Act, 2003 and under

CST Act, 1956 were properly maintained in the prescribed registers;

To determine and ensure the correct classification of goods traded and

determine total and taxable turnovers;

To determine and ensure the application of correct classification of rate of tax

for Correct Output VAT quantified, input credits availed and to check whether

proper restrictions if any is made or not and to facilitate the dealer to arrive at

correct Net VAT on such total and taxable turnovers;

To ensure proper physical verification of documents ensuring correct charge of

Input/Out Put VAT in it and the correctness of claims made in accordance of

law.

To verify the correctness of entries made in e-uPaSS.

To check the MATCHING STATUS OF VAT input credit & outflow to

determine and advise necessary corrections if any;

PRECAUTIONS

While computing the ‘TOTAL TURNOVER’ one should include:

--- Exempted sales

--- URD Purchases

--- All taxes collected

--- Commission Charges in case of commission dealer

--- Any cess including APMC Cess & Weigh-men fees charged

--- Freight and insurance recovered from the buyer in the invoice issued

--- any other charges / amount collected in the invoices

--- Any item mentioned above collected by issuing separate Debit & Credit Notes

For the benefit of members the method of computing TURNOVERS AND

NET VAT liability 2 FLOW CHARTS –cum- WORKING SHEETS provided

for information.




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Flow Chart -1:

To compare month-wise and annual figures of turnover and tax liability and the

facts with the books of accounts, the Auditor should ensure that the details of

monthly Returns (Original / Latest Revised) filed in Form VAT 100 and

particulars of Purchases & Sales uploaded and its ITC Matching status is in proper

manner or not.

Flow Chart- 2:

In case where the Auditor point out any discrepancies viz., the under liability to tax

or the over liability to tax of such dealer as a result of any errors or omissions in

the above flow chart-1 or in any manner he may adopt to compare the figures of

Books of account to the Monthly returns already filed by the dealer, then he should

proceed to rectify such errors and omissions of relevant tax period as per in

accordance to the books account as per flow chart-2 to ensure that the

computations are correct and are in accordance with law by passing his comments

in a separate sheet and advice the dealer to file the revised returns in Form VAT

100 and revision of e-uPaSS for the relevant tax periods (months) and to pay the

differential tax, interest or penalty as applicable.

As per the KVAT law, the interest at the rate of 1.50% of the difference tax

liability should be computed till the date of payment of the tax payable. Therefore,

it is advisable to compute and reflect the tax, interest and penalty till the date of

signing / filing of KVAT Audit Statement.

In case for any of the tax period, if the input tax credit claimed is in excess or

short, then refund claim is to be reflected in the remarks column (However this

column were deleted). So, to avoid complications, manual copies of the revised

returns (if any) shall be submitted along with this audited statement to the

jurisdictional VAT office to seek manual refund proceedings in this regard.

Figures can only be rectified since refund is not ensured.

. Ensure that the table as shown in the certificate must match;

. The Audited Statement should have the Tax Practitioners Enrollment

number / CA Membership number ;

. Identify inputs in manufacture/ trade and verify their taxes rates with

schedules/ notifications.

. Explore possibilities of incorrect classifications.

. Study impact on taxes and recommend measures to optimize taxes.

. Ensure accuracy on input credits/ output taxes

. Verify stocks/ transactions

. Check yield of inputs vis-à-vis outputs to verify accuracy of reported

purchases and sales




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. Ensure genuineness of purchase Invoices / bills of suppliers to ensure

proper claim of input credits

. Ensure correct uploading of particulars of purchases and sales including

URD setoff and carry forwarded (un-utilized tax deposits).

. Verify with regard to misclassification/ inflation of purchase

invoice/deflation of sale invoice

. Ensure proper claim of input credits on Capital Goods purchased and proper

recording of costs and depreciation of such goods.

. Ensure credits in respect of stocks held on transitional date (Previous year /

on the date of inspection if any) are properly claimed.

. Analyze set-off availability/applicability in respect of units enjoying

incentives/concessions.

. Tabulate the output Tax payable/ Refundable.

. Based on the findings, issue certificate in prescribed format.

. The KVAT audit Certificate/ Report has to be filed for the financial year

(April to March) only.

The Auditor is entitled to rely on the information given by the dealer so long as he

has exercised his professional due diligence and judgment in seeking information

and explanations.

The Auditor has to comment if there any adjustments entries passed in the books

of accounts pertaining to sales or purchase like goods destroyed, samples, reversal

of taxes, goods sent for approval, suspense account, etc

The Auditor has to comment stating that he has relied on the purchase invoices and

purchase register produced for verifications to arrive the amount of input tax credit

and that he cannot certify the computation of classification of goods purchases.

The auditor can add the comments, that the audit is carried out under the Generally

Accepted Accounting principles and clearly state the extent of reliance placed on

books and records and the manner in which he has carried out check.

The certificate states that profit & Loss Account and Balance sheet has to be

enclosed. It is not specified that it should be audited. But it is advisable to enclose

the Audited profit & Loss Account and Balance sheet. In case the dealer has a

consolidated profit & Loss Account and Balance sheet for the whole of India, then

in such case the dealer can enclose such financial statements duly reconciled.




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DOCUMENTATIONS

BASIC DOCUMENTS REQUIRED FOR KVAT AUDIT:

Sales / Dispatch Register, (Local, interstate, Export), Purchase/Receipt Register

(Local, interstate, Import), Sales Invoices, Purchase Invoices, RA Bills, Goods

Dispatch & Receipt Memos, Credit and Debit Notes & registers, Classification

Schedule (Rate of tax), Statutory forms utilization registers with full details,

Ensure Original Statutory Forms including TDS Forms filed electronically and

acknowledged by LVO & its part/ counter-foils, Sub-Contracts, Details of Labor &

like Charges, Monthly Returns (Original / Revised) e-uPaSS statements &

matching status, Stock Valuation Statements, Financial statements- Audited,

Correspondence with the department, Registration certificate (VAT, PT, Entry

Tax) Stock inward/ Outward Register, Input VAT / Output VAT Register and

place of business within Karnataka and outside Karnataka etc.,

--- Obtain a Authorization / Appointment letter from the dealer along with a

undertaking for having disclosed all relevant information and documents

pertinent to the KVAT audit.

--- Intimate and take consent from previous auditor if any;

. Previous years signed KVAT Audit Report;

--- Obtain the following documents / details from the client

. Brief profile of the client, details of his businesses and locations of his branches

along with the details of the concerned in-charge person/s; . Copies of the

constitution of the organization, like memorandum and Article of Association,

partnership Deed, Addendum to the Deeds etc;

. A list of products being dealt with, the various notifications and clarifications

applicable, copies of important judgments, advance ruling copies and

clarification with reference to the client in specific and products in general;

. Copies of business related contracts and agreements.

. Copies of the registration certificates issued under the KVAT Act and / or under

the CST Act and other allied laws for verification of commodities permitted;

. Copies of the Application made for Composition scheme, special Accounting

Scheme, partial Rebating Application and permission obtained etc.,

. List of visits by the various department officials, notices received and replies

thereof, pending litigations before various authorities and other important

issues resolved / unresolved;

. It is advised to obtain all the relevant management representation certificates

from the dealer before the VAT Audit Report is signed.




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FAQ`s ON KVAT AUDIT

. Whether revised figures can be incorporated in KVAT Audit Report

without filing of the Revised Returns?

--- In terms of section 35(4) of the KVAT Act, 2003 dealers are required to file

the revised returns, if any, within a period six months from the end of the tax

period to which such return relates. In case if there is change in the details /

turnovers in respect of the returns filed with the department then revised details

can be incorporated in the KVAT Audit Report as such, some experts opine

that, “since there are no specific restrictions under the KVAT Act, 2003 such

revised returns should be enclosed along with the KVAT Audit Report.

. Should the Same Auditor of the dealer conducted Audit U/s 44AB of the IT

Act,1961 has to do the KVAT audit?

--- There is no specific restriction baring any Auditor other than who audited U/s

44AB of the dealer under IT Act, 1961. Appointing KVAT Auditor is optional

and left to the discretion of the dealer to get his audit report from any auditor.

. Can the inspections / searches / investigations be avoided if the Audit

Report / Certificate is submitted for the relevant period?

--- There are no such specific provisions under the KVAT Act, 2003 to this effect

and hence the VAT authorities have the powers to call for re-assessments / re-

verifications/ revisions even though the dealer has filed Audit Report /

Certificate.

. If a dealer has more than one TIN in the State – whether separate audit

reports or a consolidate Audit Report / Certificate to be field?

--- The Audit Report / Certificate has to be field separately TIN wise.

. What do you mean by address of any branch or unit in the state having a

different registration number?

--- Under Rule 42 of KVAT Rules, 2005 if a registered dealer is a body corporate

and has more than one place of business, then with the permission of

Commissioner of Commercial Taxes, Karnataka, Bengaluru such dealer can

apply for a separate TIN under the KVAT Act, 2003 subject to certain

conditions. In case the dealer has any such TIN, then the address of such

branch should be added / disclosed to the Report.

. If the dealer is selling more than 100 items which are all major, should he

disclose all items under the sales and purchase column?

--- In case the dealer other than a retailer dealing in multiple items, then in such

case the auditor may specify the major items by giving general classifications

like provisions Viz., Furniture, Vegetables, Crockery, Shoes, Gift items,

Garments, etc., and with a classification of VAT @ 0%, 1%, 2%, 4%

,5%,5.5%, 14.5%, 17% & 20% and also in CST at 0%, 1%, 2%,

4%,5%,5.5%,14.5%,17% & 20% category with & without C Forms.

. Whether any method is prescribed under the KVAT for stock valuation?

--- Under the KVAT law, there is no specific method prescribed for stock

valuation unlike the Income-tax Act, 1961. The Auditor can disclose the

method followed for Income Tax Act 1961 or under the Companies Act, 2013

to be consistent with the other / allied laws.




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. Whether the turnovers have to be disclosed monthly or annually?

---- The relevant details under this clause has to be disclosed month-wise for the

transactions by way of annexure as the tax period under the KVAT law is a

month as detailed in VAT Flow Chart provided herewith.

. How does one disclose each purchase corresponding to the relevant export

or CST sale?

--- In case the dealer who is able to furnish each purchases correlating to the sale,

the auditor can disclose it accordingly. In genuine cases, and in case of H Form

purchases and sales, Direct Exports where one to one co-relation between

purchase and sales is must and in other cases it is not mandatory, a suitable

disclosure may be made to the effect that it is not practical to correlate each

purchase against each type of sale. This should be backed up by an adequate

management representation.

. How to arrive the unadjusted excess input tax credit carried over from the

previous year and to the next year.

The details can be arrived in the following manner:

Un-availed input tax brought forward from previous year XXX

Add: Input tax availed in financial year XXX

Less: Utilized against output tax payable XXX

Less: restrictions if any XXX

Balance carried forward XXX

. For the sales ratios, whether ratios pertaining to outside state sales will also

have to be furnished?

--- Yes. Sales ratios pertaining to outside state transactions would need to be

disclosed, which will help in calculating partial rebate u/s 14 and 17 of the

KVAT Act, 2003.

. If C/F/H/I Forms are not obtained as on the date of submission of the audit

report, whether dealer can seek extension of time? In that case will the

auditor be liable to disclose the additional / differential tax payable by the

dealer in his audit certificate/report?

--- The dealer can approach the VAT officer for extension of time; however, the

additional tax payable shall have to be disclosed by the auditor in his report only

in case the dealer submits that no forms are receivable.




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PRACTICAL ISSUES

Where there is a sale of business as a whole, whether buyer or vendor is

required to comply with Audit?

--- The vendor is required to comply with Audit and filling of Form VAT 240 etc.

To what extent an Auditor can rely on electronic records maintained by the

dealer?

--- The dealer can maintain the records electronically and to what extent reliance can

be placed on such electronic records is a matter of judgment of the Auditor. But

from the Auditors point of view, some of the relevant hard copy can be obtained

like financial statements, consolidated monthly Sales and Purchases copies and

other relevant records for documentation and evidence.

Whether verification of up loading of data is required by the KVAT

Auditor?

--- It is advisable for the KVAT Auditor to check whether the conditions as specified

in Notifications are fulfilled and accordingly the uploading is made in

compliance with the KVAT law.

Whether tax is payable or the refund can be claimed based on K-VAT

Audit Report without filling any refund documents?

--- If there is tax liability or a refund claim, it has to be disclosed in the Audit Report /

Certificate. The tax payment can be made along with the Form VAT 240

accordingly. The refund documents have to be manually filed if there is any

refund of taxes without ensuring but cannot be adjusted against any tax liability.

Is there any difference between the turnover as defined under INCOME

TAX and VAT ?

--- Yes, there will be difference in Total turnovers under the KVAT Act, 2003 and to

Income-Tax Acts.

Whether KVAT Audit report should be prepared monthly or yearly

because the tax period is monthly under KVAT Act ?

--- In our view it is yearly since the section, rule and form refers to an year.

Whether KVAT Audit report should be True and correct or true and fair ?

--- Yes, True and Correct

Whether the enclosures attached to the KVAT Audit report is to be signed

both by the KVAT Auditor and the Dealer?

--- Although the law does not specify, it would be a healthy practice to do so.

Whether the KVAT Audit report should verify the arithmetical accuracy of

the books of accounts or input tax credit claim or the payment of the taxes ?

--- The auditor certifies the accounts as “true and correct”. So all the facts stated in

the Form VAT 240 and the relevant annexure enclosing to such Form needs to

be checked.

THANK YOU

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