VAT AUDIT under MVAT Act,2002

MALAD-GOREGAON CPE STUDY CIRCLE of WIRC

STUDY CIRCLE MEETING

ISSUES ON VAT AUDIT(UNDER MVAT ACT,2002 )

SUNDAY 20TH NOVEMBER 2011

CA AMAR N . SHUKLA

1CA AMAR N. SHUKLA

VAT AUDIT under MVAT Act,2002

•PROVISIONS OF VAT AUDIT

• FORM 704 ( AMENDED ?? )

•ISSUES ARISING OUT OF VAT AUDIT

VAT AUDIT Sec. 61 of MVAT Act, 2002

• VAT Audit v/s TAX Audit & Corporate Audit• T.O. of Sales or Purchases v/s Gross Receipts of Sales • Dealers not liable to Tax Audit can be liable for VAT audit.• Conducted by CA/ICWA ( section 61 )• Report u/s 61 shall be in Form 704 ( rule 65 )• Complete Audit Report ( Expln II )• Knowingly furnished incomplete audit report -61(2A)• Such report shall be submitted within 10 months from the end of the year

to which it relates ( rule 66)• Submission by the dealer ( sec.61(2) )• Penalty @ 1/10 % of Sales ; 61(2) • Simple imprisonment of 6 months with fine ,on conviction ; Sec. 74 (3) (m)• Delay by one month possible subject to Commissioners satisfaction that

the delay was beyond the control of dealer

CA AMAR N. SHUKLA 3

Applicability Sec. 61 of MVAT Act,2002

• Every dealer ‘liable to pay tax’ to get accounts audited if : a)T.O. of Sales/ Purchases exceeds 60lakhs ( 40 lakhs upto fy 09-10) or b)Dealer/person holding liquor licence in Form PLL,B-RL,E,FL or CL c) ALL Entitlement Certificate holders under PSI ( Package Scheme

Incentive )* *( Inserted by M.T. amendment dt 29-4-10 w.e.f. 1-5-2010 )

• Whether E.C.holders having TO < 60 lakhs covered u/s 61 from F.Y. 2010-11 or from F.Y. 2009-10 ?

• S.61 refers to Turnover of sales or purchases and not Gross to of

sales or purchases as is referred to in F-704

CA AMAR N. SHUKLA 4

Who is a dealer ?• 2(8) : person who buys or sales goods in the state for

commission/remuneration/otherwise in relation to his business & includes

a) Agents b) Auctioneers c) Non-resident dealer d) Society, club ,AOP• Explanation : Deemed dealers, namelyi. Customs Department, … … … iva. Public Charitable trust , … … … …ix. Shipping and construction co.,air transport companies, airlines and advertising

agencies• EXCEPTIONSI. Agriculturist selling his own produceII. Educational institution in performance of functions to achieve its objectsIII. A transporter holding permit for transport vehicles ( including Cranes ) under

Motor Vehicles Act,1988

CA AMAR N. SHUKLA 5

When a dealer is ‘liable to pay tax’ (Sec.3)

• Dealer Liable to pay tax and get registered • i) Importer – T.O. of Sales > 1Lakh + TO of Sales/Purch of txble goods > 10,000

• ii) Others – T.O. of Sales > 5 lakhs + TO of Sales/Purch of taxable goods > 10,000

• iii) Voluntary Registration - No TO criteria -3(9)

CA AMAR N. SHUKLA 6

‘TO of Sales’/ ‘Goods’ / ‘Sale’ • Turnover of sales – sec 2(33) aggregate of ‘sale price’ in respect of any ‘sale’ of ‘goods’ ( net of Returns within prescribed time) including Deposits/ Hire purchase receipts/ Installment sales / Right to use goods receipts

• Goods -- Sec 2 (12) movable property

• Sale -- 2(24) sale of goods made within the State Expln. a) Includes Sale within the state as per Sec 4 of CST Act Expln. b) Deemed Sales like Works Contract , Hire Purchase , Installment Sale , transfer of right to use , Sale by a club/aop to its members, supply and

service of Food and Drinks

CA AMAR N. SHUKLA 7

‘Sale price’

• Sale price – 2(25) Valuable consideration paid or payable Sum for anything done at the time of or before

delivery excludes Cost of Transit insurance and installation

when separately charged Explanation I Inludes Excise , Custom duties &

Bom.Prohibition Act. Explanation II Excludes TAX Explanation III Includes Deposits

CA AMAR N. SHUKLA 8

‘Turnover of purchases’

• TO of Purchases --S.2(32) aggregate of ‘purchase price’ in respect of any ‘purchase ’ of ‘goods’ ( net of Returns within prescribed time) including Deposits / Hire Purchase / Installment Sale payments /

Right to use payments

CA AMAR N. SHUKLA 9

‘Purchase price’• Purchase Price - 2(20) Valuable consideration paid or payable for any purchase

made ( + ) Sum for anything done at the time of or before

delivery ( - ) Cost of Transit insurance and installation when separately

charged Explanation I Includes Excise , Custom duty & Bom.Prohibition Act Explanation II Excludes TAX Explanation III Includes Deposits

CA AMAR N. SHUKLA 10

Special considerations under CST Act,1956

CST Turnover ; Sale price u/s 2(h) of CST Act,1956• Deposits not covered• Freight allowed as deduction• Cash Discount as per normal trade practice• Customs and Excise paid by buyer or third party

not included• Goods Return claim mutatis mutandis to sec

2(33) of MVAT ( circular 26T dt 18-9-2006)• Works contract quantification


TO Limits for part of the year ( sec 58)

• Business commenced during the year Rule 18(1) -- Full t.o Limit• Business closed during the year proportionate Limit • Transfer of Business during the year Transferor -- proportionate t.o limit Transferee -- Existing Dealer -- Full TO limit ( GTO of both business) New Dealer -- Full TO limit


Appointment & Engagement• NO SET PROCEDURE • No Intimation to the VAT Department Statutory Auditor √ Tax Auditor √ Internal Auditor X Responsible for writing or handling books of accounts X Tax Consultant √ Indebted in excess of Rs.10,000 X

• All Other ICAI guidelines , Standards ,etc to apply Letter of appointment, Communication with previous auditor, Code of Ethics

• No Ceiling on number of MVAT audits


Why Audit ?

• Scheme of MVAT Act - TRUST the dealers • There is self-assessment by the dealer • Tax calculated and paid by the dealers

through their periodical returns• Hence, VAT audit to cross-check by an

independent auditor.• Form 704 is nothing but a virtual assessment


Before starting Vat Audit • Understanding of dealer’s business and policies• Nature of business • Nature of its products & its Classification as per MVAT• Process of manufacture ( whether any part of the work is

sent out of state for further processing )• Study of Statutory audit / Tax audit reports• System for data capture ; whether designed to identify each

and every transaction of sale & purchase of goods recorded in the books as per the meaning under the Sales tax laws.

• Strategize for gathering audit evidence. ( Letter of Appointment, Management Representaion letter ,Audit programme, Check-list ,etc )


E-Form 704

• Form 704 consists of 3 Parts , 5Tables, 6 Schedules and 16 Annexures (+. Letter of Submission with 41 Instructions)

• Three Parts Part 1 -- Report, verification &

certification, Computation of tax liability & RecommendationPart 2 -- General Information about the auditeePart 3 -- Schedules and Annexures applicable to

the auditee


• Certificate v/s Report –para 2.2 of Guidance note on Audit report and certificates for special purpose .

• Certificate is a written confirmation of the accuracy of facts stated therein and does not involve any estimate guess work or the opinion.

• Report is a formal statement usually made after an enquiry , examination or review of specified matters under report and includes the reporting auditors opinion thereon.

• Recommendations to the dealer• Can VAT auditor revise audit report?


Issues in Schedule I • An item of 12.5% is purchased from trader. The bill shows Rs.

1,00,000/- Net plus Tax of Rs. 3,750/-. Show Set off in Sch I of Audit Report as :

In clause 4 (from row 58 ) where the rate wise tax break up to be given show Rs. 30,000/- as net and Rs. 3,750/- as Tax amount. The Diff of Rs. 70,000/- should be shown in clause 3 (computation of purchases eligible for set off) as deduction in row 52 as other allowable deduction.

• Material of 12.5% rate is purchased for Rs. 1,00,000/- + Rs. 3,750/- now is to be sold for Rs. 1,20,000/- how much tax to be charged?

It is purch of material mfg by PSI. The original tax free amount will be Rs. 70,000/- now tax should be charged on Rs. 50,000/- The bill will be Rs. 1,20,000/- + Rs. 6,250/-

Show Gross 126250/- in Sch I ; row 8 ; clause 1(a) and Show 70000/- in row 18 ; clause 1(k) ; and show 6250/- in row 12 ; 1(e) ; so remaining amount 50000/- @ 12.5% in row 24; clause 2(a)


Schedule II• For composition Retailers ,if TO sales during one return period is less

than TO of purchases ,then , To show taxable turnover of sales in Sch. II in Row 14 , enter total of (Sales of Return period where TO sales is less than TO purchase + purchase of other Return period where TO purchase are less than TO of sales)Eg. Sale PurchaseIn first six months 100000 90000Second six month 120000 150000In such case enter :GTO of sales 220000Amount in line 14 210000 ( i.e. 120000 + 90000 )Net on which composition is payable 10000


Annexure I 6(2) Transactions

• In transaction u/s 6(2) under the CST Act , I have received declaration in Form-C but not received declaration in Form-E1/ E2 for the same transaction. Now, in Annexure I, details are to be written as:

select Form-E1/E2 in column 4, write details pertaining to purchases in columns 1 to 3, write details of sales in the column no. 5, 6, 7 & 8 and write rate of tax as applicable in column 9.

• In transaction u/s 6(2) under the CST Act, I have received declaration in Form-E1/E2 but not received declaration in Form-C for the same transaction. Now, in Annexure I, details are to be written as :

details of sales in the entire row after selecting Form C in column 4 and write rate of tax as applicable in column 9.


Annexure I 6(2) Transactions

• In transaction u/s 6(2) under the CST Act, I have not received declaration in Form – C & E1/E2 of the transaction. Now, in Annexure I, details are to be written as :

Transaction related to Form E1/E2 in one row and corresponding transaction related to Form ‘C’ in the next row below. Select Form-C in column 4, enter details of sales in the entire row and in column 9, write rate of tax as applicable. In the next row, enter details of form E1/E2. Select Form-E1/E2 in column 4, write details pertaining to purchases in column 1 to 3, write details of sales in column 5 & 6, and put zero in column 7 to 9.


Issues on VAT Audit

1. A transporter having permit gives his trucks on hire to a company. Company employs his driver to run the truck . Hire charges collected are in excess of 60 lakhs for fy 10-11 .Whether the transporter is liable to VAT Audit ?

What is the position if the Transporter gives the Trucks on hire with their own drivers ?

2. A works contractor is having works contract reciepts of Rs. 58 lakhs . Tax charged on the same is 2.90 lakhs . He is having his own cranes . An amount of Rs.3lakhs is credited to P & L a/c as Rent received . ( charges for use of cranes by others ) . He has not done VAT audit for 10-11 . What are the consequences ?

3. Mr M of Mumbai gets commission from M/s.G of Gujarat for effecting sales for him in the state of maharashtra. M/s.G transfers the goods to M on a monthly basis .M gets a commission of 5% on Sales effected by him. M has sold goods worth 60 lakhs on behalf of M/s.G . Mr. M has not done any audits. Is it OK ?


Issues on VAT Audit4. A Builder and Developer who is not the member of MCHI obtains

the registration under MVAT Act.,2002 today as a dealer wef from current date and opts from the composition scheme to pay vat at the rate 1% on the booking of under construction flats. In respect of the booking of the flat from 1/4/2010 to 31/3/2011, the dealer applies for adm relief to the Hon. Commissioner of sales tax willing to discharge his tax obligation along with the applicable interest but seeks the predated registration with immunity from penal action by the dept for delayed registration. Having paid the VAT @1% for the period 1/4/2010 to 31/3/2011 with interest and pending the ADM petition before the commissioner, Whether the dealer is required to get the VAT AUDIT done u/s 61 for the period 1/4/2010 to 31/3/2011 on or before 31/01/2012? What would be the position if his adm relief application is accepted and the appropriate order is issued by the Hon. Commissioner ?


Issues on VAT Audit

5. Lilavati Hospital is purchasing the medicines for consumption during the treatment of the patients and bills the cost of the medicines to the patients. Purchases of the medicines by the hospital exceeds the limits u/s 61 . Whether the Hospital is required to obtain the Vat audit report u/s 61 of MVAT Act. ?


Issues on VAT Audit6. A four star Hotel charges the vat @ 12.5% on the food

and beverages served in the banquet Hall , charges for which are fixed at a particular rate per plate which includes the Rent for the hall also. The entire charges are split on the basis of service tax notification permitting the bifurcation of the food element @ 40% . The Hotelier after having come to know about the DDQ of TIP TOP ENTERPRISES starts charging vat @ 12.5% from the mid of 2010-11. What view a VAT AUDITOR should take while finalising the VAT AUDIT for 2010-11? What would be the scenario if the dealer has also filed the application for DDQ with the Commissioner for the same question?


Issues on VAT Audit

7. M of Mumbai has import goods worth 75 lakhs and his local sales is only 35 lakhs , whether M is liable to VAT audit ?

8. M of Mumbai has effected local taxable sales of 25 lakhs out of total branch transfers of 1 crore received from G of Gujarat. whether M is liable to VAT audit ?


Issues on VAT Audit

9. The dealers computer system got crashed due to some virus and he has lost the soft copies of the Form 231 which he had uploaded with the Department ? He does not have a hard copy either . What is the auditor supposed to do ?

10. One dealer had opted for composition scheme for retailer for financial year 2009-10. For FY 2010-11 , he has changed to normal system of VAT , whether he was supposed to declare stock as on 31-3-2010 for claiming VAT input from 1-4-2010 onwards ?


Issues on VAT Audit

11. Goods were transferred from H.O. situated in other STATE on a specific order placed with the branch. Can the Branch issue F form ? If the answer is No , then can the branch issue C form ?

12. A Mumbai dealer imports raw materials and sends the same for manufacturing to his Gujarat factory. The finished goods are then send to Mumbai for exports . Whether F forms are to be received/ issued for above transactions ?


Issues on VAT Audit

13. Tax Invoice for Purchase dated 29-03-10 received in June 2010. Returns for Mar 10 are filed. How a person can claim such Input VAT credit ?

14. Dealer has not disclosed purchases debited to P & L a/c . He has not claimed set-off as well . Whether auditor should qualify ?

15. Works Contractor having old on-going contracts along with new contracts . He has two types of Invoices. - @ 4% on old ongoing W/C. ( Erstwhile WCT ) - @ 12.5 % on Fresh VAT W/C.

Can he claim input tax credit on the sales ratio if he is not in a position to allocate the purchases towards old WC and VAT WC ?


Issues on VAT Audit

16. VAT amount shown as inclusive in the Invoice. Can Set-off be calculated on the reverse calculation ( R/100+R ) ?

17. Product A was chargeable @ 12.5% till a particular date, say 15-6-2010. W.E.F. 16-06-2010 , the product A was notified to be taxable @ 5%. . What happens to set-off on stock in hand of product A as on 15-06-2010 ?


Issues on VAT Audit

18. A ltd, a trader in pharma goods has taken Motor Cars on operating lease. It pays MVAT on lease rentals on monthly basis. Whether set-off can be claimed against VAT payable on trading goods ? What will be the position if he has entered into a Finance lease ?

19. No set-off is available on discontinued business. What will happen if dealer discontinues old commodity business , but continues with the business in new commodity business under the same constitution ?


Issues on VAT Audit

20. A new dealer trading in electronic goods took registration late . He got his TIN wef 30-9-2010 ; date of application .His TO details are as under :

Local Purchases upto 30-9-2010 Rs.15,00,000 + 5% 75,000

Sales upto 30-09-2010 Rs.12,00,000/- Stock as on 30-9-2010 Rs.3,00,000+5%15000 Sales upto 16-8-2010 Rs.5,00,000/- What will be his tax liability as on 30-9-2010 ?


Issues on VAT Audit

21. Gold /Bullion purchase- Vat paid @ 1% .Part of the jewellery made is transferred against F form, How much retention is to be done out of 1% VAT ( input credit ) for such transfers ?

22. Whether service tax and VAT both are chargeable for a sale transaction. How is the VAT liability to be determined in following case ?

Sales value before tax Rs. 100 Service tax @ 10.3% after abatement charged Rs.3.40. VAT chargeable @ 12.5% On which amount VAT @ 12.5% is to be calculated ?

100 or 103.40 ?


Issues on VAT Audit

23. Main Contractor got a Contract of Rs.1 Crore. The same contract was sub-contracted @90% .Who is liablie for VAT audit ?

24. What is the total contract value in case of Civil Contractor ? What is the treatment of opening and closing W-i-p for calculating the total contract value ?

25. How to give effect for DN/CN for tax difference ; i.e dealer had charged 12.5% instead of 4% and subsequently given CN for 8.5% ? What if the CN was given in the subsequent financial year ?


Issues on VAT Audit26. An Unregistered Pvt ltd Co.; based in Mumbai gives a

construction contract to a contractor in Pune for a consideration of 15lakhs (> 5 lakhs). The consideration is however payable on milestone basis i.e. on completion of work basis. The contract is awarded in fy 09-10 ; work done and amount paid to the contractor is Rs.4,32,000/- .( Net 400000 + 32000 Vat ) . What are the TDS implications ?

27. Goods are transferred on consignment basis to other state. Say Rs. 2,00,000/- in June 10 and goods worth 40,000 are returned in same month. Whether F form should be for gross amount or net amount ? Or for both transactions , it is required ?


Issues on VAT Audit28. A kirana dealer deals in numerous items of goods.

Practically not possible to issue sales invoices on counter. Hence ,no sales invoices are issued. He has however maintained and segragated his purchases of nil % / 4% / 5%/12.5% goods. No bifurcation of Sales is kept.

What is the auditor supposed to do in such a case ?29. A dealer in Mumbai SEEPZ sends the goods to duty free

shops at airports at Mumbai & Chennai .He doesn’t charge VAT. The duty free shops maintain details regarding passengers and their flight numbers to which the goods are sold. Whether VAT is to be charged for the sales to such shops? If yes, Whether shops can issue ‘H’ form as sale is made only when a passenger buys it from duty free shop and treated as export by the shop ?


Issues on VAT Audit

30. Dealer deals in the products which are not mentioned in the RC ,then what will be the tax implications ?

31. A Contractor carries on WC in Pune and Panjim. The dealer is regd in Maharashtra as well as in Goa. Whether the dealer is required to furnish the details of works contract of Panjim ? Whether liable to pay tax on those WC under MVAT in Mah. ? What is the auditors role ? What if the Contractor is not regd in Goa ?


Issues on VAT Audit32. The purchaser has paid to the selling dealer amount of Tax Invoice but

it is established that the seller has not deposited the amount into Govt. Treasury, can set off be claimed ?

33. Dealer has no sales but done only construction of building & installation of machinery in a particular year. The Value of Purchases of all such capital WIP exceeds 60 Lakhs. Whether liable to get his accounts audited ?

34. A works contractor raises Invoice for work done in a month .The same is certified by an architect only for a lower amount which takes 2-3 months. The dealer only records the final certified amount as sales in his books. This certified amount is recorded in the month in which the original invoice was raised . Is this correct ?


VAT AUDIT under MVAT Act,2002

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