Audit by Department [Rule 5A(2)]:
Since the returns filed with the Department are based on self assessment, the correctness of the payment and application of statute are verified during the periodical audits conducted by the Department. The Department conducts audit under the authority of rule 5(A)(2) of the Service Tax Rules, 1994.
Rule 5A(2) is within the scope of rule making powers under section 94(2)(k) [explained in point (xviii) under Heading 8.3.3.]. The expression “verified” used in section 94(2)(k) is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute [Circular No. 181/7/2014 ST dated 10.12.2014].
(1) Furnishing of records on demand [Rule 5A(2): Every assessee, shall, on demand make available to the officer so empowered or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, or a Cost Accountant or Chartered Accountant nominated under section 72A of the Finance Act, 1994,-
(i) the records maintained or prepared by him in terms of rule 5(2);
(ii) the cost audit reports, if any, under section 148 of the Companies Act, 2013; and
(iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961,
for the scrutiny of the officer or the audit party, or the Cost Accountant or Chartered Accountant, within the time limit specified by the said officer or the audit party or the Cost Accountant or Chartered Accountant, as the case may be.
Since there are no prescribed service tax records, records maintained by the assessees are requested for scrutiny. These may include financial statements, invoices, ledgers, bank statements, CENVAT credit documents, accounting policies etc., apart from statutory returns.
(2) Selection criteria of the assessees for the audit: Circular No. 995/2/2015 CX dated 27.02.2015, which has come into effect from 1st July, 2015 has specified new norms to be followed by Audit Commissionerates. The new norms do not prescribe any frequency for conducting audits. The new norms have introduced risk based selection of assessees for audit based on identified/quantified risk parameters and also introduced jurisdictional specific criteria (as opposed to uniform norm across the country) for segmenting the taxpayer into large, medium & small categories.
The criteria for categorizing an assessee as large, medium or small would be value of services rendered and services received (which are dutiable on reverse charge basis) and total service tax paid. The threshold limits of value of services for categorizing the units into large, medium and small would be dependent upon (i) the available manpower in the Audit Commissionerate and (ii) the assessee base, turnover and service tax paid by each assessee in the jurisdiction of the Audit Commissionerate. It may be noted that threshold limits may vary from one Audit Commissionerate to another Audit Commissionerate in view of varying number of assessees and quantum of value of services and service tax paid in case of each assessee.
The selection of assessees would be done based on the risk evaluation method prescribed by the Directorate General of Audit. The risk evaluation method would be separately communicated to the Audit Comissionerates dur ing the month of March / April every year. The risk assessment function will be jointly handled by National Risk Managers (NRM) situated in the Directorate General of Audit and Local Risk Managers (LRM) heading the Risk Management section of Audit Commissionerates. The Audit Commissionerates could also select few units at random or based on risk perception in each category of large, medium and small tax payers.
(3) Objections raised during audit: The auditors discuss each and every objection they are going to raise and issue a spot memo. If the assessee voluntarily rectifies the error and corrects the same by payment of service tax, interest and penalty etc., the para would be settled. If the Department does not agree with the assesse’s reply, a show cause notice is issued by the Audit Commissionerate answerable to respective competent authority in executive Commissionerate. The assessee’s written reply and submissions made in personal hearing will be considered and the case will be adjudicated.