DEPARTMENTAL VAT AUDIT :

Any system of tax administration that relies on self-assessment has to put in place a robust audit mechanism to measure and ensure compliance with the provisions of the Act. Tax administrations have, over the years, evolved from mandatory assessment of virtually all tax payers without an institutionalized audit mechanism to a system of self assessment for virtually every tax payer coupled with risk profiling of tax payers and their audit.

The word “audit” has been defined in section 2(14) of the Model GST Law and it involves a detailed examination of all records, accounts and returns of the tax payer to test their reliability, to verify the correctness of information disclosed in them and to assess the degree of compliance with the provisions of the Act and the Rules. Every information disclosed in a record or any return or document has to be assessed, cross verified and tested in terms of the internal and external evidence available. Internal evidence includes such documents or records as are maintained by the person being audited while, external evidence means such documents or records regarding the person being audited as are generated by other persons with whom he has business dealings. Audit involves examining the evidence, ascertaining its reliability and establishing the relevance or applicability of such evidence to the affairs of the person being audited and testing or verifying the information disclosed in the records, accounts or returns of the person. Thus, audit is an activity that calls for the application of specialize skills.

In terms of section 49 of the Act, the Commissioner, or any officer authorized by the Commissioner in this behalf, may undertake the audit of the business transaction of any taxable person. Such an audit may be done by a general order, in which case many taxable persons, selected on the basis of predefined parameters, may be required to be audited. An audit may also be conducted upon a special order in which case, a particular person may be required to be audited in the context of certain transactions/class of transactions that this person may have undertaken. The order authorizing the audit will also contain the frequency at which any audit is to be conducted and the audit shall be conducted in accordance with a standardized audit manual that will be issued in
this behalf.

It is imperative to adopt a scientific method for selecting persons to be subjected to audit. A study undertaken in this regard has shown that the very best of auditors could produce only average result while auditing persons selected randomly whereas even average auditors performed above par while auditing persons selected on the basis of risk profiling. Hence, a model containing parameters which are indicative of, or have strong and demonstrated co-relation to, tax evasion should be developed for the purpose of selecting persons for audit. The past history regarding compliance should also be a decisive factor in selection for audit along with the scale of operations of the taxable person. Some of the following criteria may be adopted for selection:

• Total tax/tax throughput
• Refund claim
• Export/zero rating
• Ratio analysis
• Cash dealings
• History of delinquency
• Unusual deviations from “norms”/”standards”.

Once selection for audit has been made, the auditee has to be informed by a notice issued at-least 15 working days before the proposed audit is to be undertaken and the notice shall also specify the place where the audit is proposed to be conducted; the audit can be conducted at either the place of business of the taxable person or the office of the audit authority or at both places.

Before undertaking the audit, the authorities have to prepare for such audit and this involves gathering evidence and other information that is considered to be relevant for, or related to, the business transactions of the auditee. This may include the past records of the person, comparative information regarding similar persons in the same trade or industry, trends of economic activity which are relevant in the context of the business of the auditee, business processes adopted by the auditee and generally a profile that gives a 360o view of the business
activities of the auditee.

During the conduct of the audit every class of transactions undertaken by the taxable person should be thoroughly  examined and scrutinized by the audit authority. But before doing so, the internal control mechanism put in place by the person should be examined and tested and probable areas of weakness in the system should be identified. Internal controls encompass a set of rules, policies, and procedures an organization implements to provide reasonable assurance that:

• its financial reports are reliable,
• its operations are effective and efficient, and
• its activities comply with applicable laws and regulations. How rigorous an audit should be and the degree of detail which the auditor has to adopt while examination would largely depend on the effectiveness of the internal control mechanisms and systems put in place by the auditee.

The audit is to be conducted in a transparent manner and is to be completed within 3 months from the date of commencement of the audit and if the Commissioner is satisfied that the audit can’t be completed in the said period of 3 months, he may extend it by any period not exceeding 6 months. In this context an audit shall be deemed to have commenced on the earlier of the following:

• the date on which the records have been furnished to the audit authority, or

• the date on which the audit has been instituted at the place of business of the auditee.

Even though the Act does not elaborate on the issue of what constitutes “a transparent manner” An audit shall be deemed to have been conducted in a transparent manner if it is carried out in accordance with standardized, predefined and well understood operating procedures. Accordingly, the auditee should the afforded sufficient opportunity to present his views on every evidence collected and that the auditee may not be burdened with the task of providing any evidence/document that is not within his control. During the course of audit, it shall be the duty of the auditee to arrange for necessary facilities to verify the records and documents that are produce and also to furnish such evidence/documents/information that may be required in the context of the audit. The auditee should also render all assistance to complete the audit in a timely manner.

Upon the completion of the audit, the audit authority shall prepare a report of such audit and also informed the auditee of

• the findings of such audit,

• the reasons for such findings, and

• the rights and obligations of the person who has been audited.

The proper officer may initiate proceeding for determination of tax, levy of interest and/or penalty if the audit conducted reveals any evidence of

• tax not paid or short paid

• input tax credit erroneously availed

• amount erroneously refunded.