Audit

The selective audit of service taxpayers and other assessees like input service distributors, may be done by the jurisdictional central excise officer (authorized for the purpose) or by an audit party deputed by the Comptroller and Auditor General of India. Rule 5 of the Rules makes it mandatory for every assessee to make available the records, on demand, for inspection and examination to such authorized person/audit party.

The objective behind Service Tax audit is to ensure that assessee under Service Tax law complies with the provisions of Finance Act, 1994 Chapter ‘V’ and the rules made there under.

Except for the places where there is a exclusive service tax Commissionerate, Service Tax is administered by Central Excise Department. Accordingly, an auditor means, a Central Excise Officer entrusted with the duty of conducting audit.

In Central Excise Commissionerates, Service Tax audit cell is functioning headed by the Joint/Addl. Commissioner under the overall supervision of the Commissioner. The audit of all units is being conducted by a team of officers comprising of Superintendents and Inspectors.

Parameters for selection of units for audit:

SNo Duty paid by Cash + CENVAT Frequency
1. Taxpayers paying more than Rs. 50 lakhs Every year
2. Taxpayers paying between Rs. 25 lakhs and Rs. 50 lakhs Once in two years
3. Taxpayers paying between Rs. 10 lakhs and Rs. 25 lakhs Once in five years
4. Taxpayers paying below 10 lakhs 2% of the total number every year

For the categories mentioned at Sr. No. 2, 3, 4 the selection of assessee would be based on ‘risk parameters’. These taxpayers should be selected on the basis of assessment of the risk potential to the revenue.

Risk Parameters : An illustrative list.
a). High tax payers
b). Taxpayers showing significant increase in availment of input service credit
c). Taxpayers providing both taxable and non taxable services
d). Taxpayers providing both taxable and exempt services
e). Taxpayers whose value of taxable service exhibits downward trend
The above mentioned risk parameters may vary from one industry to another and one service category to another.


LTU : Large Taxpayers Unit
A large taxpayer who is liable to be audited every year would not be ordinarily audited annually. The selection of a taxpayer for audit would be done based on ‘risk assessment’ taking into account various parameters. As far as possible, the audit of the head office and all the units will be conducted simultaneously. Dates for audit will be fixed in consultation with the large taxpayer. (Circular No. 834/11/2006-Central Excise, dated 05-10-2006.)

Period of Audit

Every audit should invariably cover the retrospective period up to the previous audit by the Department Audit Party or the last 5 years whichever is less and should extend up to one completed month preceding of audit.

Before the Audit

(a). Master file on each Service Provider is maintained with department
(b). Desk review is performed on the basis of relevant documents and information about the taxpayer
(c). Information about the taxpayer and the system followed by him is gathered
(d). Internal Controls are evaluated.
(e). Verification of records is done, if there are any objections then clarification is sought from the taxpayer.
(f ).  Suggestions are given to reduce specific errors detected in the audit to improve compliance.


Report of the Audit

The auditor should submit the draft Audit Report, to the Assistant/Deputy Commissioner (Audit) thereafter the same alongwith enclosures, should be submitted to Audit Cell for consideration in the Monitoring Meeting. Based on the decision of the monitoring meeting the draft audit report should be finalized by the Audit Cell within 15 Days from the date of meeting.