General Procedure of Business Audit under Maharashtra VAT Act, 2002

Every dealer/manufacturer registered under Maharashtra Value Added Tax Act, 2002 have to face the
Business Audit. Sales Tax Department has recently vide their Circular No. 25T of 2008, dated.
23.07.2008 clarified the general procedure for Business audit as below:

01. Objects of Business Audit:

The primary object of business audit is to promote compliance with law. At a practical level, the object
of audit is to ascertain the correctness of returns and to identify inadequacies in returns, if any when
checked against the books of account and the circumstances of the business. If the returns are not filed
then, the audit officer is expected to quantify the liability of the dealer and enforce recovery.

02 Procedure of Audit:
The audit is carried out at the place of the dealer by the officers working in the Business Audit
Divisions. The cases for audit are selected by the Business Audit Criteria Committee on the basis of
certain criteria. Normally, the audit is carried out with prior information of the date to the dealer, unless
there is deliberate decision to conduct surprise audit.

03 Scope of Audit:
i) The audit officer will ascertain the correctness of returns filed by the dealer, both under MVAT Act
and CST Act. Obviously, the audit officer will verify the books of accounts maintained by the dealer
along with sale bills, purchase bills, sales journals, purchase journals, ledger, cash book, delivery
challans, dispatch proofs, bank statements, etc. to ascertain the correctness of turnover returned and also
the correctness of claims made through returns.
The audit officer may also ask for agreements, purchase orders, work orders, tender documents
etc.

ii) The audit officer is expressly authorised to make enquiry as to whether the dealer
has filed returns and made payments under other allied laws, such as Profession
Tax Act, Luxury Tax Act., Income Tax / Excise laws.
iii) It will be the dealers’ responsibility to give correct and complete information during the course of an
interview conducted by the auditing officer and he shall ensure that all persons concerned with the
accounts, filing of returns, payment of taxes, sales, purchase, production and other business activities are
available with information sought by the audit officer.

iv) In discharging the function of audit, wherever required, the audit officer can use all the powers of a
Civil Court for the purposes of proof of facts by affidavit, summoning and enforcing the attendance of
any person and examining on oath of affirmation, compelling production of documents etc.
These powers would be utilized by the audit officer only in circumstances where use of such powers
becomes necessary for achieving the purpose of audit.

v) The audit officer is also authorised to take physical stock of goods and ask for clarification if there is
any variation.
In addition, the audit officer is also authorised to count cash and bank balance and to ask for
reconciliation thereof.
The dealer shall furnish self-certified copies of documents and statements as required by the audit
officer.

vi) Even
if the audit is on a particular issue or for a shorter period, the audit officer
can make enquires as regards other periods or other issues.
04 Powers of the Audit Officer:
If any discrepancy is noticed in the process of audit, he has to communicate his observations to the
dealer. The communication to dealer is expected to be unambiguous and clear in its import. If the audit
observations / objections are acceptable to the dealer then after compliance by the dealer the process of
audit would stand concluded. The corrective action could be filing of revised returns and making
payment of differential dues, if any, including interest.

05 Duties of Dealer:
As expressly mentioned in Section 22 read with section 2 (18), 63 (4), 64, the dealer under audit has to
afford necessary facility to auditor to inspect books of accounts. The dealer shall give unhindered access
to his books of accounts and / or to computerized books of accounts. The audit process can be hastened
only if the dealer keeps his books of accounts, bills and all relevant documents at the place of business.
The queries raised by audit officer are expected to be clarified with requisite evidence/documents then
and there only so that the issues are immediately resolved and the resolution of issues is not kept
pending. Legal issues having financial implications, of course, could be resolved on a later date. The
dealer shall also furnish the E-mail addresses and contact numbers of his vendors/ vendees.

06 Rights of the Dealer:

The dealer under audit has a right to ask for valid authorization of audit officer for carrying out audit. He
can also ask for Identity proof of audit-team. The dealer can continue his business during audit. He can
also take help of sales tax consultant / practitioner, if so required by him.

It is a new concept introduced in VAT regime. It is introduced on the western lines so that

there should be check on the assessee and the result expected to be is proper tax

compliance by the dealers. The random audit of few assessees is considered essential for

the success of the VAT system.

Section 22 as per MVAT Act, 2002 is reproduced below for discussion –

1. With a view to promote compliance with the provisions of this Act, the Commissioner

may arrange for Audit of the Business of any Registered Dealer, for the purpose of this

section. The selection of the dealer for audit shall be made amongst the dealers –

a. Who have not filed returns by the prescribed date or

b. Who have claimed refund of tax or

c. Where the Commissioner is not prima facie satisfied with the correctness of any return

filed by a dealer or is not satisfied with any claim made, deduction claimed or Dnyanesh

V. Retharekar, Advocate, Ex-Dy. Commissioner of Sales Tax Maharashtra Value Added

Tax Act, 2002 Business Audit - An Analysis

turnover disclosed in any return filed by the dealer or

d. Who are selected by the Commissioner on the basis of the application of any criteria or

on a random selection basis or

e. Where the Commissioner has reason to believe that detailed scrutiny of the case is

necessary

2) Deleted

3) On or after the appointed day any officer to whom the powers and duties under this

section have been delegated by the Commissioner in writing may

conduct audit of the business. (deleted w.e.f. 15-8-2007)

4) Deleted

5) (a) During the course of the audit, the officer may require the dealer

(i) to afford him the necessary facility to inspect such books of account or other

documents as he may require and which may be available at such place.

(ii) To afford him the necessary facility to check or verify the cash or stock which may be

found therein

(iii) To furnish such information as he may require as to any matter which may be useful

for or relevant to any proceedings under this Act.

(b) The officer conducting the audit shall on no account remove or cause to be removed

any books of account, other documents or any cash or stock.

6) Deleted

7) Deleted.
8) Deleted.

The beginning words of the section itself speak the volume of authority and power

conferred by the Act on the Commissioner.

With a view to promoting compliance of this Act ...

What is the meaning of Promoting compliance with the provisions of this Act?

It means doing everything as prescribed by the Act. Complying everything as prescribed

in the MVAT Act, 2002. Not only Act, but Rules, Notifications issued by the Government

from time to time and compliances with it, and further circulars issued by the

Commissioner of Sales Tax for the purpose of the Act or rules and notifications and its

implementation by the Sales Tax authorities.

The minimum compliances as required by the MVAT Act, 2002 and MVAT Rules 2005 can

be summarized are as under:

1. To obtain the Registration Certificate by the dealers who are exceeding the minimum

threshold limit as prescribed by the Act; i.e., say Rs.1 lakh for the importer or Rs. 5 lakh

for others. Those prospective dealers who wish to do business can even obtain

Registration Certificate under voluntary registration scheme, which recognizes a business

entity/person as a dealer even though the minimum threshold limit is not achieved.

2. To file correct, complete and selfconsistent returns -

The return should not only be correct and arithmetically accurate but they are expected

to be self-consistent; Self-consistent means they are expected to be self-

explanatory/self-speaking and easily readable and understandable by the concerned

authority or the department.

3. To intimate important changes in the business in the business e.g. change in

ownership, conversion of partnership into private limited, shifting of place of usiness,

change in name and style of business, change in activity etc. These types and other

changes as described in the Act are required to be intimated to the department within 30
or 60 days or within such time as may be prescribed, within occurrence of such event/

incidence. If time to intimate such change in the business is not prescribed in the Act or

any Rule then compliance has to be done within reasonable time.

4. To pay due taxes in time in the proper forms of return; i.e., 231, 232, ..., if taxes are

paid late after the due date prescribed for the same by the Government then interest is

automatically attracted which is required to be admitted in the returns filed for the said

period and paid by the dealer. If not paid with returns or thereafter before initiation of

assessment proceeding or business audit proceedings then interest will be recoverable

from the dealer under section 30 of The MVAT Act, 2002.

5. Correct disclosure of GTO (S) and GTO (P) with set-off claim and any other deductions,

discounts, etc. as per law. The turnover of sales and purchases should be correctly

reported as per books of account and records. The various deductions such as goods

returns, trade discounts, rate variations, any other special discount or deduction which is

likely to change the GTO of Sales/GTO of purchases should be properly and timely

disclosed in the returns filed for the respective periods. The set off or input tax credit is

linked to purchases hence they should be carefully reported with due precaution.

6. Proper filing of return under The CST Act, 1956, compatible to M.V.A.T. returns, etc.

7. Timely response to every notice or any other communication from the departmental

authority. The departmental authorities may issue various notices or queries related to

dealer’s business activity or issues related to that under MVAT Act or Rules made

thereunder, they should be replied with or should be complied with

within the prescribed time.

8. Keeping all books of account and records at place of business, which should be

available for verification at any time by the departmental authority. This includes not only

sales, purchase ledger and sales, purchase invoices but also includes all relevant records

directly linked or indirectly linked to the business activity of the dealer. The concerned

officer may call for such records for verification which he may feel to be necessary and

relevant for the purpose of the business.

9. Records and books should be legible and easily understandable by the authorities so

that Turnover of Sales/ Purchases, tax levy, its collection, payments, set-off can be

properly ascertained at the time of inspection or audit by the department. If books of

account are not legible or properly maintained by the dealer the concerned

assessing/audit officer can direct the dealer to maintain the records in a particular style

or manner which he may deem fit.

10 Audit Report u/s.61 of MVAT Act, 2002 – whether submitted by the dealer or not. The

VAT Audit report is required to be submitted by the dealer within 10

months of the financial year end to the Sales Tax department. Dealer should follow the

same scrupulously otherwise very heavy penalty is prescribed under

the Act. It may be levied @ one-tenth per cent of the sales turnover.

11 Registration with the department for e-services; It is made mandatory for all dealers

irrespective of their tax liability or periodicity of filing the returns.

Thus, above types of important and several other compliances are expected to be fulfilled

or complied by the dealer. They are the obligations or duties which

dealer is required to perform under MVAT Act 2002 and Rules thereunder .They are

duties cast on the dealer and failure to do so may result into deprival

of few benefits to the dealer.

The section 22(1) says that,

For the purposes of this section, the selection of dealers for audit shall be made from

amongst the dealers.

a) Who have not filed returns by the prescribed dates:

The dealer has to file returns as per periodicity given in MVAT Rules. The

periodicity/frequency of filing the returns is linked to previous year’s tax liability (same

arrangement was there in the BST ACT 1959 and Rules there under) The different forms

of returns are prescribed for different types of dealers i.e. 231, 232, 233, 234 and 235.

There are different provisions for newly registered dealers and dealers under PSI. The
due dates are also different but whether the dealer is required to file monthly, quarterly

or half yearly returns should be strictly followed.

From February, 2008 BIG TAX PAYERS (LTU as they are known in VAT regime) were

directed to file e-returns, but now in last 12 months all dealers (monthly

returns filers, quarterly return filers, six monthly return filers etc.) are directed and

required to file e-returns as per provisions newly inserted in the MVAT Act and Rules. In

fact recently it is made mandatory to file the returns online. This means the physical filing

of the returns is now totally done away with.

The non filers should be construed here as those dealers who have not filed returns by

the prescribed dates (late filers) and those dealers who are totally defaulters; i.e., who

have not filed returns at all for a particular period say for a particular month, quarter or

six months as the case may be as per his liability.

Thus assessee not filing returns within prescribed time can expect a notice for Business

Audit from the Sales Tax Department.Or The section further says that,

b) Who have claimed refund of tax –

Refund may arise due to many reasons - i.e., Purchases Value in a month is higher than

Sales Value, the raw material is of higher tax rate than the finished goods, there is export

or interstate sales; section 5(a) etc. The dealers who have claimed refunds in the returns

filed for the said periods can be taken up for business audit or refund audit.

OR

c) Where the Commissioner is not prima facie satisfied with the correctness of any return

filed by a dealer or is not satisfied with, any claim made, deduction claimed or turnover

disclosed in any return filed by the dealer.

The officer may on apparent verification of a return or returns for a month or quarter,

year etc. and if he feels it necessary to take up a case for business audit due to any

doubt or due to any reason which requires him to ascertain facts and figures related to

business of the said dealer. There may be ‘n‘ number of reasons which may require and
or instigate a officer to take up a case for business audit or may invite attention of an

officer to take up a case for business audit.

Section further says,

d) Who are selected by the Commissioner on the basis of the application of any criteria or

on a random selection basis or

(This is discussed later at length in this note)

e) Where the Commissioner has reason to believe that detailed scrutiny of the case is

necessary,

This is also discussed in detail in this note.

Except this section there was nothing in the MVAT Act, 2002, Rules or Notifications issued

thereunder where the audit or business was discussed. The departmental officers were

however doing it as per instructions given to them. The assessees and the tax

professionals were not knowing the exact nature, process and purpose of the business

audit uptill October 2008, when Hon'ble Commissioner issued a Trade Circular discussing

the objects and scope of the Business Audit. Moreover assessment section is very much

provided in the MVAT Act, 2002 (section 23), which again created little confusion as to

what is audit and what is an assessment.

Summary of Hon'ble Commissioner’s Circular on Business Audit (No. 25-T of 2008 dated

23-7-2008)

SUB. General Procedure for Business Audit

Objects

To ascertain correctness of returns and to identify inadequacies in returns if any when

checked against the books of account and the circumstances of the business.

Procedure of Audit: cases are selected by business audit criteria committee on the basis

of certain criteria. Normally an audit is carried out with prior information of the date to

the dealer, unless there is a deliberate decision to conduct surprise audit. The officer is
authorized by JC. Penalty may be levied by the officer if information sought for is not

kept ready by the dealer at the time of the visit.

Scope of Audit

1) To verify all books of account and relevant records

To make enquiry about tax payment and return filing in allied Acts; i.e., PT, luxury tax,

etc. depending upon facts the auditor may also ask for returns or any other information

related to Income tax, excise

2) It is dealer’s responsibility to give correct and complete information during interview

carried out at the time of visit and dealer should ensure all relevant persons are present

at the time of visit of the officer. The object of interview is to know business and

accounting system.

3) Visiting officer enjoys powers of a civil court u/s 14 – may be utilized by officers

whenever necessity is felt to do so. (i.e., proof of facts by affidavit, summoning and

enforcing the attendance of any person and examining him on oath or affirmation,

completing production of documents)

4) The audit officer is authorized to take stock of goods and ask for clarification if there is

any variation. Also authorized to count cash and bank balance and to ask for

reconciliation if warranted. However should not remove any books or records or cash or

stock from the dealer’s premises.

5) The audit officer may verify any records of any period and any issues in a financial

year for which audit notice is given.

6) If dealer does not co-operate then audit officer can seek intervention of investigation

branch with the approval of the JC.

POWERS of Audit Officer

If any discrepancies are noticed in the process of audit either in returns, books of account

or otherwise then the audit officer has to communicate it to the dealer on the date of
audit or immediately thereafter, on compliance from dealer the audit would get over. The

corrective action could be filing of revised return and making payment of differential dues

if any including interest. In case dealer objecting for the observations then officer shall

initiate appropriate proceedings including assessment.

Duties of dealer

The dealer to afford necessary facility to the auditor to inspect books of account. The

audit process can be fastened only if dealer keeps ready all the records. The queries

raised by audit officer are expected to be clarified with requisite documents and evidence

then only issues are solved. The dealer shall also furnish the e-mail addresses and

contact numbers of his vendors/vendees.

Rights of the dealer

Dealer can ask for valid authorization of audit officer for carrying out audit. The dealer

may or may not accept audit observations communicated to him by audit officer. The

dealer under audit will have a right to know the result of audit within a reasonable period

of time. Normally audit process is expected to finish within 3 months provided dealer co-

operates fully. This time limit is not applicable if audit results in initiation of assessment

proceedings.

What is Business Audit?

The audit is nothing but assessment at the dealer’s POB. But without any assessment

order passed by the officer. It is done with the previous intimation to the dealer. The

word used in the Act is Audit or ‘Business Audit‘ and not the "Audit of Accounts". What is

probably expected here is that the visiting officer by his visit to Dealer’s POB and after

verification of records, relevant books of account etc. and on the spot visit to POB can

make certain observations and study the business of the dealer, which can help officer to

cross check/verify with the returns filed by the dealer and he can ascertain whether

business activity is properly reflected in the returns filed for the said period or periods. In

previous BST Act a year was considered as a unit but in VAT regime a month or quarter is

presumed as a unit unlike a year, it is possible that few checks can be done on the spot
during the time of business audit at dealer’s place and proper tax compliance can be

achieved.

The visiting/assessing officer is probably expected to study the business of the dealer,

processes and practices adopted by the dealer and come to conclusions after verification

of records, if it is done say within reasonable time of the end of that period (month,

quarter) then it can be very effective from the point of view of the

Department/Government. The discussion or interviews with the director, partner, owner

of the business or the person in-charge of accounts and sales tax matters may reveal

some important clues which may not be directly and easily detected from books of

account of the dealer. It may ultimately result in more tax recovery or deny excess set

off or reject any wrong or doubtful claim done by the dealer.

As per VAT concept each and every month of a financial year is considered as a separate

unit and therefore the officer may verify and inspect records of a particular month or a

quarter or of a full year.

As seen in last 3 years, the initial VAT years; i.e., F.Ys. 2005-06, 2006-07, 2007-2008

the Department is issuing notices for 2/3 year i.e. F.Ys. 2005-06, 2006-07 and thus it is

Audit for full year.

It is seen that an advance intimation of the officer’s visit for the audit purpose is issued

to the dealer who in turn can get it modified/changed from the officer in-

charge of the audit, which is nothing but a adjournment given to the dealers as per his

convenience.

The main difference between old Assessment System (under BST Act) and Business Audit

in VAT regime is that in old system of assessments/ verification of records was done at

Sales Tax Offices and assessment orders were issued/ passed after verification of records

but in VAT audit verification is done at dealer’s

place and order may not be passed, rather it is rarely passed and a intimation in Form

No. 07 is issued to the dealer. It is a formal communication issued by the officer to the

dealer where discrepancies are intimated to the dealer from his returns and books of
account which has impact on enhancing tax or reducing set off claim and dealer is

required to revise his returns according to officer’s suggestion/intimation. If dealer is

agreed on the so called discrepancies pointed out by the officer he can file the revised

return/ returns and discharge additional tax liability accordingly or can revise return and

reduce his refund claim.

If dealer disagrees he can explain the so called discrepancies and object for it then officer

can or may issue a formal notice for assessment in Form No. 301 under section 23 of the

MVAT Act, 2002 and may proceed to assess the dealer and then he can pass a formal

assessment order and raise dues according to his findings or may reduce refund

claim.When the matter is unacceptable to the dealer the officer has to issue assessment

notice under section 23 of the MVAT

Act, 2002 and may assess the dealer as per his findings. However it has been observed in

last 3 years that the officers are insisting for the revised returns only and are reluctant to

pass the assessment order. It is probably due to the ideal VAT system which expects

dealers to be self compliant.

Duties of dealer : Comments

When officer comes to a dealer’s POB for Business Audit, the dealer shall offer all relevant

books of account and records to the visiting officer for inspection and verification. The

officer can demand regular books of accounts and all relevant records and evidences in

support of claims as per returns filed for the said period by the dealer.

The dealer should allow and co-operate visiting officer to check/verify the stock and cash

at the time of visit, To furnish any other useful and relevant information, required by the

officer.

However

The officer is not allowed to remove any books of account or records from the dealer’s

place.
Following books may be made available to the officer during visit :

(1) Purchases and Sales Registers (2) Ledger (3) Purchases, Sales Invoices (4) Other

relevant documents (5) Stock Register (6) Copies of returns filed (7)

Balance Sheet copy with VAT Audit Report.

The section 22 does not speak of anything about what the officer is supposed to do

during and after visit. It is described by the Hon'ble CST in the Trade Circular issued by

the CST on 23-8-2008 discussed above.

According to me it is necessary that the;

• Officer should pass order or issue proper written communication to the dealer as to

what is result of audit conducted by the him/ department.

• If returns for a particular month/ quarter or period as the case may be are correct and

complete it should be clearly certified if not, then what are the differential dues which will

be likely to be raised or extra refund reduced or refund enhanced, should be clearly made

known to the dealer.

• If nothing is found worth mentioning which may result in extra tax than declared or

reduce refund compared to the returns filed then NIL order should be

passed.

• The dealer must be aware of officer’s conclusions after visit within a reasonable time

say of 2-3 months and it should be communicated to the dealer what

is status of his returns whether they are correct or wrong or need some

changes/modifications etc.

Rather it will not be wrong if we say that it is the right of the dealer to know the Audit

Results in writing.

It is recently started by the Department and a formal communication in Form No. 07 is

sent to the dealer pointing out the discrepancies noticed by the visiting officer and dealer

is asked to answer it expecting that the dealer will file revised returns based on officer’s

findings.
VAT Audit and dealer

The dealer may not agree or differ in officer’s findings and officer may insist for additional

payment of tax due to one reason or the other, in this situation unless a order is passed

by the officer, the legal process remains incomplete. Further, the dealer also gets a

chance to plead his case at higher forums. There may be certain legal queries as to

interpretation of certain sections of law and its implication given in certain facts and

situations. In such a situation unless a order is passed by the officer it cannot be

contested at higher level.

It is important to do so keeping in view principles of natural justice, probably that is the

reason why section 23 of Assessment in M.V.A.T. Act, 2002 is provided in the Act

immediately after Audit Section.

It will not be wrong to say that outcome of section 22 is finally indicated through section

23, which is Assessment Section.

However, it is noted that the Departmental Officers are not passing any orders but

insisting the dealers to revise the returns. The returns may be revised but as discussed

above if any matter is not easily acceptable to the dealer then it will not be proper to

insist for revised returns by the Departmental officer rather he should pass order and

provide opportunity to the dealer to contest the unacceptable issue at higher forum.

In the State level Advisory Committee meeting conducted by Hon'ble CST dated 22-1-

2008, the Business Audit issue is discussed it is summarized below.

The query was raised at Service Cell meeting Mazgaon Mumbai. by Maratha Chamber of

Commerce, Pune to clarify the scope of audit.

The Hon'ble Commissioner of Sales Tax replied as under –

1) The criteria for Business Audit is dynamic and centrally decided. The list of dealers for

Business Audit is duly approved by the Commissioner of Sales Tax/Addl. Commissioner of

Sales Tax in this regard.

(a) A sample audit of a month to test check discrepancy will be carried out for the

quarter. In case of discrepancy, the audit of entire year will be carried out.

Thus the process of audit is based on risk profile of the dealers / commodities thereof.

(b) Chairman desires to device format to be communicated in respect of discrepancies

found out during Business Audit in this regard.

(A Trade Circular is issued by the Commissioner of Sales Tax dated 23-7-2008 on the

topic Business Audit and Form No. 07 is devised thereafter)

Comments

From the above discussion one thing becomes very clear that the criteria for the Business

Audit is dynamic that is it may be kept changing. It is said to be based on risk profile of

dealers/ commodities and may not be declared by the Government in the initial phases of

MVAT implementation. It may be declared in the future. This is probably to have

authority for randomly selecting the cases for audit and to keep check on the dealers so

that the system should not be misutilised by the dealers or anybody. It is possible that

the Government or the Commissioner of Sales Tax may declare certain criterias for audit

of a particular year or a particular quarter or month of a financial year.

The criteria may be like the various criteria declared from time to time by the

Commissioner of Sales Tax for the acceptance of returns in the BST Act,1959 regime

which is popularly known as Summary Assessments or the order under section 33(2) of

the BST Act 1959

The section 22(1)(c)(d)(e) gives various options available to the departmental authorities

to take up a case for a business audit. The list given below may be the criteria for

selecting the cases for Business Audit according to me (excluding other class of

assessees).

1) The Dealers claiming 6(2) or High Seas Sales claims u/s 5(2) of the CST Act, 1956.

2 ) Dealers with export claims above a certain turnover limit say Rs. 5 crs in a year.

3) Dealers with import from out of country above say 3 crores p.a.
4) Dealers with set off claim above a certain limit say Rs. 10 lakhs in a year.

5) Dealers undertaking works contract or lease activity above Rs 2 crores p.a.

6) Dealers claiming tax free sales or job work above say 5 crores, in a year.

7) Dealers with tax throughput of Rs. 2 crores but paying tax very negligible say Rs.1

lakh in a year.

8) Dealers claiming major portion of their sales as exempted under the Act or dealers

claiming the exempted sales more than 50% of their sales turnover.

9) Dealers usually filing late returns.

10) Dealers filing returns in time with ad hoc payments.

11) Dealers whose previous audit shows dues raised are more than 20% of the tax paid

with returns or whose refund is reduced by 20% of the claim as per returns.

12 ) The dealers with a track record of frequent ex parte or best judgments assessments

or better known in VAT as unilateral assessments.

13) Dealers with a particular commodity as their main product say hotelier or liquor

dealers with small turnovers say 30 lakhs in a year.

14) Dealers with normal trend to show more purchases as compared to sales and thus

claiming refund or claiming no tax payable at year end or quarter end.

15) Dealers claiming stock transfer or branch transfer above Rs 3 crores in a year or

dealers with substantial portion of turnover disclosed as branch transfer

compared to his turnover.

16) Dealers whose previous business audit has resulted in short payment of tax or excess

claim of set off or excess claim of refund by say 15% or more as compared to his filing of

returns for a particular year or month or a quarter the 15% or more difference is

detected by the departmental authority after conducting

business audit of the dealer.

17) Dealer filing irregular returns or there appears inconsistency in filing of returns or

there is sudden fall in the turnover or sudden rise in the turnover or same range of

turnover is reported from month to month or quarter to quarter

18) Turnover reported in round figure which is repeated randomly.

19) Based on TIN Nos. cases may be taken up for business audit say even numbers or
odd numbers or number in multiples of 5, 10, etc. (last four digits of TIN may be

considered)

20) For Composition Dealers i.e., retailers some different types of criteria may be fixed

and the cases may be taken up for business audit may be once in 5/6 years.

21) References received from other sections of Sales Tax Department (Registration

Advisory Visit, Refund Audit etc.) and other Departments (Income Tax, Central

Excise) as to probable tax evasion or duty evasion etc.

Following provision is a very imp. (it is a clause reserved by the Government), "The

Commissioner has reason to believe that detailed scrutiny of the case is necessary"

section (22)(1)(e )

It is a very important clause - when it is felt necessary by the Commissioner in the

interest of revenue to take up a assessee/dealer’s case for Business Audit and therefore a

discretionary power is provided to take up a case for Business Audit, that is reserved by

the Government and it will be any other case found necessary for audit in the interest of

revenue by the Commissioner for the reasons which may be disclosed or may not be

disclosed at all but still the case will also be a eligible and will be selected for business

audit. This clause is always essential to be inserted in any taxing statute so that a

democratic Government can keep proper check on its financial/revenue resources and

therefore obviously Government has to keep few discretionary powers in the hands of its

implementing machinery. The Government and/or its administrative machinery will

always try to plug any suspected, doubtful, probable revenue loss to the State

exchequer. This provision enables the Government to keep proper control on the

assessees. The reasons for the same may not be disclosed at all to the assessee.

The reason to believe is very wide and exhaustive term and can be applied to any

situation and selection of any case for audit purpose according to me it is a

necessary power conferred on the Administrative Authority but only thing that is essential

while using such a discretionary authority that it shall not be used arbitrarily and without

any reason.
The criterias given above are only indicators and a attempt to discuss possibilities. These

probabilities may be changed from year to year or from period to period. They are not

applicable to LTU. Once a dealer is identified as a LTU he is eligible for business audit at

all times for any period/periods.

LTU (Large Tax Payer units) and Business Audit

This is again a new Class of dealers identified in VAT Regime. They are privileged class of

big tax payers whose annual tax payment is above Rs. 1 crore per year. These cases will

be audited every year. All services that is Amendments in RC, various Declarations under

CST Act, Refund claims, Business Audits, etc. will be done at a particular place and only

by a single officer will handle the case like pre VAT Period.

Refund Audit

This is done by different section as the name indicates it is carried in cases where

monthly refund/quarterly refund is claimed. In VAT regime assessment is not a regular

activity as was done previously in BST regime. It is done only when refunds are claimed

as per returns filed and dealer filed Form No. 501 to the respective section. However it

may be noted that it is done under a different section (51) and the business audit and

refund audit are not necessarily mutually exclusive. The refund audit is only limited to

refund purpose without covering the entire activity of the dealer.

How cases are selected for Business Audit?

As discussed above the criteria are not disclosed by the department during initial years of

VAT introduction. A team of senior officials is formed under Additional Commissioner of

Sales Tax (VAT-3) who selects the cases for business audit based on various methods

/criteria fixed by them. The Additional Commissioner of Sales Tax (VAT 3) will be

responsible for policy matters related to Business Audit and he generates general audit

cases for Mumbai as well as mofussil areas - Subsequently it will be done through

computerized process and it will be directed to all offices including mofussil areas to

select cases as per the direction given. At local level other than Mumbai region the Joint

Commissioner can select other cases considering local issues and risk commodities for

audit purpose however he has to seek approval from Additional Commissioner VAT-3. The
specific cases may be selected based on information received as to evasion or any other

deficiencies noticed. It is expected that each case will get audited at least once in five

years, it means ideally 20% cases will be audited each year.

Many times in a VAT statute a word is used SELF ASSESSMENT.

We will try to understand the meaning of above word.

As the name indicates under a self assessment system a tax-payer is responsible for

determining his own tax liability including accuracy and timely reporting and payment of

his tax. Self assessment places more responsibility on the tax-payers. There is no regular

intervention by the departmental officer at each time to check that the return filed is

correct or not. The returns can be submitted to bank or to the department or through

mails (online filing of returns)

Accuracy of return forms is checked and notices are issued (defect notice) to the dealer.

The dealer is expected to comply the same within prescribed time. If the

dealer/assessee fails to comply the notice then it is presumed that the dealer has not

filed the return/returns and he is presumed to be a defaulter for that specific period.

The benefit of self assessment system is that tax officials need to spend less time on

routine work and hence can devote more time in more productive activities like survey,

investigation of selected cases.

Under this section a self assessed case may be reopened subsequently if found necessary

by the department. Because there is no assessment order passed.

In the nut shell

Important features of Audit

1) It is taken up with previous intimation to the dealer at dealer’s POB

2) It may be for a F.Y. or years, may be for a month or quarter. Currently it is done for

full F.Y.

3) It may be taken up only to ascertain and or verify certain claims, issues as per returns

filed by the dealer for a specific period.

4) The criteria for selecting a case for audit may not be disclosed to the assessee rather it

will never be disclosed to the dealer and it may be through COMPUTER generated

systems /Mahavikas.

5) The assessment order will not be passed or it will be passed very sparingly after

properly issuing notice under section 23 for the purpose of assessment but dealer is

asked to file return or revised return as the case may be based on observations/findings

of the officer.

What will be position of Audit in GST regime?

I feel that this type of audit provision or provision with little modifications will be likely to

be there even under GST regime which is expected to roll out in next F.Y. 2010-11. This

type of provision will be always provided in taxation because the check on assesses is not

possible unless such type of provision is provided in the Acts. No doubt the frequency of

audit may be reduced. However, the problem in GST will be that both authorities one

under Central GST and another under State GST may verify the dealer’s records and the

dealer will be required to comply with both legislations and, rules, notifications in this

regard. The addition of services with goods will give rise to many issues like accounting of

lease transactions, luxury services (hotels etc.) works contracting, and ITC/set off issues,

etc. The number of dealers will go up substantially in GST regime resulting into less

frequent business audits of a dealer during a particular span of time. The IGST which

seems to be a substitute for current CST will be again a common statute for both

authorities under the CGST and SGST. The transition phase from VAT to GST will be a

challenging one giving rise to various issues and problems.