Checks and balances are utmost essential in any tax regime. The service tax payers are entrusted with a self-assessment system wherein the tax paid by them is deemed to be appropriate and correct. Nonetheless, there might be instances where some assessee deliberately engages in tax evasions. Issues related to undervaluation of taxable services or wrong availment of Cenvat credit is very common.
However, the service tax department has its own ways and means to keep a tab on the same. Audit has been one of the major tools, allowing the department to counter the leakage of revenue. 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.
One may ponder that on what criteria / basis department audits the assessee. Selection of taxpayers for conducting audit is based on 'risk parameters'. These taxpayers should be selected on the basis of assessment of the risk potential to the revenue. Probability of being audited increases along with falling under risk parameters. Following assessee have more chance of facing an audit- a) high tax payers b) taxpayers showing significant increase in availment of input service credit c) taxpayers providing both taxable and non taxable services) taxpayers providing both taxable and exempt services e) taxpayers whose value of taxable service exhibits downward trend - It should noted that this is an illustrative list and the above mentioned risk parameters may vary from one taxable service to another
Situation is different for a large taxpayer who is liable to be audited every year. 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. Once the service provider or assessee is short-listed for the purpose of audit, the department than call for certain information from the service tax payer including copies of their balance sheets, profit and loss accounts, copies of contracts or agreements, Cenvat credit details, copies of ST3 returns etc.
This information is thereafter studied and examined which is commonly known as desk review by the audit officers. It gives them a fair idea about the areas to be examined in detail. There is a new method for Audit which is nowadays adopted by the department known as CAAP -computer aided audit programme. This audit is done by running software specially developed for the purpose of audit. Alternately a team of the auditors may visit the service provider and physically examine the books of accounts.
During the course of audit, if the assessee is convinced that he is liable to pay the tax, he has an option to pay the same on the spot with interest. However, if he disagrees with any of their objections, he has all the right to mention his views to the visiting officers who in turn are obliged to record the assessee views and reasons for not paying the tax demanded. In addition to the same the assessee should also hand over his views in writing to the department. The Assessee has every right to request the visiting Officers politely to show their identity cards and any approval letter that they are carrying from their superior officers.
Assessee has right to be provided with audit report. Generally, the auditor should submit the draft audit report, to the assistant/deputy commissioner (audit) thereafter the same along with enclosures, is submitted to audit cell for consideration in the monitoring meeting. This monitoring cell meeting is usually chaired by the commissioner who is the final authority to approve or reject any audit objection taken by the officers. Based on the decision of the monitoring meeting the draft audit report is finalised by the audit cell within 15 days from the date of meeting.
The assessee is thereafter expected to submit their para-wise submission which forms the basis of their defence in the future battle of litigation.