VALUE ADDITION DURING VAT AUDIT
Madhukar N Hiregange FCA
Many states in India have started asking the professionals ( sometimes Chartered Accountants only) to carry out a VAT audit similar to the Tax audit as envisaged under Income Tax. This is a move towards distancing the tax administration form the erstwhile hold of the Sale Tax officers. Also a move to trust the tax payers more. In central excise regime the self assessment scheme which has been working for some time now has result, which indicate that 97 % of the monies are collected on voluntary compliance by tax compliant assessees. A mere 3% is out of the audits/ investigation etc.
The VAT audit assignment is an opportunity for providing extraordinary service to the client. The statutory requirements of the audit could be covered and the compliance of the Act and rules confirmed or reported. While doing so the context of the verification can be expanded to examine and report any value addition which is possible for the client. In the audit program which is designed the areas where value addition is possible can be added as per the experience of the auditor. The areas where value addition normally could be possible as per the authors among many others are as under:
Ensuring that the goods are properly classified under proper schedule so that the tax rates are proper and correct. The cost of an incorrect tax rate is that there is risk of a demand from the department or being uncompetitive in the market. Both the results are equally disastrous. Educating the client to any error/ exposure in this area could be important as the impact of the same may not be appreciated by a business man where no such demand has been made till date.
Ensuring that the concern has a policy goods of procured only from registered dealers and avoid procuring from unregistered dealers. This would save on transaction cost of compliance in that area along with avoiding the additional risk denial of the credit/ deduction.
Where the dealer is an exporter ensuring that the input setoff is claimed on inputs even if they are used in exempted goods which are exported or exported as such.
Ensuring that input setoff is properly claimed in case of Schedule V items especially on electronic or electrical items. Confirm that where they are used in relation to manufacturing activity, storing information, for issuing invoices, setoff can be claimed.
There are a number of options under works contract, each with its own restriction/ conditions and benefits. Confirming that these were considered when opting in every year. Possibility of having another concern for availing the alternative may also be a possible solution.
Ensuring that the deduction for labour charges is claimed for works contract either on actual basis is higher and on standard basis is not ascertainable.
Proper planning for the extent of consignment sales within the state. The sales mix between direct sales and those through the agent.
Reviewing the customer profile for methodology of selling by stock transfers to depot / consignment agents outside the state rather than direct sale or vice versa.
Reviewing the supplier’s location for optimizing the tax credits.
Confirming that the refund claims are made from time to time appropriately to avoid unnecessary locking up of funds for working capital.
Examining the option of supply of materials to job workers / contractors free of cost to optimise the tax cost.
Confirming that the job worker does not add the value of materials sent by the principal for discharging VAT/CST.
As the audit is being done many more areas where value could be available would unfold. That maybe added to this list. The auditor could then be a profit centre instead of a cost centre and could also be adequately compensated for the same. If the value addition were established the clients would require the audit without any statutory requirement.