Manual Scrutiny of Service Tax Returns
Key Guidelines
[Service Tax Circular No. 185 dated 30th
June 2015]
Preliminary Online Scrutiny
Scope of Detailed Manual
Scrutiny
Selection of Returns for
Detailed Scrutiny
Methodology
Documentation of Findings
Annex
I Intimation Letter
Annex
II Assessee Master Information
Annex
III Checklist
Annex
IV Observation Sheet for Documenting Scrutiny Findings
Annex
V Scrutiny Report
Annex
VI MIS Report for the Month of
..
Annex
VII Observation Sheet for Documenting Scrutiny Findings
Annex VIII Draft Scrutiny Report No.
/2015
Subject: Detailed
Manual Scrutiny of Service Tax Returns
1.1 In the era
of self-assessment, the need for a strong compliance verification mechanism
cannot be over emphasized. Such a mechanism has three important prongs - audit,
anti-evasion and return scrutiny. In order to put in place a strong 'return
scrutiny' system, a two-part system of return scrutiny was envisaged- a
preliminary scrutiny which would be online covering all the returns; and a
detailed manual scrutiny of select returns, identified on the basis of risk
parameters, to be done by the Division/ Range offices.
1.2 The Board
vide Circular No. 113/07/2009-ST dated
23-4-2009 had laid down the procedure
for carrying out detailed scrutiny of returns and had circulated a Return
Scrutiny Manual for Service Tax. However, with the introduction of the Point of Taxation Rules, 2011, which
shifted the liability of payment of service tax from receipt basis to accrual
basis, and the advent of negative list-based comprehensive taxation of services
in 2012, it was felt that the guidelines for detailed scrutiny of returns
needed a revision. In this background, it has been decided that detailed
scrutiny of ST-3 returns, with effect from 01.08.2015, should be carried out in
the manner outlined below:-
2.0
Preliminary Online Scrutiny
2.1 The purpose
of preliminary scrutiny of returns includes ensuring the completeness of the
information furnished in the return, arithmetic correctness of the amount
computed as tax and its timely payment, timely submission of the return and
identification of non-filers and stop-filers. On the basis of the validation
checks incorporated in ACES by the Directorate General of Systems & Data
Management (DGS&DM), preliminary scrutiny of all returns is done online in
ACES and the returns having certain errors are marked for Review and Correction
(RnC). These have to be processed accordingly by the
Range Officers.
3.0
Scope of Detailed Manual Scrutiny
3.1 The purpose of
detailed manual scrutiny of returns is to ensure the correctness of the
assessment made by the assessee. This includes
checking the taxability of the service, the correctness of the value of taxable
services in terms of Section 67 of the Finance Act, 1994, read with the Service Tax (Determination of Value) Rules,
2006 and
the effective rate of tax after taking into account the admissibility of an
exemption notification, abatement, or exports, if any; ensuring the correct availment/utilization of CENVAT Credit on inputs, capital
goods, and input services in terms of the CENVAT
Credit Rules, 2004, etc. In doing this, the proper officer must rely mainly on
assessment-related documents like agreements/contracts and invoices. Detailed
financial records should not be called for in a routine manner.
3.2 A detailed
scrutiny programme typically supplements the audit programme. The scope of
audit, on the other hand, is to inspect the financial records of a company for
a complete financial year in order to identify non-compliance issues and to
evaluate the assessee's internal control system. The
two processes of audit and scrutiny are, in fact, complementary to each other.
4.0
Selection of Returns for Detailed Scrutiny
4.1 The detailed
manual scrutiny programme must replicate some of the best practices in audit. A
Return Scrutiny Cell should be created in the Commissionerate's
Headquarters. The Return Scrutiny Cell shall maintain the records of the assessees and the returns which are selected for detailed
scrutiny and also the results thereof.
4.2 The focus of
detailed manual scrutiny of the returns would be on the returns of those assessees which are not being audited. The detailed return
scrutiny would be conducted in respect of such assessees
whose total tax paid (Cash + CENVAT) for the FY 2014-15 is
below Rs. 50 lakhs. Each Commissionerate has to
select equal number of assessees for carrying out
returns' scrutiny from each of the these three total tax paid bands (Cash+CENVAT) viz., Rs. 0 to Rs. 10 lakhs, Rs. 10-25 lakhs and Rs. 25-50 lakhs for
the financial year 2014-15.
4.3 The risk
parameters and the risk tools which would govern the selection of the returns
for detailed manual scrutiny have been developed. The risk scores for the Service
Tax returns for the financial year 2014-15 have been calculated. The data has
been segregated on the basis of Zone/Commissionerate/Division/Range.
The data resides with DGS&DM which will be shared with the Service Tax
& Central Excise field formations through secure data exchange in the
following manner:-
43.1 The risk
score files will be placed on a server. Chief Commissioners of Service Tax
& Central Excise Zones are required to nominate a 'Zonal
Nodal Officer' who shall access these data and distribute the same to the Zonal Commissionerates dealing
with Service Tax. The said officer should preferably be of the rank of
Additional/Joint Commissioner and should necessarily have an official email id
(ICEGATE or NIC email).
4.3.2 The
nomination of Zonal Nodal Officers should be informed
to the Service Tax Wing, CBEC by email addressed to commr.s1-cbec@nic.in alongwith attaching a scanned copy of the nomination
letter. The said communication should contain the nomination by the Chief
Commissioner along with the designation, email id, telephone numbers (mobile
& land line numbers) of the nominated Nodal Officer.
4.3.3 An email
will be sent by DGS&DM to the Zonal Nodal
Officer. These Zonal Nodal Officers would need to
copy and paste on the internet browser the 'weblink'
of the page hosting the folders. They would need to login using the username
and password which would be shared with them through a separate email sent on
their official email id. They would then need to click on the folder bearing
the respective Zone name (available on the left panel) to access the files placed there.
4.3.4 The Return
Scrutiny Cell, through an officer authorized by the Commissioner, shall collect
the Risk Score data for the Commissionerate from the Zonal Nodal Officer.
4.3.5 The list
of returns to be taken up for detailed scrutiny would be finalized by the
Additional/Joint Commissioner in-charge of Division (or in his absence by the
Commissioner) as per the risk score in conjunction with the total tax paid by
the assessee, local risk parameters (including
sensitive and evasion prone sectors), past compliance record of the assessee and manpower availability. The list of the assessees selected will be sent to the respective
Divisions.
4.3.6 The assessees who have been selected for audit or have been
audited recently (in the past three years) should not be taken up for detailed
scrutiny. However, the Chief Commissioner, may direct
detailed manual scrutiny of an assessee's return who
has paid service tax (Cash + CENVAT) more than Rs. 50 lakhs in certain specific cases. In no event should an assessee be subjected to both audit and detailed manual
scrutiny.
4.3.7
All the officers should maintain strict confidentiality regarding the Risk
Score data including the original score, further selection by the Commissionerate, etc. Under no circumstances it is to be
shared with the assessee or any other authority since
this is information available in a fiduciary relationship, pertaining to a
third party, and which may entail further investigation.
5.0
Methodology
5.1 Detailed
scrutiny of returns must be conducted by the Service Tax Range headed by the
Superintendent and assisted by a complement of Inspectors. However, the
Divisional DC/AC shall be responsible for the overall supervision of this business
process in respect of his/her division. Before return scrutiny is initiated,
the assessee must be given prior intimation of at
least fifteen days and the purpose of the exercise must be spelt out in an
Intimation Letter in a format given as Annexure I. Once an assessee's
returns are taken up for detailed scrutiny, the Range should compile the Assessee Master Information to facilitate trend analysis in
a format given as Annexure II. Since this information is based on the returns,
it can be obtained from the returns filed in ACES without making any reference
to the assessee. Returns scrutiny must be done for a
complete financial year by looking at two half-yearly returns in conjunction.
Before scrutinizing the return for evaluating the correctness of assessment,
the information available in the assessee master
should be carefully studied by the Divisional DC/AC and discussed with his
officers, much like Desk Review in Audit. To begin with, the returns for the
financial year 2013-2014 should be taken up for detailed scrutiny.
5.2 One of the
important objectives of return scrutiny is to ensure validation of the
information furnished in the self-assessed ST-3 return. The validation exercise would
require reconciling information furnished in the ST-3 return
with ITR Form Nos. 4, 5, 6 and 26AS and any third party information made
available. In addition to this, the scrutiny exercise must also look at the
correctness of self-assessment with respect to taxability, admissibility of
abatement and eligibility for exemption, valuation and CENVAT credit
availed/utilized.
5.3 A Checklist has been prepared for carrying out detailed
manual scrutiny of selected ST-3 returns (Annexure III).
For achieving the stated objectives, the checks have been categorized as
follows:
ท
Reconciliation
for validation of the information furnished in the ST-3 return;
ท
Taxability
in respect of services which may have escaped assessment;
ท
Classification
(for the purposes of due availment of
abatement/exemption benefit);
ท
Valuation;
and
ท
CENVAT
credit availment/utilization.
5.4 In case any
additional details are required, the same may be obtained from the assessee through requisition rather than through a visit.
Calling of such additional documents must be done with the approval of the
jurisdictional DC/AC so as to obviate the complaint of administrative
intrusion.
5.5 Based on the
experience of some Zones/Commissionerates, it is seen
that in a month an Inspector will be able to perform detailed manual scrutiny
of a minimum of three assessees. While some cases may
take time, the scrutiny process of an assessee should
be completed in a period not exceeding three months.
6.0
Documentation of Findings
6.1 In order to
ensure transparency of the scrutiny process, it is important to document the findings
flowing from the scrutiny effort. For this purpose, an Observation Sheet should
be prepared. The format of the observation sheet, enclosed as Annexure IV,
bears a one-to-one co-relation with the checklist. The scrutiny officer must
record his findings under each of the subject of the checklist namely,
reconciliation, taxability, classification, valuation and CENVAT credit. Under
each of these heads, the officer should record any action that needs to be
taken by the Range. The findings should clearly outline the process of scrutiny
that led to the outcome. It is also possible that the officer may come across
some issues which may have to be referred to audit or anti-evasion. These
should also be noted in the relevant column given in the observation sheet. In
cases where detailed scrutiny of returns results in detection of defaults in
service tax payment and it appears that the proviso to section 73(1) of the Finance Act, 1994 is invokable,
the ST-3 returns of the past periods should
also be verified and the results of such verification should be recorded.
6.2 All scrutiny
findings in a month must be discussed in a Monthly Scrutiny Monitoring
Committee Meeting headed by the Additional/Joint Commissioner in-charge of the
Division (or in his absence by the Commissioner) where each Range should
present their scrutiny findings in the form of a 'Scrutiny Report' given as
Annexure V. The meeting should be attended by all the Range Inspectors,
Superintendents and DC/ACs of the Divisions whose supervisory control is with
the said ADC/JC. This would provide an opportunity to the officers from other
Ranges to respond to the findings and also share best practices. The views of
the committee on the return scrutiny findings must be documented and follow up
action taken. Important issues may be put up to the Commissioner for
information. The minutes of the meeting and the decisions including detection
and recovery of service tax dues should be properly recorded and maintained by
the Scrutiny Cell of the Commissionerate.
6.3 Zonal Chief Commissioners are requested to submit monthly
reports in the format given in Annexure VI to the Directorate General of
Service Tax till facilities are developed to enable the Commissionerates
to upload the data in the MIS of CBEC.
6.4 Based on the
past experiences in performing detailed manual scrutiny, a few Templates/Case
studies have been prepared and are enclosed as Annexures VII and VIII. These
Case Studies will help and guide the officers who are not conversant with the
process of Detailed Scrutiny.
6.5 The
timelines to be followed for starting detailed manual scrutiny as per the above
detailed process are as below:
6.5.1 Forwarding
of official mail ids of the Zonal Nodal Officers by
06.07.2015
6.5.2 Forwarding
of data by DGS&DM by 08.07.2015
6.5.3
Finalization of the list of the returns of the assessees
selected for detailed manual scrutiny and dispatch of the Intimation Letter by
15.07.2015
6.5.4
Commencement of detailed manual scrutiny of selected returns by 01.08.2015.
6.6 Even after
the introduction of GST, it may be appreciated that the basic principles of
scrutiny of returns and reconciliation of records would remain the same.
F.No. 137/314/2012-Service Tax