Important Aspects of New VAT Audit Form -704

The Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) is in force from  01.04.2005. One of the features of this Act is that specified dealers are required to  submit  Audit  Report  as  obtained  from  Auditor  i.e.  either Chartered Accountant or Cost Accountant. This requirement is by way of section 61 of the MVAT Act, 2002.  For non filing or late filing of the Audit Report, penalty at the rate  of  0.1%  of  the  turnover  of  sales  is  also  leviable.  As  explained  from beginning, under VAT Act the assessments will be sparing, based on selection criteria. Therefore, to have authentic checking of the returns/tax liability of the dealer, the VAT Audit provision has been introduced. The VAT Audit report in Form  704  is  accordingly  notified  in  the  MVAT  Rules  right  from  01.04.2005.  However,  the  said  Form  is  now  replaced  by  Notification  dated  26.08.2009 under Rule 17A(2) of MVAT Rules,2005 applicable from 01.04.2008.  The newly introduced Form will accordingly be applicable from financial year 2008-2009. Some of the important aspects of this Form can be noted as under:

1.  This form is applicable for 2008-2009 and onwards. So far as prior periods (i.e. before 1.4.2008) are concerned the audit report will be filed in old form and in physical form.

2.  In the new form emphasis is shifted from returns to tax liability.  In  the  earlier  report  the  main  thrust  was  to  certify  the  correctness  and completeness of the returns filed by thedealer. In the new Form, the thrust is on certification of tax liability of the dealer based on his books and records.

3.  In the earlier report for almost each column and row, remarks from the Auditor were  asked  for.  This  was  creating  confusion  and  every  Auditor  followed different way of giving such remarks. The new Audit Form is designed in such a way that the remarks will get reported at one or two places viz; para-3 or para-5 of Part-1. This will be helpful to theAuditor as well as the user. In para 3 the reasons  for  negative  certification,  if  any,  can  be  given.  In  para  5  of  Part  I important observations having impact on tax liability can be given.

4.  The  most  important  aspect  is  that  this  new  Audit  Report  is  to  be  filed Electronically.  The  earlier  Report  was  to  be  filed  physically.  The  situation  is that  Report  relating  to  the  period  upto  31.03.2008  will  be  still  in  the  old physical Form. Only Reports to be filed for the period from 01.04.2008 will be in  this  new  Electronic  Form.  The  Commissioner  of  Sales  Tax  has  issued Circular bearing No. 27T of 2009 dt. 01.10.2009  by  which  the  procedure  for  e-filing  of  this  Report  is  clarified.    Though, Auditor  will  give  his  Report  to  the dealer, the dealer will upload the same. Therefore, the Auditor may be required to  give  Report  in  Electronic  Format  alongwith  physical  copy  to  facilitate  the dealer  to  file  new  Report  Form.    After  uploading  the  Report  the  dealer  is  also required  to  submit  ‘statement  of  submission’,  as  explained  in  the  above Circular.

5.  The  new  VAT  Audit  Form  has  three  parts.    Part-1  is  about  certification, whereas  Part-2  is  about  general  information  of  the  dealer  and  Part-3  is  about calculation of tax liability consisting of Schedules/Annexures.

In  Part-1,  at  the  beginning,  there  is  portion  containing  Instructions. There  are  about  19  Instructions.  The  rule  making  authority  has  given weightage  to  these  Instructions,  in  as  much  as  in  the Certification  Part  the Auditor   has  to  certify  that  he  has  read  and  understood  instructions  and followed the same while preparing the Report.  Thus, theAuditor is expected to follow the instructions and in any case, if not in position to follow the same, he will be required to report in para-3 of Part-1.

6.  As stated above, Part-1 is about certification. The para-2(B) of Part-1 starts as under:

“Subject to *my/our remarks about non-compliance, short comings and deficiencies in the returns filed and  tax  liability  computed  and  presented  in  respective  schedules  and  Para-4  of  this  Part,  I/We  certify  that,-……”

Thus,  an  impression  arises  that  this  is  not  a  Report  as  such  but certification.  Report is generally an opinion based on the overall verification of the  records,  certification  means  certifying  correctness  of  the  facts  so  certified. For  example,  if  a  ‘debtors  list’ is  certified,  as  per  any  records  then  suchcertification   is  expected  to  be  correct  as  per  actual  amounts,  leaving  no difference  even  of  Rupee  or  Paise.  Therefore,  an  issue  may  arise  whether  the VATAuditor is giving certification, so that the amounts/tax liability mentioned in the Audit Report is verified fully in all its respects, including 100% accuracy of  the  various  claims  and  amounts  mentioned.  In  certification  in  para-2(B), there are certain items mentioning that the Auditor has fully verified the facts stated  therein.  For  example,  in  clause  (i)  the  Auditor   certifies  that  ‘all  such declarations  and  certificates  are  produced  before  me.  I  have  verified  the  same and they are in conformity of the provisions related thereto’.

Due  to  above  certification,  it  may  be  understood  that  the  Auditor  is supposed  to  check  each  and  every  declaration  form  (like  ‘C’  form),  physically and  that  also  with  correctness  of  the  details  mentioned  therein.  There  are certain  more  items  of  similar  nature.  Therefore,  understanding  the  scope  of Audit is important.  It has to be kept in mind that though above is the mode of reporting,  the  report  is  still  an  expression  of  opinion  only  and  it  is  notcertification   as  understood  in  relation  to  Audit.    This  aspect  is  clear  from  the overall  reading  of  the  Form,  particularly  from  the  reading  of  the  responsibility statement after para-1C in Part-1. The said statement is as under:

“Maintenance  of  books  of  accounts,  sales  tax  related  records  and  preparation  of  financial  statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales  tax  related  records  based  on  our audit.  We  have  conducted  our  audit  in  accordance  with  the standard  auditing  principles  generally  accepted  in  India.  These  standards  require  that  we  plan  and perform  the  audit  to  obtain  reasonable  assurance  about  whether the sales  tax  related  records  and financial  statements   are  free  from  material  mis-statement(s).  The  audit  includes  examining,  on  a  test basis,  evidence  supporting  the  amounts  and  disclosures  in  the financial  statements .  An  audit  also includes  assessing  the  accounting  principles  used  and  significant  estimates  by  management  as  well  as evaluating  the  overall financial  statements  presentation.  We believe that our audit provides a reasonable basis for our opinion.”

Based on above responsibility statement, it can be said that the report is in the form of opinion and not a certificate as such.  Therefore, theAuditor can give  the  specified  certificates  in  para-2(B)  of  Part-1,  based  on  his  satisfaction from  the  verification,  which  may  include  test  verification  of  the  relevant records.    However,  now  in  light  of  above  responsibility  statement,  the Auditor will have to maintain his working papers meticulously to word off any charge of negligence etc..

7.  In Part-1, the VAT Auditor has also to give liability picture in summarized form by way of Tables. Unlike the old Form, in new Form the Auditor is not to give any recommendation for revising the returns.  He has to only report about additional liability/refund etc.  The dealer   will  take  call  to  revise  the  returns accordingly  or  not.    There  is  amendment  in  section  20(4)  of  MVAT  Act,  2002 which  is  about  revised  returns.  Section 20(4)(b)  is  about  revising  the  returns pursuant toAudit Report.  From reading of said section, it transpires that the dealer  will  be  required  to  revise  each  individual  return,  as  per  the  changes required  in  the  same.  In  relation  to  old  Form,  the  Commissioner  of  Sales  Tax had  issued  Circular  26T  of  2006  dated  18.09.2006  by  which  the  dealer   was able to revise only last return, to take care of all the changes during the audit period.  Thus, the responsibility of thedealer has increased.

8.  In Part-2, general information is called for.  As compared to old Form, certain new requirements have been added.  Like,  details  about  filing  of  returns  and payment  under  Profession  Tax  Act/Luxury  Tax  Act  etc  have  been  called  for. Though,  strictly  speaking  in  the  VAT  Audit  Report,  details  about  other enactments  can  not  be  asked  for,  it  appears  that  since  the  other  enactments are also administered by the sales tax department, these details are asked for.  The  other  distinguishing  feature  in  Part-2  is  that  the  Activity  Code  is  also required  to  be  reported.    These  Activity  Codes  are  made  available  on government  website  and  the  Auditor,  after  selecting  applicable  codes  has  to give  bifurcation  of  turnover  qua  such  codes.    One more additional feature is that particulars of bank accounts in the given format are also asked for.

9.  Part-3 is about computation of liability.  It has six schedules and eleven Annexures.  The  Schedules-  I  to  V  are  for  reporting  transactions  under  MVAT Act, 2002, whereas Schedule-VI is about reporting transactions under CST Act, 1956.  As clarified in the Instructions, the Schedules are as per return format. Under  MVAT  Act,  2002,  there  are  different  type  of  returns  viz;  From  Nos.231, 232, 233, 234 & 235.  Schedule-I relates to Form No.231 and so on.  It is also possible that more then one Schedule may also apply, depending upon the type of returns applicable to the said dealer.

In  addition  to  the  Schedules,  there  are  also  Annexure  from  ‘A’  to  ‘K’.  These are supplementary to Schedules. In the Electronic Format, the Auditor is supposed to first fill up Annexure, so that some of the fields in the Schedules and Tables will be auto calculated.    Though,  there  can  be  various  minute details  about  each  item  of  the  Schedules/Annexure,  for  sake  of  brevity,  the same are not discussed here. However, some of the additional items in this new Form, as compared to old Form, can be mentioned as under:

(i)  List of new suppliers on the purchase of which set off is claimed. (Annexure ‘G’.

However, this Annexure is dropped in E-template).

(ii)  List of TIN wise suppliers showing total purchases and taxes. (Annexure ‘J’).

(iii) List of TIN wise purchasers showing total sales and taxes.

(Annexure  ‘J’).  At  present,  there  is  no  requirement  for  noting  the  TIN  of  the purchasers  and  hence,  probably  the  dealer  may  not  have  these  details available. However, the object behind such requirement appears to be to cross check  the  set  off  claims  of  the  purchasers  and  if  these  details  are  readily available  with  the  Audit  Report,  the  department  may  not  go  for  manual  cross checking,  making  the  process  faster  and  avoiding  human  contacts.  Therefore, the  Auditor  may  give  the  required  information  to  the  extent  possible,  with suitable disclosures.

(iv) List of credit notes, party wise, showing amounts and taxes.

(Annexure ‘J’).

(v)    List of debit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

(vi)  Ratio analysis. (Annexure ‘F’).

(vii)  Bank statement examination, for certification as per para-2(B)(m) of Part-1.

(viii) Stock records requirement for reporting at various places.

(ix)  Reconciliation with Excise / Custom records.(Instruction-19).

(x)    Interest working as per (Annexure ‘A’ & ‘B’).

(xi)   Personal visit to Place of Business.

The new Audit Form-704 is more elaborative. It also requires more details then the old one. In first year, the dealers may not be able to generate the details to comply  with  these  requirements  and  it  may  involve  additional  work.  However, in  subsequent  years,  care  can  be  taken to  see  that  the  softwares  are  changed suitably  to  generate  the  required  details.  It  appears  that  in  long  run,  the  new Form  will  be  more  dealer  friendly,  once  it  works  satisfactorily  for  first  year. Being  in  the  Electronic  Form,  the  users/department  will  be  able  to  take maximum  advantage  of  the  same  and  will  be  useful  in  monitoring  the dealers/future planning.