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Serious Lapses in Scrutiny of Returns by Central Excise - CAG

DDT in Limca Book of Records - Third Time in a rowTIOL-DDT 2901
02 08 2016

Tuesday

THE CAG in its latest Report to Parliament on Central Excise and Service Tax found serious lapses in the scrutiny of returns by the Department.

Preliminary scrutiny/Review and Correction

After the introduction of Automation of Central Excise and Service Tax (ACES), preliminary scrutiny of returns is being done by the system itself. The purpose of the preliminary scrutiny is to ensure completeness of information, timely submission of returns, time payment of duty, arithmetical accuracy of the amount computed as duty, closing and opening balance of CENVAT credit etc. The range superintendent is required to verify the returns thrown by the system for review and correction. He is also required to rectify the errors, if any, in the returns in consultation with the concerned assessee.

During scrutiny of 2,580 returns in selected ranges of 41 Commissionerates CAG observed in two cases, in Jamshedpur and Patna Commissionerates, that there were differences in the closing balance and opening balances of CENVAT credit as per the returns furnished by the assessees. Although the system had marked the returns for review and correction, the department did not verify the differences involving availing of CENVAT credit of Rs.14.01 lakh during the period of review.

Detailed scrutiny

The purpose of detailed scrutiny is to establish the validity of information furnished in the tax return and to ensure correctness of valuation, availing of CENVAT credit, classification and effective rate of tax applied after taking into consideration the admissibility of exemption notification availed etc. Unlike preliminary scrutiny, detailed scrutiny is to cover only certain selected returns, identified on the basis of risk parameters, developed from the information furnished in the returns submitted by the taxpayers.

Para 48 read with para 4.1A of Manual for the Scrutiny of Central Excise Returns, 2008, provides for selection of upto five per cent of total returns received for a detailed scrutiny of assessment on the basis of risk parameters. Paragraph 4.2A of the Manual for Scrutiny of Service Tax Returns, 2009 stipulates that upto two per cent of the returns need to be examined in detailed scrutiny.

Selected ranges of 21 Commissionerates out of selected ranges of 41 Commissionerates, stated that no detailed scrutiny of returns was undertaken by them. The reply from the remaining 20 Commissionerates is still awaited by Audit.

Verification of CENVAT credit availed

ER-1/ER-3 and ST-3 returns contain a table for details of CENVAT credit taken and utilised for furnishing information regarding various types of credit taken and its utilisation for different purposes during a month/quarter. It is very important on the part of the department to verify the amount of "credit taken" as shown in these returns with the source documents such as invoices, bill of entries etc. At present department verifies the amount of credit shown in the returns in course of detailed scrutiny and internal audit of the assessees.

Scrutiny of the figures as furnished by the department regarding verification through detailed scrutiny and internal audit done by department of CENVAT credit availed by the assessees falling under the selected ranges, revealed that on an average of 40 per cent of CENVAT credit availed by the assessees remained unverified. Specifically, during 2014-15, 16 ranges out of 38 ranges had not verified the correctness of CENVAT credit availed by the assessees to the extent of 90 per cent of the credit availed by them. Further, CAG also noticed that most of the selected ranges had not conducted detailed scrutiny of returns and CENVAT verification was being carried for selected units by internal audit of the department. As a result, a large portion of CENVAT credit which the assessees used for payment of duty/tax was not verified.

When Audit pointed this out, the Ministry stated (February 2016) that action has already been initiated.

Rs.2836 Crore CENVAT Credit by Reliance not verified: In Mumbai ST Commissionerate, Audit observed that CENVAT credit amounting to Rs. 2,835.80 crore availed and utilised by Reliance Communication Ltd., during the period of review remained unverified by the department as the department did not conduct internal audit of the unit for the period 2010-11 to 2014-15 despite the unit being one of the top service tax paying units and falling under mandatory category for internal audit. During audit, CAG observed non-reversal of CENVAT credit of Rs. 24.36 crore.

When Audit pointed this out, the Ministry stated (February 2016) that the assessee will be selected for internal audit in future.

During the exit conference, the Ministry stated that due to manpower constraints there is skewed coverage of internal audit and detailed scrutiny.

While acknowledging man power constraints, audit does not appreciate how such cases were left out from the 2,183 number of assessees paying more than Rs. three crore covered by internal audit during 2014-15.

Audit is of the view that there is a need for department to revisit the parameters for selection of cases for internal audit/detailed scrutiny keeping the existing man power constraints in view.

Certain CENVAT Issues Pointed by Audit

CAG found that assessees have:

Availed CENVAT Credit on ineligible input services,

Availed CENVAT credit of input services for the period not covered by notification,

Availed CENVAT Credit on sales commission,

Availed CENVAT Credit on exempted goods,

Availed CENVAT Credit on ineligible documents,

Availed CENVAT Credit on old invoices,

Availed suo-moto CENVAT credit,

Used CENVAT credit for payment of service tax under reverse charge.

Excessive Use of CENVAT Credit

CAG observes that excessive use of CENVAT credit to the extent of seven to ten times of national average in service tax and seven times in central excise in some of selected Commissionerates could indicate the likelihood of misuse of CENVAT credit by assessees. Moreover, around 90 per cent of CENVAT credit availed was not verified by the department through detailed scrutiny and internal audit in 16 ranges.

In view of the large amount of duty being paid through CENVAT credit, Audit is of the opinion that the department needs to strengthen its internal control mechanism using the existing man power judiciously.

FTP - Board of Trade

PARA  300 of Foreign Trade Policy Statement 2015-2020, states:

300. Two mechanisms are being put in place for regular communication with stakeholders. The first of these is a Board of Trade which will have an advisory role and offer a platform for discussion and consultation. The Board of Trade will be constituted once the policy comes into force.

The objective is to have continuous discussion and consultation with trade and industry. The Board of Trade would,  inter-alia, advise the Government on policy measures related to Foreign Trade Policy in order to achieve the objective of boosting India's trade.

The BOT shall have the following terms of references:

(i) To advise Government on Policy measures for preparation and implementation of both short and long term plans for increasing exports in the light of emerging national and international economic scenarios;

(ii) To review export performance of various sectors, identify constraints and suggest industry specific measures to optimize export earnings;

(iii) To examine existing institutional framework for imports and exports and suggest practical measures for further streamlining to achieve desired objectives;

(iv) To review policy instruments and procedure for imports and exports and suggest steps to rationalize those for optimum use; and

(v) To examine issues which are considered relevant for promotion of India's foreign trade and for strengthening international competitiveness of Indian goods and services.

In order to give appropriate representation to MSME sector, Government has decided to include the name of President, Laghu Udyog Bharti, New Delhi as Ex-officio member of BoT.

DGFT Trade Notice No. 12/2015-20., Dated: August 01 2016

FTP - Export of Basmati Rice

GOVERNMENT has amended Chapter 10 of Schedule 2 of ITC(HS) Classification of Export and Import Items to stipulate:

(i) In addition to the EDI ports, export of Basmati Rice will now be permitted through Land Custom Stations (LCS) on Indo-Bangladesh and Indo-Nepal border also, subject to registration of quantity with DGFT.

(ii) Export of Basmati Rice shall not be permitted on the basis of Documents against Acceptance (D/A) unless such export is covered either by Bank Guarantee or ECGC Guarantee, with effect from 01.10.2016.

DGFT Notification No. 18/2015-20., Dated: August 01 2016

NADT Organises Training for ITAT Members

THE National Academy of Direct Taxes is organizing a six-day training program/seminar for the Judicial and Accountant Members of the Income Tax Appellate Tribunal from 29th August to 3rd September 2016.

While talking to the Director Designate of the National Judicial Academy, Justice Raghuram, yesterday, I suggested to him that his academy should organize a regular training programme for CESTAT Members, especially the newly appointed Members. Somebody who has not seen a Tribunal or Court Bench can get appointed as a judge and start sitting in judgement from the very first day without any idea about the process, procedure and protocol of the court.

F.No. NADT/P&R/ITAT Course/2016-17., Dated: August 1, 2016

Tax evasion is reprehensible; it is social injustice by the evader to his fellow citizens. Arbitrary or excessive taxation is equally reprehensible; it is social injustice by the government to the people.
 

Until Tomorrow with more DDT

Have a nice day.

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