ACADEMIC YEAR 2011-2012

A PROJECT ON

VAT AUDIT
SUBMITTED TO

University Of Pune For The Partial Fulfillment of The Degree Master of Commerce

GUIDED BY Prof. Dr.C.V.Gandhi PRSENTED BY Mr.Pankaj S. Patil

M.Com (Part II) Roll No. :- 227

B.Y.K.College of Commerce, Nashik

ACKNOWLEDGEMENT
I have pleasure in successful completion of this work titled "VAT AUDIT" . The special environment at B.Y.K.College of commerce, nashik that always support educational activities facilitated my work on this project. I acknowledge the support and encouragement extended for this study by the principal Dr. Dhanesh Kalal. I greatly appreciate the motivation and understanding extended for the project work by Mr. Vijay P. Lagad (CEO) and the staff of the surveyed business unit / audit staff, who responded promptly and enthusiastic to my request for frank comments despite their congested schedules. I am indebted to all of them, who did their best to bring improvement through their suggestions. I am very thankful to prof. Dr. C.V.Gandhi for her encouragement and guidance for this project work. It would not have been profitable for me complete this work without her suggestion. On every part of this work. I am thankful to library staff and administrative staff of B.Y.K. College who directly or indirectly have all been helpful one way or another.

Date:

Name PANKAJ S.PATIL

INDEX
Sr. No
Introduction

Particulars

Page No

1.

1.1 Need and Importance of Project Work 1.2 Objectives of the Project Work 1.3 Research Methodology
Organisational Profile

2.1 Company Profile 2.2 Nature of Business 2.3 Owner's Profile & History of Company 2.4 Plant Location 2.5 Organizational Structure Product/Service Profile 3.1 Control Panels 3.2 Aviation Obstruction Lamps 3.3 Led Based Road Traffic Signals Vat Audit Theory 4.1 Introduction 4.2 MVAT Audit 4.3 Need for MVAT Audit 4.4 Scope of MVAT Audit 4.5 Applicability of MVAT audit 4.6 Applicable Rates under MVAT Data Analysis And Interpretation 5.1 Introduction of Company for the Respective Audit Proceeding 5.2 Carry out Interview of Dealer /Basic Checks 5.3 Examination of Records of Vat Practical Calculation of Vat Conclusion Annexure 8.1 List of important forms referred to in the Guide 8.2 Questionnaire 8.3 Abbreviations Bibliography

11

15

19

27

6 7 8

38 42 44

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CHAPTER 1

INTRODUCTION

INTRODUCTION
1.1 NEED AND IMPORTANCE OF PROJECT WORK
The Project Work is totally related to RESEARCH. A project is a research activity, which can be analysed independently. Research is discovery of facts. Project is the part of circular or degree program provides opportunities to investigate a problem applying knowledge in scientific manner. It gives opportunities to student to learn in particular situation and art of concluding a study in a systematic way and presenting its findings in project report. It is beneficial for student to in part certain skill, develops the punctuality, skill of interaction, observation etc. It is an attempt to discover intellectual and practical solutions to the problems through the application of Scientific Methods. Dictionary meaning of project is speculative imagination, a scheme of something to be done, a proposal for an understanding. Project is an economic activity with well definite objective having specific beginning and end.

According to OXFORD Dictionary

Project Work is defined as careful investigation or inquiry specially through search for new facts in any branch of knowledge.

Need & Importance

1.Project work helps researcher to control the experimental extraneous and error variance of the particular researcher problem under study 2.It helps the investigation to obtain. The answers to the questions of research 3. It helps in drawing possible conclusions from the statistical analysis. 4.As it is the basis of the whole study. The study will collapse in the absence of proper formulated design of project work, 5. 6. 8. 9. It enables investigator to anticipate potential problem. It also helps to minimize the usage of time and money. 7.It helps to plan such techniques for collecting data. It gives right direction to investigator. It helps to achieve optimum reliability

1.2 OBJECTIVES OF THE PROJECT WORK

Any Project is done to gain some knowledge & also to give exposure to the student to his branch of specialization. It gives an insight as to what really goes in the project is a continuous & systematic study of topic under consideration. The subject of Vat Audit is selected as the subject to my project. The basic objectives of undergoing this project are as follows 1. To understand Vat Audit . 2. 3. 4. 5. 6. 7. To understand how Vat Audit is applied in organizations like a manufacturing industries. To know about Vat Audit and its actual procedure in manufacturing industries.

Data Analysis with reference to Vat Audit. To evaluate the effectiveness of Vat Audit procedure. To get acquainted with the knowledge of types of Vat Audit. To know the procedure of Vat Audit working in modern world.

1.3 RESEARCH METHODOLGY

Meaning of Research: Research is a systematic structure of investigation undertaken in order to discover new facts. It provides a structure for decision-making. Research is an inseparable part of human knowledge. Research means manipulations of things, concepts or symbols for the verification of knowledge. Research is a way of thinking. Todays research becomes important activity in overall social life. Methodology is essential to perform any research activity. Method means system or order. Method means way of doing something. Research methodology provides a framework, to conduct a research. Methodology is the series of steps followed to attain the objectives of the social research. It is the line of steps followed to obtain the objectives of the social research. It is the line of action designed in such a way so that the researcher is able to collect the proper data and draw a right conclusion. It includes steps by the researcher right from the beginning to the conclusion and recommendation of the project report. To collect information regarding this subject a proper guidance from the person, who is concerned with this, is necessary. So, I visited to Supernova Electrotech Pvt. Ltd. Nashik. For collecting the information, I used following techniques of data collection. 1. 2. 3. 4. Observation Interview method. Secondary source. Questionnaire method.

1. OBSERVATION Observation technique is used where it is not possible to researcher to go physically and collect the information. Observation becomes a scientific tool for the researcher to the extent that it serves a formulated research purpose, is planned systematically, is related to more general theoretical proposition, is recorded systematically and is subjected to check and controls on validity and reliability. One great asset of the observational technique is that it is possible to record behavior as it occurs, Observation is not nearly something OR activity OR situation but it is watching, closely and systematically with the purpose in a given situation with a give the resources observation is the basic method of obtaining information about the world around you. Advantage of observation technique is, it is simplicity, direct and ritualistic study, greater accuracy and therefore data more dependable. 2. THE INTERVIEW METHOD:

Interview is one of important and powerful tool for data collection in social research. It is a verbal method of collecting special data. It is direct method of enquiry. The person who is interpreting called interviewer and the person who is interpreting collect interviewer and the person who give the information is called interviewee and responded. It is method where there are direct dialogues between more than one people. It is the face-to-face contact and collection of information totally depends upon skill of interviewer. It is not only the words spoken but also that mutter gestures, facial expression, modination of voice, rate of speech etc. This technique is used to collect the information as per requirement and it becomes possible for researchers to arrive at conclusion.

3. SECONDARY SOURCE:

Information is collected through secondary source is based on realistic information. Sources are magazines, reference books, profile of the company, annual reports, other documents etc.

4. QUESTIONAIRE METHOD:

This is one of the methods of collecting information directly by face-to-face conversation. In this method General questionnaire is prepared by covering all aspects of topic and requirements of user. Data regarding questionnaire can be collected directly with interviewee or by distributing the questionnaire to workers or staff. I used this technique by preparing questionnaire with reference to Vat Audit work done by Mrs. Shilpa Lagad.Ive tried to collect all information regarding procedure of Vat Audit work and procedure. I also refer the books for additional information on Vat Audit procedures. I used all these techniques in the project for information. I visited to Supernova Electrotech Pvt. Ltd. Nashik and took interview of Mrs. Shilpa Lagad with my questionnaires with reference to Vat Audit.

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CHAPTER 2

ORGANISATIONAL PROFILE

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ORGANISATIONAL PROFILE
2.1

Company Profile

Name of the firm Manufactures & Supplier of Year of Establishment Registered office

: :

Supernova Electrotech Pvt. Ltd. Nashik. Electronics products. : 1998

Plot No.5, Servey No.320/1, Pathardi Shivar Pathardi Deolali Road, Nashik- 422005. : 0253-2383206

Phone. No. Web-Site

: WWW.supernovaindia.com

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2.2 Nature of Business

SUPERNOVA ELECTRONICS, an ISO 9001:2000 professionally governed Company, established in 1998, with the team of professional technocrats and allied staff, based at Nashik, Maharashtra. Supernova Electrotech is a Manufacturing Unit. Supernova with its strong technological background is a player in diversified areas and supply various type of electronics products viz LED based Aviation Obstruction Lamps LED Based Road Traffic Signals Hybrid Energy Conservation Solutions Automobile & Industrial Battery Chargers Wire based and Wireless Bank & Home security Systems Thyristerised DC Drives LED Indicating Lamps for Control Panels PLC based and Electrical Power Control Panels

In all areas such as Design, Manufacturing and supply of Electronics Products. They have State of the Art plethora of development, testing, measuring and maintenance facilities at their works. They are committed to supply quality products & prompt services to achieve the customer satisfaction through the continuous improvements in all areas of operations, giving emphasis on technology up-gradation, training and reducing manufacturing & execution cost without compromising the quality and Customer Needs.

2.3 Owner's Profile & History Of Company

Shree.Vijay Lagad though is not having engineering degree, has set palnt in electronics products manufacturing only on his past experience and the perfect technical knowledge in various industries at nashik. Shree lagad have completed his bachelor degree in physics. He started his carrier with "SET TELECOM" Nashik. After working in Set Telecom for 5 Years he was working with EUREKA FORBS as marketing engineer for 2years. On the basis of this versatile experience and technical knowledge shree vijay lagad as an entrepreneur, hardworking, enthusiastic person dared to set small industry for electronic product in 1998. He started business only with one employee, after that he made good collection of well qualified and vast experienced persons. Who are having knowledge in technical, administration, technocommercial areas and finally studying the total operational areas invested a small amount of fund from house. He was also completed all applicable statutory formalities to set up small industry. 2.4

Plant Location
The Plant is located in Pathardi Deolali Shivar, Nashik. The plant is well equipped by different machineries which is useful for production of electronic product installed and deigned by Supernova Electrotech. MSEB has provided 50 HP, 3 Phase Power connection for running this plant.

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2.5 Organizational Structure:CEO MANAGEMENT REPRESENTATIVE

ACCOUNTS DEPT

PRODUCTION DEPT SUPERVISER OPERATER

STORES DEPT HELPER

QUALITY DEPT

MARKETING DEPT SALES EXECUTIVE

COLLECTION OFFICER

1.

C.E.O.

: SHRI. VIJAY PADMAKAR LAGAD : MRS. SHILPA VIJAY LAGAD : MISS PRIYANKA BAGDANI : MR.SURTE R. B. : MR. PANKAJ YEOLE : MR. PARESH ZAGADE : MR.SURTE R. B.

2. MANAGEMENT REPRESENTATIVE 3. ACCOUNT DEPTMENT 4. PRODUCTION DEPTMENT 5. STORES DEPTMENT 6. QUALITY DEPTMENT 7. MARKETING DEPTMENT

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CHAPTER 3

PRODUCT/SERVICE PROFILE

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PRODUCT/SERVICE PROFILE

3.1 CONTROL PANELS

SUPERNOVA manufactures Electrical; Electronic & PLC based control panels.The company has been promoted by professionally qualified technocrats and has excellent industrial experience. The Company has designed, manufactured and supplied control panels to the leading writing Instruments manufacturing companies at Nashik, Surat, and Noida and also the distillery plants at solapur. The company has rendered its quality & prompt services after sales and achieved customer satisfaction.

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3.2 AVIATION OBSTRUCTION LAMPS

SUPERNOVA LED based Aviation Obstruction Lamps symbolizes Innovation, Quality and reliability. The high-rise structures such as buildings, towers, windmills and chimney are the Icons of great technological achievements of mankind but at the same time become hazardous Obstacles for Air Traffic. To prevent the accidents and to navigate the Aircraft Pilots, The National and international authorities related to Civil Aviation recommend the different types of Lamps to be installed at different heights of the structures, which are above 45 meters from Ground level. According to these technical guidelines, Supernova Electronics of Nashik, India an ISO 9001-2000 company developed the state of the art Aviation Obstruction Lamps. Super Bright Light Emitting Diodes (LED) of highest luminous intensity output are utilized in these Lamps to render long life service and also economical in comparison with earlier incandescent Lamps. Along-with the long life, our lamps are energy saver, robust and rugged for the outdoor Utility and works faithfully in diverse climatic conditions.

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3.3 LED BASED ROAD TRAFFIC SIGNALS

SUPERNOVA ELECTRONICS has introduced LED Based Road Traffic Signals Lamp Head with viable optical intensity and minimum power consumption. The AlInGap or InGaN technology of LED emits bright and homogeneous light and is lifelong (i.e. minimum life expectancy 11 years.) compare to the conventional bulb. These lamps are benefited over the conventional incandescent bulb signal lamps.

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CHAPTER 4

VAT AUDIT THEORY

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VAT AUDIT THEORY

4.1 Introduction
Value-added tax (VAT) is a modern and progressive system of sales tax. It brings in the system of self-assessment giving rise to transparency and mutual trust. It is an indirect tax, i.e. collected from a person other than the one bearing its cost. In some countries, including Australia, Canada, New Zealand, and Singapore, this tax is known as "goods and services tax" or GST; in Japan it is known as "consumption tax". It is a simplified and transparent system of tax in which tax is levied on the value additions, at each stage in the production-distribution with a provision of set off of tax paid in earlier stage. Personal end users of goods cannot recover VAT on purchases, but business organizations can set off VAT on the goods that they buy to make further supplies. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. It has been criticized on the grounds that it is a regressive tax. A French economist conceived the concept of VAT in 1953. Maurice Laur, joint director of the French tax authority, the Direction gnrale des impts, as taxe sur la valeur ajoute (TVA in French) was first to introduce VAT with effect from 10 April 1954 for large businesses, and extended over time to all business sectors. VAT was introduced because very high sales taxes and tariffs encourage cheating and smuggling. In France, it is the most important source of state finance, accounting for approximately 46% of state revenues. In India, VAT system was already there in the form of Central Excise Duty. Local sales tax laws and Central sales tax law existed in the form of Sales Tax Acts for each State and Central Sales Tax Act, 1956. The first meeting on VAT was held in 1995, convened by Dr. Manmohan Singh, the then Finance Minister of India. On 16th of November 1999, the Chief Ministers and the Finance Ministers of States decided on the following:

To introduce VAT To harmonize sales tax by implementing uniform floor rate, and To discontinue industrial incentive scheme for sales tax

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The empowered committee released a White Paper on VAT on 17th January 2005. This was the uniform basis the States agreed to adopt to avoid competition between States. VAT replaced sales tax on 4 January 2005. Though some states did not opt for VAT (for political reasons), majority of the States embraced VAT, with Haryana being the first. Tax on goods is a State Tax. The Empowered Committee, constituted by Government of India, provided the basic framework for uniform VAT laws in the states. But the States have a liberty to set their own valuations for the VAT levied in their own territory. Maharashtra passed VAT bill on 1st April 2002. The Act came into effect from 1st April 2005. The Act is called the Maharashtra Value Added Tax Act, 2002.

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4.2 MVAT Audit

Section 61 requires compulsory tax audit by every dealer satisfying certain criteria. Such criteria are given in sub section (1): Every dealer liable to pay tax shall, (a) If his turnover of sales or, as the case may be, of purchases, exceed or exceeds rupees forty lakh in any year, or (b) A dealer or person who holds license in (i) Form P.L.L under the Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966. (ii) Form B-RL under the Maharashtra Manufacture of Beer and Wine Rules, 1966 or, (iii) Form E under the Special Permits and Licence Rules, 1952. (iv) Forms FL-I, FL-II, FL-III, FL-IV under the Bombay Foreign Liquor Rules, 1953 (v) Forms Cl-I, CL-II, CL-III, CL/FL/TOD III under the Maharashtra Country Liquor Rules, 1973. get his accounts in respect of such year audited by an Accountant within the prescribed period from the end of that year and furnish within that period the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars and certificates as may be prescribed.

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4.3 Need for MVAT Audit

The advantages of the VAT system for the dealer lies in good accounting practices .The calculation of input tax credit is a very critical exercise and would require a timely auditing of accounts and standardised accounting practices. Auditing and auditors have a crucial role to play in bringing about discipline and in streamlining the procedures for VAT audit. One of the reasons for an audit under the Value Added Tax Law by a Chartered Accountant, is that, under the Value Added Tax System a major thrust is laid on the self assessment meaning thereby that the tax liability is calculated and paid by the tax payers through their periodical returns. These returns will be accepted by and large and the taxpayers will not be called to substantiate the tax liability shown by them in the returns by producing books of accounts and other relevant material. The Assessments with books of accounts will be an exception. The departmental audit provided for in Section 22 of the Maharashtra Value Added Tax Act 2002 is conducted only under certain conditions. Therefore, there arises a strong need to see that the taxpayers discharge the proper tax liability while filing the returns. This can be ensured only where the particulars furnished by the taxpayers are verified by an independent auditor in minute details by not only going through the books of accounts but also by analysing and interpreting the provisions of the State VAT Laws and reporting, whether there was any underassessment made by the dealer requiring additional payment or whether there was any excess payment of tax warranting refund to the tax payer. In carrying out the audit and certification, the Chartered Accountants have to ensure that the information supplied is not only correct but also true and fair in the form in which it is being presented. Auditor has to ensure that the accounting policies and the standards being followed by the dealer are consistent and not applied on ad-hoc basis to gain any important advantage. An auditor also ensures that the books of accounts have been prepared as per the Accounting Standards and the Guidance Note on VAT by the Institute of Chartered Accountants of India.

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4.4 Scope of MVAT Audit

The objective of audit under VAT is to ensure compliance with the provisions of the Maharashtra Value Added Tax Act, 2002. Audit helps the dealers to comply with the provisions of the Act and Rules. Audit checks whether the self-declared tax and claim of input tax credit or refund are correct. Dealers who satisfy certain criteria will be selected for departmental audit under Section 22 of the said Act. The period within which a dealer will be subjected to audit will depend on the audit strategy of the department and the performance of the dealer. Section 61 of the said Act provides for compulsory tax audit in case of dealers specifying certain criteria. The report of audit under this Section has to be submitted to the Jt. Commissioner Incharge of Business Audit. If a dealer was having more than one certificate of registration in the year 2005-06 and was filing separate returns for his different places of business, he should now file only a single audit report in form 704 in respect of all such places of business for which he was filing separate returns in the year 2005-06. If a dealer was holding an entitlement certificate during the year 2005-06, he should file a single audit report in respect of the year 2005-06. Even if the entitlement certificate had expired or was cancelled during the year 2005-06, he should still file a single audit report in respect of the year 2005-06. Audit Report The audit has to be conducted within the prescribed time from the end of the financial year and report furnished in prescribed form within such period. The time prescribed is eight months from the end of the financial year under Rule 66. Thus, the dealer should submit the audit report by 30th of November following the financial year. Rule 65 prescribes the form for the audit report as Form 704. The audit report has to be signed by the auditor.

Applicability of MVAT audit

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Every dealer who is liable to pay tax shall be required to get his accounts audited if: 1. His turnover of sales or purchases exceeds rupees forty lakhs in an year, or 2. He holds license in specified forms issued under various laws or rules for manufacturing, storing, distributing, selling liquor, etc. Every dealer liable to pay tax shall include every dealer who is registered, every dealer who is unregistered but liable to register under Section 16 read with section 3, and every dealer having separate registration certificates for different places. The Maharashtra Tax Laws (Levy and Amendment) Act,2010 has amended the Act to the effect that Tax Audit by the Accountant under this section is required if the turnover of sales or purchases exceeds 60 lakhs in a year. This amendment is effective from the 1st may ,2010 i.e for the financial year starting 1-4-2010.

Exemption from Audit Proposed amendment exempts the following dealers from the provisions of this section i.e. no Audit Report has to be submitted by following dealers. (i) Departments of the Union Government. (ii) Departments of State Government. (iii)Local authorities. (iv)Railways. (v) Konkani Railway Corporation Ltd. (vi) Maharashtra State Road Transport Corporation.

4.5 Applicable Rates Under MVAT

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SCHEDULE PARTICULARS(Rate of Tax/Tax Liability) A Exempted Goods. B List of goods for which rate of tax is 1% (It includes gold, silver, precious C metals and stones, pearls of all types). List of goods for which rate of tax is 5%(It includes goods such as all types of yarn, aluminum utensils, bearings bicycles, bulk drugs, capital goods, coffee beans and seeds, maids, rice, wheat, pulses, flour, atta, edible oils, writing instruments etc.) D E List of goods for which rate of tax is 20% or above (It includes goods such as petroleum products, foreign liquor, and country liquor and import goods.) List of goods not covered elsewhere for which rate of tax is 12.5% (Fresh Registration).

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CHAPTER 5

DATA ANALYSIS AND INTERPRETATION

27

DATA ANALYSIS AND INTERPRETATION

Flowchart of Procedure To Be Followed On Audit visits To Supernova Electrotech Pvt. Ltd. VAT AUDIT
Arrive at dealer's premises for Introduction and Basic Checks Examination of Record's of VAT

Arrange Work Area For Access to Record's & Contact Person. Audit Selected Figures/Return

Carry out Additional check where necessary

Scrutiny of Return Filed, Tax Invoices & Memoranda Of Sale or Purchase. Retention of Records

Select Additional Areas

Independent Audit of Account Production & Inspection of Document

Closure of Audit Visit

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5.1 INTRODUCTION OF COMPANY FOR THE RESPECTIVE AUDIT PROCEEDING

Introduce the staff with company profile and give instructions to his assistant and make familiar with all the points which are important for audit. The head of divisional VAT office should pass VAT dealer files selected for the audit to the auditor so that visit preparation can commence. Audit visit should be carried out on 4/5 working days of the week and the other days should be office days for the planning of audit visits, report writing, the resolution of queries and issue of assessments. Ideally, all audit staff should attend the office on the same day to allow for the discussion of the problems identified in the past week and to developed team work. However, the head of audit division should hold regular staff meeting will all audit staff, at least once in a quarter, to identify audit problem exchange ideas and plan future audits. Before the visit, The Supernova Electrotech Pvt. Ltd. File should be reviewed in detail, checked for outstanding references, copies of any VAT returns/revised VAT returns and the revenue risk areas should be identified. The plan of the areas to be checked should be developed at this time.

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5.2 CARRY OUT INTERVIEW OF DEALER /BASIC CHECKS

A) All VAT audits should start with the performance of basic checks, which are mandatory. These include: Check that the VAT certificate is displayed; Carry out an initial interview with the dealer. Check if there are any changes to the registration details; Check the VAT registration particulars to ensure the details on the register are correct. Ensure the activity code and commodity codes are correctly allocated. Complete or confirm and update the information required on the Form Audit 5; Check the VAT returns filed since the last audit visit with reference to the dealers summary of input/output/ net tax for each tax period; Record any changes in the VAT dealers business activities, accounting systems, VAT activities, imports, exports, tax-free and exempt sales, etc.; Resolve with the dealer any outstanding matters e.g. late submission of returns / late payment/ matters left over from the previous visit/correspondence; Make sufficient arithmetical checks on the records of sales and purchases until satisfied that they are accurately maintained. B) All auditing checks should be completed on the basis of test-checking and sampling techniques. Risk areas of over claims of input tax or under-declaration of output tax should have been identified prior to the visit. The test checks should commence in the risk areas by selecting a particular tax period. C) If the results are satisfactory, the auditor should move on to the next area for testing; if unsatisfactory, the checks should be extended to identify the full and accurate extent of any tax under-declaration so that an assessment is soundly based, and will stand the test of review /appeal.

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5.3 EXAMINATION OF RECORDS OF VAT

5.3.1 Auditing of inputs: (Business purchases) Business purchases (inputs) provide the logical starting point for a VAT audit. Identification of the inputs to a business should provide the pointers to expected outputs. Records will provide the total figure, but they may not have paid VAT on all their purchases. They must now deduct the total value of : Imports from out of India. Inter-State purchases. Purchases of tax free goods. Direct purchases from exempted units under the Package Scheme of Incentives. Consignment transfers, and Local purchased from unregistered dealers. Local purchases from registered dealers not supported by tax invoice.

Total Interstate Purchase Local Purchase Total Purchase Tax on Local Purchase

Others xxx xxxxx xxx xxx

5%

8% xxx xxxxx xxx

12.50% xxx xxx xxxxx xxx

Total xxx xxx xxxxx xxx

xxxxx xxx

The resulting figure represents purchases against tax invoices from registered dealers. A dealer can claim set off only for VAT paid on purchase if they have a valid tax invoice for that transaction and they had maintain account of purchases showing the specified details. To check whether all the purchase entries included are from registered dealers the researcher checked the filed physical invoices and cross verified them with by the unique TIN allotted to the vendors by the Sales tax department.

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5.3.2 Auditing of Output: (Business Sales) Appendix D provides a summary of the checks to be used when auditing output records and accounts. The sampling techniques described above should be applied in completing these audit checks.Checks should be completed on references received under the audit cross reference system set out above .Dealer should also make some adjustments to the total turnover of sales to arrive at the amount on which tax is due. From the total sales one should deduct The total of exports and inter-State sales. The total of sales of goods that are tax free, and Branch / consignment transfers to locations in Maharashtra as well as other States. the tax collected. To calculate the tax due, company should start allocating their turnover of sales in the return period (net of the above deductions) to the rates of tax they have been charged. They should also ensure that the correct tax rates are applied. The information should be readily available from their records. This gives the total of sales tax due. The region for which researcher calculated VAT did not include any factories hence there were no stock transfers to calculate.
Total Interstate Sales Local Sales Total Sales Tax on Local Sales xxxxx Others xxx xxx xxx xxxxx xxx xxx xxxxx xxx 5% 8% 12.50% xxx xxx xxxxx xxx Total xxx xxx xxxxx xxx

Sales and purchases not liable to tax under VAT The VAT law specifically excludes from value added tax all imports, exports and interstate transactions. These transactions are covered by the CST Act. Similarly, transactions that take place outside Maharashtra are not within the scope of MVAT Act. To determine this amount the researcher calculated the total value of transactions that were chargeable under CST Act and deducted the amount of CST sales and purchases from total sales and purchases respectively before calculation of VAT on those amounts. Use of mark-up, cash reconciliation and cash flow tests Where examination of the dealer records gives rise to suspicion that the output tax may be under-declared, the auditor should consider using the techniques set out in Appendices L-N. Examination of annual accounts: When reviewing the VAT dealer records, if applicable, the annual accounts should be consulted to establish whether there are areas in the VAT records which should receive more indepth check.

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5.3.3 Calculating the amount of set off due (VAT paid on purchases) This is the next stage of tax calculation. At this stage VAT is charged on total purchases. Dealer must, however, make some adjustments to this amount for, in certain cases, the full set off of the VAT paid on purchases is not available. Adjustments to tax available for set off If dealers purchases include goods, used o as fuel, or o for the manufacture of any tax-free goods, or o as packaging for tax-free goods, this goods should be sold. Then a dealer must calculate the value of those items and deduct tax @ 4% of the corresponding purchase price from the amount otherwise available for set off. (Not applicable to PSI dealers other than the New Package Scheme of Incentives for Tourism Projects, 1999 and also to manufacturers of tax-free sugar or fabrics covered by Entry A 45 and where such goods are sold in the course of export falling under section 5 of the CST Act, 1956).Similarly, if the goods are stock transferred by way of branch / consignment transfer to a place outside the State, deduct tax @ 4% (1 % in respect of goods covered by Schedule B) of the corresponding purchase price from the amount otherwise available for set off. Dealer must also make further adjustments as follows: If they have been used any goods (other than capital assets) as part of a works contract for which they have been opted for payment composition @ 8% on the total contract value, they must also deduct 36% of the amount from the set off otherwise available (4% of purchase price in respect of construction contracts for which they have been opted for payment of composition @ 5% on total contract value). Where a dealers sales are less than 50 % of their gross receipts, then they can claim set off only on those purchases of goods or packing materials effected in that year where the corresponding goods are sold within six months of the date of purchase or consigned within the said period to another State by way of stock transfers. In respect of office equipment, furniture or fixtures which have been treated as capital assets, a dealer should reduce set-off otherwise entitled by an amount equal to 4% of the purchase price. If a dealer is the retailer of liquor vendor and its actual sale prices are less than the Maximum Retail Price, there is a special formula for calculating the amount of the adjustment. Effectively this means that, if a dealer sells at 75% of the MRP then they can claim set off only to the extent of 75% of the tax paid. A dealer can not claim any set off for the tax paid on any purchases that remain unsold on the date when business discontinues. All this information should be available from their records, including tax invoices and bills or cash memorandum they have issued, and the tax invoices they have received.

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Total Set-off available The amount of set-off admissible can be adjusted against tax payable. The amount of net tax payable is the total of sales tax collected on sales less the set-off available.As there were no factory inputs involved, the total tax paid on the local purchases can be taken as set-off or Input Tax Credit (ITC). Final VAT Working
VAT Working Total Product Sale Product Sale 5% Product Sale 12.50% Product Sale 8% Total Local Sales - Sales Reg. Works Contract - Identification Method Taxable Amount Payable xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx Taxable Amount Payable

WCT -5% WCT - 12.50%

Total Projects Total VAT Sales Less ITC Net VAT Payable xxxxxx

xxxxxx xxxxxx xxxxxx

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5.3.4 Accounts audited by accountants 1) The MVATA 2002 requires VAT dealers whose turnover exceeds Rs. 40 lakhs and those holding prescribed licenses to obtain a certificate on Form 704 from a chartered accountant. 2) In other offices the form should be accepted and filed in the VAT dealer folder. No follow up action should be taken with regard to non-filers from the business audit branch as this would divert valuable audit resources from their main function. 3) This list of the 704 received should be available for viewing to the auditing officials. This will help official to access any form of any particular dealer. The form 704 of the dealer, if available should be given to the officer before audit if the dealer is chosen for audit. The forms should be scrutinized when preparing for a VAT audit visit, as part of the pre-audit preparation, and used to target risk areas for audit. 4) On the audit visit Form 704 should be used as a method of verifying the accounts produced by the VAT dealer.

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5.3.5 Scrutiny of returns filed The return filed by the dealer should be correct, complete, and self-consistent in every respect. The Sales Tax Office will check the return to ensure that there are no obvious errors in consistencies or contradictions in calculations. If this check reveals discrepancies, then the dealers will be advised and invited to submit a fresh return. The department will issue this defect notice within four months of receiving their return. Then they should file their fresh return within 30 days of the notice. If they fail to do so, it will be deemed not to have filed the return within the time allowed, and will so liable to a penalty charge. At the same time, as the department issues the defect notice, dealers will be sent a 'show cause' notice, explaining that a penalty may be imposed. Tax invoices and memoranda of sales or purchases As a registered dealer, they should issue a tax invoice when they sell goods to another registered dealer and charge VAT. For sales made to consumers and unregistered dealers, they must issue a tax invoice, or a bill or cash memorandum. However, if a dealer is a composition dealer other than a works contractor, they must issue a bill or cash memorandum only and not a tax invoice. Failure to issue a tax invoice or a bill or cash memorandum may result in a penalty. The tax invoice must contain: the words 'Tax invoice', printed in bold letters at the top or at a prominent place; dealers name, address and registration number (TIN). the name, address and the registration number(TIN) of the purchaser; serial number of the invoice; date of issue; description of the goods, the quantity and price of the goods sold; rate and the amount of the tax charged and indicated separately; prescribed declaration regarding validity of the registration and payment of tax; And it must also be signed either by dealer or by someone who is authorized by the dealer. If a dealer issues a bill or cash memorandum, it must contain: words 'Bill / cash memorandum', printed in bold letters at the top or at a prominent place; if a dealer is 'a composition dealer (other then works contractor) then the words Composition Dealer at the top of the bill / cash memorandum; dealers name, address and registration number (TIN); the name and address of the purchaser, registration number (TIN) ; serial number of the bill / cash memorandum; date of issue; description of the goods, the quantity and price of the goods sold; prescribed declaration' regarding validity of the registration and payment of tax;

And it must also be signed either by dealer or by someone who is authorized by the dealer.

5.3.6 Retention of records 36

A dealer must keep all their records including tax invoices / bill / cash memorandum, relating to their stock of goods, purchases, sales, deliveries and payments made or received for the purchase or sale of goods for a minimum of five years from the end of the year to which they relate. However, in case any legal proceedings are pending; the records pertaining to that period should be retained till the proceedings reach finality.

5.3.7 Independent audit of accounts by a Chartered Accountant If dealers annual turnover of sales exceeds Rs.40lakhs, or if they hold a license for the manufacture or sale of liquor, then they must have their books of accounts audited by a practicing chartered accountant. The Chartered Accountant's audit report, to be made on Form 704 and it must be submitted within 8 months from the end of the financial year. If they fail to submit the audit report to the Sales Tax Department within the prescribed time, then they may be liable to a penalty.

5.3.8 Production and inspection of accounts and documents If the concerned sales tax authorities have reason to believe that there may have been attempts to evade the payment of tax, they may require dealer to produce all their books of accounts. If a dealer fails to comply with such a requirement, it may commit an offence and will be liable to a penalty.

37

CHAPTER 6

PRACTICAL CALCULATION OF VAT

38

PRACTICAL CALCULATION OF VAT

SUPERNOVA Electrotech Pvt. Ltd.
Following details for the financial year FY 2011-12. Company is selling products i.e. Aviation Lamp(AOL); Control Pannel; Traffic signals with excluding VAT. Companies product fall-in schedule C (5%) and schedule E (12.5%). For making above products company purchases the following raw material (Input). 1. Input for Aviation Lamp (AOL) Particulars PCB Base Top Strip Wire Led Lights Resisters Polymide Dome Qnt/uni t 1 1 20 500 400 25 1 Rate 500 35 15 5 5 30 1250 Qnt. Purchase/ Year 500 500 500 500 500 500 500 Total 250000 17500 150000 125000 0 100000 0 375000 625000 Vat Rate 12.5% 12.5% 5% 5% Import 5% Import Input Vat 31250 2187.5 7500 62500 Nil 18750 Nil Total 281250 19687.5 157500 1312500 1000000 393750 625000

2. Input for Control Pannel Particulars PCB Heat sink Transformer Bobin wire Resisters Qnt/unit Rate 1 4 2 12 500 25 500 140 1200 70 5 35 Qnt. Purchase/ Total Vat Input Year Rate Vat 300 150000 12.50% 18750 300 168000 12.50% 21000 300 720000 5% 36000 300 252000 5% 12600 300 750000 5% 37500 300 262500 5% 13125 Total 168750 189000 756000 264600 787500 275625

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3. Input for Traffic signals Particulars Signal Lights fixture wire chock control PCB Holder Switch Socket Qnt/unit 3 1 100 1 3 6 1 Rate 1250 3570 5 650 720 25 75 Qnt. Purchase/ Year 1000 1000 1000 1000 1000 1000 1000 Total 3750000 3570000 500000 650000 2160000 150000 75000 Vat Rate 5% 12.5% 5% 5% 12.5% 12.5% 5% Input Vat 187500 446250 25000 32500 270000 18750 3750 Total 3937500 4016250 525000 682500 2430000 168750 78750

Below quantity of sale during the year FY 2011-12 Description of item Aviation Lamp(AOL) Control Pannel Traffic Signals Qnt. sale 500 300 1000 Sale Rate 12500 17500 3750 Total sale 6,250,000.00 5,250,000.00 3,750,000.00 Vat % 5% 12.5% 5% Vat Amount 312500 656250 187500 Total sale 6,562,500.00 5,906,250.00 3,937,500.00

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SOLUTION: 1. Computation of input tax credit

Total Import Purchase Local Purchase - (5%) - (12.5%) Total Purchase Tax on Local Purchase Purchase Amount VAT Amount at 5% VAT Amount at 12.50% Total

1625000 8734500 6465500 16825000 15200000

1625000 9171225 7273687.5 18069912.5 -

436725

808187.5
-

436725

808187.5

2.

Computation of Output VAT liability Sr.No. Description of item Aviation 1 Lamp(AOL) 2 Traffic Signals 3 Control Panel Total sale 6,250,000.00 3,750,000.00 5,250,000.00 Vat % 5% 5% 12.5% Vat Amount 312500 187500 656250 Total sale 6,562,500.00 3,937,500.00 5,906,250.00

3.

Computation of final VAT Working Sr. No. 1 2 Particular 5% sale 12.5% sale Output vat 500000 656250 Input credit 436725 808187.5 Total vat Payable (63,275.00) Refund claim 151,937.50

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CHAPTER 7

CONCLUSION

42

CONCLUSION
The pre-audit process of VAT audit included summarizing the monthly data of sales, purchases, works-contracts, etc. into one annual summary and calculating the total VAT liability for which the researcher has prepare following workings: For determining sales amount the researcher consolidated the monthly local sales data and deducted the local sales return for FY 11-12 and calculated the total tax payable under all the three tax rates (i.e. 5%, 12.5%) For determining purchases amount the researcher consolidated the monthly local Purchases data and deducted the local purchase returns return for FY 11-12 and calculated the total tax payable under all the three tax rates (i.e. 5%, 12.5%) There were no works contracts in the region for which researcher calculated the VAT liability. To determine CST sales amount the researcher calculated the total value of transactions that were chargeable under CST Act and deducted the amount of CST sales and purchases from total sales and purchases respectively before calculation of VAT on those amounts for the FY 11-12 The region for which researcher calculated VAT did not include any factories hence there were no stock transfers to calculate. To check whether all the purchase entries included are from registered dealers the researcher checked the filed physical invoices and cross verified them with by the unique TIN allotted to the vendors by the Sales tax department. As there were no factory inputs involved, the total tax paid on the local purchases can be taken as set-off or Input Tax Credit (ITC).

43

CHAPTER 8

ANNEXURE

44

ANNEXURE
8.1 Sr. No. 1 2 3 4 Form Number 101 103 210 221

List of important forms referred to in the Guide

Subject Application for Registration under the MV AT Act, 2002. Application for cancellation of Registration Certificate. Chalan in respect of payment made otherwise than with return by a dealer under the MVAT Act, 2002 Return-cum-chalan for all VAT dealers other than dealers executing works contract, dealers engaged in leasing business, composition dealers (including dealers opting for composition only for part of the activity of the business), notified Oil Companies. Return-cum-chalan for all composition dealers whose entire turnover is under composition (excluding works contractors opting for composition and dealers opting for composition only for part of the

222

223

activity of the business). Return-cum-chalan for VAT dealers who are also in the business of executing works contracts, leasing and dealers opting for composition only for part of the activity of the business. Return-cum-chalan holding Entitlement Certificate. (Transactions by relating to the business of execution of works contracts, leasing, trading and composition only for part of the activity of the business to be included in a separate return in Form 223). Return-cum-chalan for Notified Oil Companies. (Transactions by OIL Companies relating to the business of execution of works contracts, leasing and composition only for part of the activity of the business, to be inc1uded in a separate return in Form 223). Application for cancellation of assessment order under section (1) of section 23 of the Maharashtra Value Added Tax Act, 2002. Appeal against an order of assessment, interest, penalty or fine. Application for grant of stay against order of assessment, penalty, interest or fine Application for tax clearance certificate. Application for refund under sub-section (1) of section 51 of the Maharashtra Value Added Tax Act, 2002. Audit report under section 61 of the Maharashtra Value Added Tax 45

224

225

9 10 11 12 13 14

304 310 311 414 501 704

Act, 2002.

46

8.2 Questionnaire
1. What is the name of unit? 2. When was unit is established and registered? 3. What is the nature and infrastructure ability of business? 4. What is the name of supplier? 5. How marketing and sales functions are done? 6. Which are the different techniques for quality checked? 7. How internal control system works? 8. How to maintain purchase registered? 9. How to maintain sale registered? 10. Whether invoices, challan, payment receipt preserved for required period or not? 11. Whether accounting records are audited or not? 12. Whether return filing in due date or not? 13. Is the records kept for 5 years or not? 14. Whether separate account for input credit maintained or not?

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8.3 Abbreviations
CST - Central Sales Tax MVAT Act - Maharashtra Value Added Tax Act, 2002 MVAT Rules - Maharashtra Value Added Tax Rules, 2005 PAN - Permanent Account Number TIN - Taxpayer Identification Number VAT - Value Added Tax

48

CHAPTER 9

BIBLIOGRAPHY

49

BIBLIOGRAPHY

Books
MVAT act, 2002 ICWAI Modules

Websites
www.mahavat.gov.in www.buestarindia.com www.tax4india.com

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