8/26/2010

ISSUES ON VAT AUDIT –KARNATAKA AND RECENT

AMENDMENTS MADE.

CA. Sanjay M Dhariwal

KVAT AUDIT

 Total Turnover- Rs. 40 lakh for FY 2009-2010/60 lakh for 2010-2011

 Form VAT 240- Amended

 Time limit of filing- 31st December 2010 for Financial Year 2009-2010

 File to LVO/VSO Jurisdiction where monthly returns are filed

 Auditor- Chartered Accountant, Cost Accountant, Tax practitioner

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CONTENT OF FORM VAT 240

 Form VAT 240 is divided into 4 parts

 Certificate – issued by the CA / Cost Accountants / STP

 Part I – General Information

 Part II – Particulars of Turnover, Deductions and Payment of tax

 Note to Part II

 Part III – Particulars of declarations and certificates

AUDIT CERTIFICATE

 The introductory Para of the certificate defines the status of the Auditor,

 Details of the dealer with TIN and Year of Audit.

 The comments, observations and shortcoming on the returns filed by the

dealer should be added to the report- Monthly returns

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CERTIFICATE- CLAUSE

1) The books of account and other related records and registers maintained by the
dealer are sufficient for the verification of the correctness and completeness of
the returns filed for the year.
Maintenance of Books of Accounts as per KVAT law

Accuracy and completeness of the data filed to dept

Variances of returns with books of Accounts

CERTIFICATE- CLAUSE

2) The total turnover of sales declared in the returns includes all the sales
affected during the year.
Total turnover as defined in Rule 3(2)
All sales are Accounted
Classification of sales – Rate wise/local-Interstate-/etc
Variances of returns with books of Accounts

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CERTIFICATE- CLAUSE

3) The total turnover of purchases declared in the returns includes all the purchases
made during the year.
- Accounting of all purchase invoices
All kinds of purchases like local purchases(RD/URD), interstate purchases, import,
etc

Variances of returns with books of Accounts

CERTIFICATE- CLAUSE

4)The adjustment to turnover of sales and purchases is based on the

entries made in the books of account maintained for the year.
Reasons for adjustment like
Adjustment of taxes or credits,
Cancellation of invoices,
- Reconciliation adjustments like difference between contract receipts and total
turnover
- Entries thorough debit /credit notes or journal entries,

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CERTIFICATE CLAUSE
5)The deductions from the total turnover including deduction on account of sales returns
claimed in the returns are in conformity with the provisions of the law.
- Conformity of deductions as per Rule 3(2) of KVAT Rules

- Evidence/Documentations for deductions

- Sales return- Time span with support of Credit notes, Debit notes,

- Exempted sale deductions- Sale of exempted goods

- Sub contractor deductions- registered sub contractor

- Actual labour- Labour bills

CERTIFICATE CLAUSE

6) The classification of goods sold, rate of tax applicable and computation of output
tax and net tax payable as shown in the return is correct;
- KVAT Schedules, Central Excise Tariff, Commissioner Clarifications, Notifications,
Circulars

- Computation of output tax and net tax payable as per KVAT law

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CERTIFICATE CLAUSE

7) The classification of goods purchased, the amount of input tax paid and deduction of
input tax credit claimed in the return is correct and in conformity with the
provisions of the law;
- KVAT Schedules, Central Excise Tariff, Commissioner Clarifications, Notifications,
Circulars

- Purchases invoices and taxes paid on purchases

- Whether goods are purchased are eligible or ineligible for claim of input tax paid.

CERTIFICATE CLAUSE
8) The utilization of statutory forms under the KVAT Act, 2003 and the CST Act,
1956 is for valid purposes;
- Obtained statutory forms from department

- Statutory forms with the Invoices, Registration certificates, usage, etc

- Co-relation of Acknowledged statutory forms with consolidated report

(Electronically)– difficult

- Valid purpose……?

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CERTIFICATE CLAUSE

9) Other information given in the returns is correct and complete.

- Verification of Entry tax

- Any adjustment of input tax credit against entry tax

- information other than the above clauses like excess tax collected, carry forward of
credit, etc

CERTIFICATE
 Summarize the additional tax liability or additional refund due to the dealer in
his report.

 The Summary sheet should disclose the difference between the monthly
returns and the audited figure pertaining to output tax payable, Eligible input
tax credit, Ineligible input tax credit, CST payable and other items.

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CERTIFICATE

 Advice the dealer to file the revised return- 6 months

 Tax liability with interest and penalty-

 Refund

 Input tax credit carry forward- Opening and closing

 Revision of Returns along with VAT 240- ????

 Tax payment along with VAT 240-????

PART 1 CLAUSE 12
 Whether registered under the KTEG Act, 1979 and enrolled / registered under the
KTPTC & E Act, 1976
 Refer VAT 1

 Obtain PT registration certificate as both employer and employee

 Check whether Professional Tax has been discharged or not for all the
branches.
 Books of account maintained
 Cash Book, General Ledger, Bank book, Sales Register, Purchase Register, , etc
which are generated from the computer system
 Method of valuation of opening and closing stocks
 How does one go about valuing the opening stocks

 How does one go about valuing the closing stocks???????

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PART 2 - CLAUSE 1
 Total and Taxable turnover
 Refer Rule 3 for the purpose of both total and taxable turnover;

 URD taxes shall not form part of total turnover

 Stock transfer should be disclosed at prevailing market value or the amount for
which the goods are ordinarily sold by the dealer;
 Stock transfer of capital goods ?

 Advances received prior to commencement of the work in case of works

contractor- Not to be considered;
 Sales return beyond six months generally considered as sales and offered to tax.
Tracking with Debit Note/Credit Note
 VAT collected should be shown separately/ Forfeiture of VAT in case of excess
collection

CLAUSE 3
 Details of taxable sales within the State
 One needs to provide – description of goods, taxable turnover, rate of tax and
tax payable
 Tax payable and tax collected is different

 Sale of fixed assets which is not subject to tax – can the sale value is
considered as inclusive of taxes or one needs to charge on the whole sale value
 VAT on Freight charges

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CLAUSE 4
 Details of purchase and receipts
 Imports

 What value one needs to declare – landed cost or invoice value

 Is foreign exchange fluctuation will form part of import value

 Inter-state purchase

 Inter-state stock transfer

 Purchases from registered dealers within the State

 Purchases from unregistered dealers within the State

 Where does one reflects the exempted purchases

 Non disclosure of interstate purchases, Imports , E-1 purchases and other
interstate purchases in the monthly return- comments

CLAUSE 5
 Details of input tax paid on purchases
 One needs to provide – description of goods, taxable turnover, rate of tax and
tax payable
 All purchase which is covered within the definition of input needs to be
disclosed;
 Input tax credit based on date of invoice or Accounting of Invoice in the books of
Accounts.
 Can input tax credit be adjusted against the scrap sales where the goods are
exempted from tax?
 Input credit based on original/Duplicate copies and not Xerox copies
 Input tax credit on purchase invoices where the invoices does not bifurcate the tax
component.

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CLAUSE 6
 Details of input tax paid on purchases eligible for deduction (give details of capital
goods separately and specify whether calculated on the basis of partial rebating
formula)
 Here also one needs to provide – eligibility of input tax based on description of
goods as capital goods or inputs.
 Computation of eligibility separately based on partial rebate /special rebate
formula if applicable

CLAUSE 7
 Details of input tax paid on purchases ineligible for deduction (give details of capital
goods and special rebate separately and specify whether calculated on the basis of
partial rebating formula)
 As per section 3(2), Whether Unregistered purchase tax is to be paid on
consumables, printing and stationery (Input tax restricted goods)?
 Goods sent for job work

 Restriction of input tax credit against the use of exempted goods? And also
Apportionment of input tax credit for sale to SEZ, EOU, E-1 sales, Form I Sales

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CLAUSE 8
 Details of input tax deduction claimed on purchases relating to inter-State sales and
export sales (give details of capital goods and special rebate separately and specify
whether calculated on the basis of partial rebating formula)
 Practically difficult to co relate the input tax claimed with interstate sale or export
for large scale/medium scale dealers

CLAUSE 9
 Details of un-adjusted excess input tax credit carried over from the previous year
and to the next year
 Opening unadjusted credit if disclosed in VAT Audit Report and also accounted in
books of accounts
 Otherwise the opening balance of the excess credit as disclosed in books and
Returns

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CLAUSE 10, 11, 12

 Total and taxable turnovers under the CST Act, 1956

 Deductions claimed (specify in respect of each deduction its nature, whether it is in

order and supported by prescribed documents)

 Details of taxable sales

CLAUSE 13
 If the dealer has opted for composition indicate the type of composition scheme
opted and details of the composition amount paid its rate and the basis
 Change in the scheme from regular to composition or vice versa

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CLAUSE 14 & 15
 Details of returns filed along with revised return- change for 2009-2010 or 2010-
2011
 Details of inspection of the business premises / books of account of the dealer by
departmental authorities on inspection / visit
 Statement/ Notices from the departments- observations by the Auditor

 Any application for Commissioner clarifications or Appeal pending

 Visits by the VAT officials in the current year asking the details for financial year
2009-2010

KVAT AUDIT
Note to Part II:
 Trading account should be maintained in respect of each class of goods by the
traders
 Manufacturing account in respect of each class of goods (whether taxable or not)

 The Accounting ratios on sales and non sales transactions has to be furnished
separately like turnover ratio, stock turnover ratios, gross profit ratio. Cost of
goods sold ratio
 The details of the transactions within the state and outside the state should be
suitably computed and declared separately. It has to be declared separately in the
profit and loss Account and the Balance sheet.

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PART 3 – CLAUSE 1, 2 & 3

 Details of sales / purchase as commission agent
 Principal and Agent transactions where principal/Agent, within/outside the state
and or Agent/ principal, within/outside the state
 Details of tax deducted at source from the amounts payable to the dealer
 VAT 156 / 158 / 159

 TDS deductions- Compliance like industrial canteens, Government works contract

and notified goods for that year- section 18-A struck down

CLAUSE 4 & 5
 Stock of declarations / certificates / delivery notes under the KVAT Act, 2003 / CST
Act.
 Opening Stock

 Forms obtained during the year from CTD

 Forms utilized during the year

 Loss, if any

 Closing Balance- electronically filed

 Details of any misuse of forms- difficult to evaluate

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CLAUSE 4 & 5…….

 Compliance of Statutory forms:
 TDS certificates,
 C form, Form F
 E-I forms,
 E-II forms,
 Form –H.
 The details of Form I is not added but still can be added to claim exemption

Illustration for audit for works contractor

• Verification of details of contract entered and the agreements entered

• Whether the dealer under the regular scheme or composition scheme

• Different Audit report for change in the scheme on the mid of the year

• Break up of contract receipts including any mobilisation advance

• Whether labour charges deducted on actual or Adhoc basis

• Whether any deduction towards payment to sub contractor - deduction only
on payment basis
• Whether sub contractor are registered or not

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• Whether sub contractor has furnished the monthly return or not

• Even unregistered tax is to be paid by the works contractor under both the
scheme
• Tax payable on receipts or taxable turnover which ever is higher
• Reconciliation of Bank statement with contract receipts vis-à-vis with bills
raised and vis-à-vis WIP.
• Any forfeiture of tax for the refund of the advance or installment to the buyer
• Where material is supplied by the contractor and the sub contractor
executes only labour work so whether labour deduction can be claimed twice
by the contractor and sub contractor

OTHER ISSUES
Audit plan/Audit Programme for KVAT Audit
1) Separate Audit plan/Programme for each class of dealer
2) Objective of Audit is Compliances of the KVAT law

 Analyze the nature of business

 Supporting sections, Rules, Notifications, Circular, Clarifications applicable

 Documentations required from the dealer like Registration certificates, details of

Statutory forms, agreements, Invoices, Financial statements, Monthly returns, etc
 Verification of relevant documentations

 Verification of correspondence with departments if any

 Discussion with the dealer on any relevant compliance- Legal or procedural

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OTHER ISSUES
Areas to be looked into during Tax Audit with VAT Audit like
1) Freight charges for local sales/Interstate sales – Sharavathy Steel Products
Private Limited Bangalore Vs state of Karnataka 2010(68) KLJ 206 (Tri)
2) Total Turnover/Taxable Turnover
3) Sale of fixed Asset/ Restricted capital goods
4) Cost/ ineligible tax credit
5) Non sale transactions (Goods on approval, Stock transfer, sample, gifts)
6) Payment of penalty/interest
7) Disallowed labour and like charges

OTHER ISSUES
8) Closing work in progress
9) Composition/Regular scheme
10) TDS for works contractor- IT/ VAT
11) Adjustment as prior period items/post period items
12) No provision of revision of IT Audit Report and VAT Audit Report
13) Detailed classification of goods for sales and purchases which may be local,
interstate with rate of tax in Trading account for KVAT Audit

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OTHER ISSUES
 Reliance on Books of Accounts maintained electronically. Hard copies should be
obtained (consolidated) from the management after their conformations.
 When Input tax credit is adjusted against the entry tax payable, verification of entry
tax compliance
 Whether both the benefits of depreciation and input tax credit can be availed by the
dealer?
 Verification of transactions with the sister concern companies
 Centralized accounting
 Statement/ Notices from the departments- observations by the Auditor

PROCEDURAL AMENDMENTS- KVAT RULES 2010

MRP Dealers- Rule 3(4)
A registered dealer selling Cigarettes, Gutkha, Cigars and other manufactured tobacco is
liable to pay tax on MRP if the consideration for sale exceeds rupees five hundred only. Total
turnover is aggregate of maximum retail prices of the goods sold (RULE 3(2) is not
applicable)
Taxable Turnover is total turnover less deductions
(d) Sales return
(h) Tax collected
(i) Turnover of agent
Form 105 in new form prescribed for dealer paying tax on MRP basis
The Invoice should disclose the MRP in addition to details specified in Rule 29

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PROCEDURAL AMENDMENTS- KVAT RULES 2010

Issue of TDAIN- Rule 9(3)

• Issue of registration certificate to specified persons under sub section 9-A(1)

• It requires Central Government, any state government or any other specified bodies

to deduct tax from the amounts payable by them to any works contractor.

• With regard to this now the commissioner can authorize any LVO or VAT sub-officer

to assign Tax Deduction Authority Identification Number (TDAIN)to Central

government, any State government or others specified in section 9-A.

PROCEDURAL AMENDMENTS- KVAT RULES 2010

Rule 15 (4) - Transfer of registration to legal heirs

• Insertion of proviso to sub-section 1 of Section 27 w.e.f. 1-04-2009. The
prescribed authority may instead of cancelling the registration, may permit
transfer of his certificate of registration to the legal heirs subject to
application made by the legal heirs for transfer of registration.

• There was no rule prescribing the procedure for the above. Now the same is
prescribed in Rule
• Any legal heir of a deceased individual dealer may apply for transfer of
registration in Form VAT 1 along with the documents prescribed like death
certificate, sworn affidavit etc. And after enquiry, the authority may permit
such transfer.

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PROCEDURAL AMENDMENTS- KVAT RULES 2010

Turnover changes (Rule 37- Tax period)
Filing returns quarterly- For Regular dealer- Total turnover not exceeding twenty five
lakh earlier the limit was fifteen lakh.
Removal of Form 6
The Annual Form VAT 6 (Amendment in registration details) which was to be filed along
with the monthly return of last month of the financial year is not required to be filed
with effect from financial year 2010-2011.
Submission by Casual dealer
When casual trader stops his occasional transactions during the course of a month,
then he shall submit Form VAT 110 which has replaced Form VAT 100.
Keeping of Accounts (Rule 33(3)(b)
The substituted Rule prescribes to maintain VAT Account by regular dealer with details
of input tax, Output tax, debit notes and credit notes issued during the tax period
The earlier requirement of entering the details in website is now removed.

PROCEDURAL AMENDMENTS- KVAT RULES 2010

Change in Registration details

For changes in registration certificate, the application shall be made in Form VAT 1 which
has replaced VAT 2

Rule 50 – Mode of payment - Proviso Inserted

The proviso states that for specified classes of dealers as notified by the commissioner,
the tax shall be paid through electronic remittance through internet.
Rule 153(4) – Petitions, appeals and applications for review to High Court
Appeal to High court, against any order passed by Advance Ruling authority shall be made
in Form VAT 486.

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PROCEDURAL AMENDMENTS- KVAT RULES 2010

Rule 38 – Submission of monthly returns
The details to be entered in commercial tax website with respect to Local Registered
Dealer purchase for which input tax credit was availed has been removed from the
Rules.
Therefore the following documents shall be accompanied with the returns –
•Statement of local RD eligible purchase
•Local sales made to other registered dealers
•TDS certificates when the credit for TDS has to be claimed.
The Monthly returns may be filed through website by using the dept allotted username
and password. The payment details have to be given along with return. Along with
Acknowledgement number return and Cheque the return can be filed with department if
the e payment is not made. Otherwise the E payment has to be made through notified
banks and return can be filed electronically

PROCEDURAL AMENDMENTS- KVAT RULES 2010

Rule 130-B – Claim of refund of tax (Inserted)

• The buying dealer, not liable to get registered under the Act can claim the refund of
excess tax paid to selling dealer (MRP).
• The refund claim has to be made in Form VAT 166 to the local VAT jurisdiction of selling
dealer.
• The refund payment order shall be made in Form VAT 255 within sixty days from the
date of application.

Rule 159(3) - Inspection of goods

The owner or person – in - charge of a goods vehicle shall carry proof of entering the
details in the website along with other details.

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PROCEDURAL AMENDMENTS- KVAT RULES 2010

Rules 164 & 165 – Clarification of rate of tax and Advance ruling
1. Definitions for the purpose of advance rulings with respect to clarification of rate
of tax are given in rule 164.
2. Advance Ruling Application under section 60 to be made in Form VAT 540 along
with a fee of Rs.1,000/-.
3. The authority, after examining the application, may either admit or reject it. But it
shall not reject without giving an opportunity to the applicant to show cause
against such rejection. If any rejection is made, then the authority shall mention
the reason thereof.
4. The authority shall not admit the application when the issue raised is already
pending before any authority, Tribunal or any court, or relates to a transaction
or issue which is designed apparently for avoidance of tax.
5. The authority shall pass an order within three months of receipt of any
application.
6. Other conditions prescribed for such clarification to be provided.

THANK YOU
sanjay@dnsconsulting.net

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