SELECTION OF ASSESSEE/TAXPAYERS FOR AUDIT - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

CHAPTER 5 SELECTION OF ASSESSEE/TAXPAYERS FOR AUDIT 5.1 Objective: Selection of assessees/taxpayers for audit means selection of assessees and taxpayers to be audited during a specified period, taking the available resources into account. Given the large number of registered assessees and taxpayers under Central Excise and Service Tax, it is impossible to subject every assessee/taxpayer to audit each year with the available resources. Further, emphasis placed merely on coverage of more number of assessees and taxpayers would dilute the quality of Audit. Selection of units for audit in a scientific manner is extremely important as it permits the efficient use of audit resources viz. manpower and skills for achieving effective audit results. Selection of units for audit based on revenue risk leads to deployment of audit resources where they are most needed, i.e., in the audit of less compliant units. Such selection is finally subject to the availability of administrative resources. These assessees and taxpayers should be selected on the basis of assessment of the risk to revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment . It involves the ranking of assessees and taxpayers according to a quantitative indicator of risk known as a risk parameter . 5.2 Method of selection based on risk assessment: The selection of assessees and taxpayers would be done based on the risk evaluation method prescribed by the Directorate General of Audit. The risk evaluation method would be separately communicated to the Audit Commissionerates during the month of May/ June of every year. The risk assessment function will be jointly handled by National Risk Managers (NRM) situated in the Directorate General of Audit and Local Risk Managers (LRM) heading the Risk Management section of Audit Commissionerates. The Risk Management section of Audit Commissionerate would ensure availability of assessee/taxpayerwise data for a period of last three years, which would facilitate risk assessment and preparation of the list of assessees/taxpayers to be audited in the current year. 5.2.1 Basing on the risk methodology, a list of units will be communicated to the Audit Commissionerates by the NRM, for the purpose of conducting audit for the audit year. The Audit Commissionerates may select the units to be audited in a particular year after reviewing the list forwarded to them by the DG(A), in the context of local risk perceptions and parameters. The Audit Commissionerate may also select an assessee with low risk score compared to an assessee with relatively high risk score. However, the reasons for such selection should be indicated which would be used as a feedback by the Directorate of Audit for further improvisation of risk factors in future. 5.2.2 The Audit Commissionerates may also select a few units at random or based on local risk perception in each category of large, medium and small units. Feedback on such random selection and results of audit thereof would help in evaluation of parameters used for the process of selection. 5.2.3 After preparation of the annual plan of audit coverage as indicated above, the Audit Commissionerates would also prepare a list of units, in whose cases the risk can be mitigated through a detailed scrutiny of returns and convey the details to the Executive Commissioners for taking necessary action. Selection of such units can be carried out at the Zonal level so that the Audit and detailed scrutiny of returns complement each other. The list of such units and reason for selection should be shared with the Directorate General of Audit. 5.3 Preparation of audit schedule: 5.3.1 Annual plan for Audit Coverage (Audit year being -1st July to 30th June): i. The Audit Commissionerate would release an Annual plan by 31st May, indicating the names of assessees/taxpayers proposed to be audited during the course of the year (period from 1st July to 30th June of the next year) and the month in which the Audit officers would visit the units for verification of records. The Audit coverage (i.e. number of units selected for Audit in a year) may be calibrated with the manpower availability in a Commissionerate. The working strength of officers in Audit Commissionerate would be taken as the basis for calibration. ii. In order to ensure adequate coverage, the assessees/taxpayers shall be categorized into three categories namely large, medium and small units.Given the past experience in detection of non-compliance and recovery of duty through audits, it is suggested that Audit Groups may be deployed to cover large, medium and small units as discussed in Para 2.6. While deploying officers due care should be taken, so that the staff is proportionately allocated to attend the audit work related to Central Excise Units and Service Tax assessees/taxpayers based on revenue profile of the Commissionerate. iii. The composition of Audit Groups to cover large, medium and small units would be as discussed in chapter 2 iv. The indicative duration for conduct of Audit that is inclusive of desk review, preparation and approval of Audit plan, actual Audit and preparation of Audit report wherever necessary, for each category would be as discussed in chapter 4 v. Given that there are around 249 working days in a year, the number of Audits that can be conducted approximately in a year are as follows: a. 31 large units (calculated at 8 days per unit) by one Audit Group c. 42 medium units (calculated at 6 days per unit) by one Audit Group and d. 62 small units (calculated at 4 days per unit) by one Audit Group The number of working days for audit are for the purpose of calculations and may vary as per the size of the assessee and the workload involved. The Commissioner can as per the jurisdictional requirement make calculations as per the local requirements and deploy officers accordingly. vi. The aforementioned number of Audits could be then multiplied by the number of Audit Groups earmarked for each category to arrive at the total number of Audits that can be conducted by each Audit Commissionerate during the year. vii. The manner of deployment of officers as mentioned above and calculation of number of units that can be audited during the year are illustrated below: a. Suppose the working strength of an Audit Commissionerates is 60 Superintendents and 80 Inspectors. The deployment of officers would be: 24 Superintendents and 32 Inspectors would be for large units, 15 Superintendents and 20 Inspectors for medium units and 9 Superintendents and 12 Inspectors for small units and 12 Superintendents and 16 Inspectors in Headquarters, as envisaged at (ii) above.To the extent possible, the manpower distribution amongst the Circles within an Audit Commissionerate should be proportional to the large, medium and small assessee/taxpayer base in the Circle. In other words, the 24 Superintendents and 32 Inspectors designated for large assessees/taxpayers would be divided amongst the Circles proportional to the number of large assessees/taxpayers under each circle. The deployment has to be done in similar manner for medium and small units. b. Using the manpower as above, there would be around 10 groups for large units, 12 groups for medium units and 6 groups for small units. The total number of units that could be audited in a year works out to around 310 large units, 504 medium units and 372 small units i.e. 1186 units in all.The Audit Commissioners may exercise necessary reallocation of officers to medium units, if the audit of large units is completed. Thus each Commissionerate can carry out the calculations based on the working strength. viii. The criteria for categorizing an assessee/taxpayer as large, medium or small would be (a) annual value of clearances and total duty paid in case of Central Excise and/or (b) value of services rendered and services received (which are dutiable on reverse charge basis) and total Service Tax paid in the case of Service Tax. The threshold limits of value of clearances / value of services for categorizing the units into large, medium and small would be dependent upon (i) the available manpower in the Audit Commissionerate and (ii) the assessee/taxpayer base, turnover and duty paid by each assessee/taxpayer in the jurisdiction of the Audit Commissionerate. It may be noted that threshold limits may vary from one Audit Commissionerate to another Audit Commissionerate in view of varying number of assessees/taxpayers and quantum of value of clearances / services and duty paid by each assessee/taxpayer. The Audit Commissionerates would obtain the requisite data from EDW / ACES / EASIEST for categorization of assessees/taxpayers into large / medium / small within their Commissionerate. The categorization would be done based on the methodology prescribed by the Directorate General of Audit. The methodology for categorization would be communicated to the Audit Commissionerates by Directorate General of Audit during the month of March / April every year. ix. The Audit Commissionerates shall consult Zonal units of Directorate General of Audit while finalizing the Annual plan of Audit coverage with the available manpower at the beginning of the financial year. The scheduling can be reviewed half yearly for necessary adjustments, if any. The Directorate General of Audit will also periodically review and revise, wherever necessary, the criteria for categorizing the units into large, medium and small within each Zone / Commissionerate, manpower deployment in each category, composition of Audit Group and number of days required for audit in each category. The review/revision would be done in consultation with the Audit Commissionerates so as to ensure that Audit coverage by officers is made optimal. x. Principal Chief Commissioner/Chief Commissioner may allow temporary reallocation / diversion of officers amongst the Audit Commissionerates to ensure adequate Audit coverage of all categories of assessees/taxpayers falling under the jurisdiction of the zone. 5.4 Integrated audits: 5.4.1 Wherever, the assessee/taxpayer is registered both under Central Excise and Service Tax, integrated audit of both Central Excise and Service Tax may be taken up.Currently, audit is undertaken for each tax separately even though the business and financial records verified during the audit are common for all the three taxes administered by the Board. In order to improve the efficiency of audit process, it has been decided that coordinated and integrated audit covering two or more taxes for assessees/taxpayers having common PAN shall be carried out. Necessary legal enablement has been provided in the notifications No 20/2014-ST and 21/2014-ST dated 16.09.2014, conferring territorial jurisdiction to the Commissionerates such that Service Tax Audit Commissionerates can audit Central Excise assessees/taxpayers within a zone and vice-versa. An assessee/taxpayer who is registered under Central Excise, Service Tax and Customs (OSPCA) need not be subjected to three separate audits. The information about various registrations being available, such assessees/taxpayers would be subjected to a comprehensive audit by the designated Audit Commissionerate. For this purpose the Principal Chief Commissioner / Chief Commissioner will assign the audit of such an assessee/taxpayer to a particular Audit Commissionerate, within the Zonal jurisdiction, based on payment of Central Excise duty or Service tax whichever is higher. Following the same principle, Customs OSPCA would be also be carried out by the designated Central Excise or Service Tax Audit Commissionerate, in an integrated manner. In case of ACP importers, comprehensive audit is required to be conducted only when the said assessee is also selected for audit, based on the risk evaluation method. 5.4.2 Co-ordination of audit ofan assessee and tax payer having multipleregistrationsin the same premises : There may be a special situation, where there are multiple registrations of an assessee / tax payer in the same premises , i.e., if a tax payer having a service tax registration falling in the jurisdiction of an exclusive service tax Commissionerate under a Service Tax CC Zone, is also having a Central Excise registration in the same premises, registered with a Central Excise Commissionerate of a different Central Excise CC Zone, both such registrants should be audited simultaneously, coordinated by the CC Zone, in whose jurisdiction, the highest duty/taxpaying assessee/taxpayer falls, irrespective of whether the assessee/taxpayer is covered under risk based selection or not ( by exchanging information from desk review to MCM). The auditors from both the PCC/CC Zones may be advised to be involved in the co-ordinated audit. 5.5 Audit of Multi Locational Units (MLUs)/ Multi Locational Service Providers (MLSP)/ACP importers (OSPCA): i. While preparing the Annual plan for audit coverage, instructions contained in Chapter 9 may be referred to. ii. Audit of ACP importers may be conducted as contemplated in the Manual on OSPCA.However, if such an ACP importer is selected for audit under the risk evaluation method in a particular year, a comprehensive audit of Central Excise, Service Tax and Customs OSPC Audit may be conducted. 5.6 Theme based coordinated audits 5.6.1 Theme based co-ordinated audits at all India level would be conducted by the concerned Audit Commissionerates in a coordinated manner. The theme would be selected by the Directorate General of Audit, based on a systematic and methodical risk analysis of internal data of assessee/taxpayer (from ACES and EDW), economic indicators, third party information from tax and other regulatory authorities and other relevant sources of data. The DGA would also consult trade, industry and manufacturers from time to time, wherever necessary. The theme would be intimated well in advance, say four to six months, to the field formations. Detailed questionnaires would be prepared to serve as guidance to the Audit parties. The dates for such audits would be fixed in advance, say, sometime in December every year, so that they can be blocked by the Commissionerates. The number of such audits will be one or at best two in a year. The selection of theme/issue, coordination and dissemination would be done by DGA in consultation with the field formations. 5.6.2 The theme based coordinated Audits would also be carried out at the Zonal level. The theme for the audit, which could be a sensitive commodity, would be selected at the zonal level and simultaneous and coordinated audit would be carried out within the zone. The number of such audits will again be one or two in a year. The theme for the Audit would be selected based on analysis of data provided by ACES, EDW and relevant third party information identified from time to time. The Principal Chief Commissioner/Chief Commissioner may involve the zonal units of Directorate General of Audit in selection of theme, planning and execution of theme based Audit. 5.7 Selection and Audit of LTUs In case of LTUs, 80% of the manpower may be used for conducting audits and 20% of the manpower may be used for headquarters functions. The audit group would comprise 2-4 Superintendents and 3-6 Inspectors. The indicative duration for conduct of audit that is inclusive of desk review, preparation and approval of Audit plan, actual audit and preparation of audit report is 8 to 10 working days. Based on the recommended duration, the number of units that could be audited in a year would be 25 LTUs (calculated at 10 days per Audit) by one audit group. The audit groups from LTU Audit Commissionerate s Circles would necessarily conduct the audit of LTUs and wherever additional manpower assistance is required the same can be sought from other LTUs or the jurisdictional Central Excise/Service Tax Audit Commissionerate. Further, audit of the LTU should be conducted in a coordinated manner i.e., the audit of Head Office and group units should be conducted simultaneously. To enable this, the audit dates should be decided in consultation with the LTU. The total number of assessees/taxpayers to be audited and selection of individual assessees/taxpayers for audit would be done as per the risk evaluation method recommended by the Directorate General of Audit. 5.8 Accredited status for deferring frequency of audit A segment of assessees/taxpayers, could be given an accredited status, similar to the one given in Customs, based on their proven track record of compliance with tax laws and procedures. Such identified assessees/taxpayers need not be subjected to Audit in every cycle. It has been decided that such units should normally be audited only after 3 years from the date of last audit. The procedure and criteria for accreditation would be communicated separately.