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TMI BlogComptroller and Auditor General of India's Report on Indirect Taxes -Service Tax Performance Audit -2006-2007 (Extracts)X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Consequently, a large number of active unregistered service providers were escaping from the service tax net and audit could identify 8,394 of these, with actual loss of service tax of Rs. 34.04 crore and further an estimated service tax leakage of Rs. 27.91 crore. (This is approximately 37 per cent of the total revenue collected from these services). There was a need for the Board to establish KPIs for a commissionerate which should include minimum number of surveys to be conducted to identify/register assessees and garner additional revenue. Further, the procedure for conducting survey needs to be streamlined to collect information about potential assessees from various sources including from income tax department. In all the cases identified by audit, of service providers who had escaped the tax net by not registering and not paying the applicable service tax, the department should do a detailed scrutiny/investigation of the service tax evaded by these service providers and take appropriate action. Additionally, inter-governmental and inter-departmental coordination and control mechanism to ensure that only registered assessees provide services and pay applicable tax, needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Survey is a key activity which helps to identify potential assessesand thereby augment Government revenues. However, performance indicators for this activity had not been prescribed. (Paragraph 3.6.2) * Measures undertaken by the department to bring unregistered service providers into tax net were ineffective and inadequate. Audit identified 8,394 unregistered service providers in these three services. While actual loss of revenue from 1,040 of these service providers was Rs. 78.08 crore, the estimate of the revenue loss from the remaining 7,354 unregistered service providers was Rs. 55.82 crore. (Paragraphs 3.6.2.2 and 3.6.2.3) Approximately 41 per cent of returns due were not submitted by the registered service providers in these three services, for which no action was initiated by department. Service tax of Rs. 14.36 crore was evaded by 414 registered service providers during the period when they did not file returns. Interest of Rs. 255 crore was also leviable, besides penalty of Rs. 14.36 crore. (Paragraphs 3.6.3 and 3.6.3.1) * Verification of returns was ineffective and policy for scrutiny of these returns ambiguous as service tax of Rs. 15.26 crore was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts Department acknowledges the cooperation extended by the Ministry of Finance in providing the necessary information and records for audit. The draft review was forwarded to the Ministry in November 2007 and an exit conference was conducted with the Ministry officials in November 2007. All the eleven recommendations given by audit in this review were agreed (December 2007) to by the Ministry. The written responses of the Ministry to these recommendations have been incorporated appropriately. AUDIT FINDINGS AND RECOMMENDATIONS 3.6 System issues 3.6.1 Trend of revenue Total service tax collected during the year 2005-06 was Rs. 23,053 crore. The three services viz. CAB, PGH and HFC contributed Rs. 68.39 crore, Rs. 58.37 crore and Rs. 39.51 crore during 2005-06, which constituted 0.30, 0.25 and 0.17 per cent respectively of the total revenue collection from all the services during the year 2005-06. Table Nos. 1 to 6 indicate the trends of revenue in respect of 70 commissionerates 3.6.1.1 CAB Table No. 1 (Amounts in crore of rupees) No of Commissionerates 2001-02 2002-03 2003-04 2004-05 2005-06 No. of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. In Mumbai ST and Ahmedabad III commissionerates, there was a decline of 17.70 per cent and 54.92 per cent of revenue during the year 2005-06 over the year 2004-05, though the number of service providers had increased significantly by 14.21 per cent and 43.46 per cent respectively during this period. * In Nasik commissionerate there was a significant fall in the revenue collection by 37.67 per cent during the year 2005-06 over the previous year 2004-05 though the assessee base remained the same. * In Cochin, Trivandrum and Pondicherry commissionerates, there was decline of 76, 81.75 and 73.20 per cent respectively in the assessee base during the year 2005-06 over the previous year 2004-05. The revenue in these commissionerates had also declined by 35, 28 and 76.25 per cent respectively. 3.6.1.3 HFC Table No. 5 (Amounts in crore of rupees) No. of commissionerates 2003-04 2004-05 2005-06 No. of assessees Amt. No. of assessees Amt. No. of assessees Amt. 70 2501 9.27 4017 18.07 3900 29.66 Figures furnished by commissionerates. Tab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawn by the Director General of Service Tax, (DGST) and circulated to chief commissioners on 26 May 2003, the department was required to collect intelligence, conduct surveys and to identify unregistered service providers and get these registered. Further, instructions to field formations to carry out 'street to street surveys' to identify tax evaders were issued in August 2004. Status of surveys undertaken by commissionerates during the year 2003- 04 to 2005-06 and its impact on revenue is given in the following table Table No. 7 (Amounts in crore of rupees) Year No. of Commissionerates No. of Surveys No. of new registrations for all services based on surveys Total additional Revenue realised 2003-04 35 2382 10194 3.42 2004-05 41 3217 7526 2.50 2005-06 58 1153 349 0.97 Figures furnished by corninissionerates Audit observed that :- * No target of surveys was fixed for any commissionerate, in the absence of which the performance of the commissionerates could not be evaluated. * The number of surveys conducted during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest and penalty) revenue due to these unregistered service providers could, be to the order of magnitude of Rs. 61.95 crore, as pointed out in the succeeding paragraphs. This represents 37 per cent of the total service tax collections from the three services during the year 2005-06. Additionally, penalty of Rs. 61.95 crore and interest of rupees ten crore would also be leviable in these cases. 3.6.2.2 Actual loss of service tax due to unregistered service providers identified by audit In order to identify unregistered service providers, the income tax records and other connected secondary records, wherever possible, were cross verified. Audit was able to verify income tax records and other related records (such as annual financial statements, departmental/public sector undertaking contracts records, etc.) of 1,040 service providers out of 8,394 such identified unregistered services providers. The service tax evaded by them was to the extent of Rs. 34.04 crore. Additionally, penalty of Rs. 34.04 crore was also payable under section 76 of the Finance Act, 1994, with a further interest liability of rupees ten crore upto 2005-06. The details are mentioned in the following tabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Trends Add Film Makers Pvt. Ltd., in Bangalore (ST) commissionerate, revealed that the assessee had realised Rs. 10.76 crore during the period from April 2003 to March 2005 on account of photography services. But it did not register itself for service tax nor did it pay service tax of Rs. 92.67 lakh. The assessee was also liable to pay interest of Rs. 29.32 lakh besides penalty of Rs. 92.67 lakh. (iv) The chief electoral officers of the states/union territories engaged various agencies for preparation and issue of electoral photo identity cards (EPICs) to the voters. The EPICs were prepared using digital photography by close circuit devices (CCD) or digital cameras alongwith data management, printing and lamination at developing and processing laboratory (DPL). All these services were in the nature of 'photography services'. The records of only 16 out of 35 chief electoral officers of the states/union territories indicated that an amount of Rs. 79.03 crore was paid to 101 such agencies for preparation of EPICs, These agencies, however, had not registered themselves with the department and had not paid estimated service tax of Rs. 6.36 crore. Penalty of Rs. 636 crore and inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices being rendered by the service providers of HFC including therapeutic massage on an all India basis and recover the applicable service tax. * The department should also review the exemption granted to therapeutic massage in view of the widespread misuse pointed out by audit. Agreeing to the first recommendation, the Ministry informed (December 2007) that the nature of services is verified through (i) surveys, (ii) audit and (iii) enforcement measures, deploying available resources hi an optimal manner. The Ministry noted (December 2007) the second recommendation above for further necessary action. (vi) Scrutiny of income tax returns of M/s. India Realistic Health Centre, Bangalore commissionerate revealed that the service provider had realised Rs. 4.34 crore from their customers on account of health and fitness centre services during the period 2002-03 to 2004-05. The service provider, however, did not register itself with the department thereby evading service tax to the extent of Rs. 38.11 lakh. The service provider also liable to pay interest of Rs. 13.16 lakh and penalty of Rs. 38.11 lakh. 3.6.2.3 Estimated loss of service tax in respect of other unregistered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to the Government sector, who may have the penchant of not registering voluntarily. Accepting the recommendations above, the Ministry stated (December 2007) that it is continuously striving to make the surveys more scientific and professional including collection of information from third party sources. 3.6.3 Ineffective monitoring of service tax returns Section 70 of the Finance Act, 1994, read with rules 7(1) and (2) of Service Tax Rules, 1994, provides that every person liable to pay service tax should itself assess the tax, furnish half yearly return in form ST-3 or ST-3A by the 25th of the month following the half year. Under the amended section 77 of the said Finance Act, a person failing to furnish the returns in due time was liable to a penalty subject to a maximum of one thousand rupees. This return is one of the critical tools with the department for effective administration of service tax and to combat evasion of service tax by registered service providers. It is, therefore, important for the department to watch and ensure that the returns are regularly submitted by all active registered service providers. The position of submission of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot take any action for non-submission of returns by these defaulters. Nor did it verify whether the defaulters were actively engaged in providing services during the period of default. This resulted in evasion of service tax to the extent of Rs. 14.36 crore. Interest of Rs. 2.55 crore and penalty of Rs. 14.36 crore was also leviable, as shown in the following table Table No. 11 (Amounts in crore of rupees) Name of the Service No. of commissionerates No. of service providers Service Tax payable Interest payable Penalty payable CAB 9 226 6.10 1.96 6.10 PGH 20 168 1.83 0.51 1.83 HFC 8 20 6.43 0.08 6.43 Total 414 14.36 2.55 14.36 Some illustrative cases are mentioned in the succeeding paragraphs (i) M/s. S.V. Large Format Digital Imaging Pvt. Ltd., in Hyderabad II commissionerate, engaged in providing photography service had not filed any ST-3 returns during the period from 2002-03 to 2004-05. Verification of its income tax returns, however, revealed that it continued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service providers as a deterrent has been put in place, the risk of suppression of assessable value in ST-3 returns to evade payment of service tax, remains un-mitigated. Attempt was, therefore, made by audit to ascertain the extent of correctness of tax paid by assessees by cross verification of ST-3 returns with income tax returns and other related records of a few assessees. Audit noticed deliberate attempts by assessees to suppress the value of services and consequently evade service tax, in a few cases. The service tax evaded by 398 assessees by suppression of their assessable value was Rs. 15.26 crore during the period from 2000-01 to 2004-05. Additionally, interest of Rs. 5.45 crore and penalty of Rs. 15.26 crore was also leviable in these cases, as has been mentioned in the following table Table No. 12 (Amounts in crore of rupees) Name of the Service No. of commissionerates No. of assessees Service Tax payable Interest Penalty CAB 28 181 8.25 3.16 8.25 PGH 30 173 6.64 2.17 6 HFC 20 44 0.37 0.12 0.37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re during the period 2003-04 and 2005-06 in ST-3 returns. During the year 2003-04, the assessee did not pay any service tax, although the gross receipt as per his income tax return during that period was Rs. 6.72 crore. This resulted in short payment of service tax amounting to Rs. 1.96 crore. Additionally, interest of Rs. 51.10 lakh and penalty of Rs. 1.96 crore were also leviable. (v) Scrutiny of IT records of M Ovira Logistics Fvt. Ltd., in Mumbai- II commissionerate, revealed that the assessee had shown receipt of Rs. 16.44 crore on account of rent-a-cab scheme operators' services during the period 2000- 01. But in ST-3 returns, gross receipt was shown only as Rs. 5.58 crore. This resulted in undervaluation of the taxable amount and short payment of service tax of Rs. 54.31 lakh during the year 2000-01. Additionally, interest of Rs. 31.77 lakh and penalty of Rs. 54.31 lakh were also leviable. Recommendations * To address the root cause of the irregularities pointed out through paragraph 3.6.4 of this report, the Board may consider putting in place a mechanism for checking/verification of returns on regular basis. This checking may be reinforced by detailed scrutiny. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied percentage of gross value) to certain services; (iii) the introduction of Cenvat Credit Rules, 2004 with effect from 10 September 2004, allowing cenvat credit of excise duty paid on inputs or capital goods or cenvat credit on input service (an overall cenvat credit of Rs. 3,502.64 crore was utilised during the year 2005-06 while paying service tax) and (iv) grant of exemption of service tax on export of service. The succeeding paragraphs of this audit review report on the three selected services bring out that scrutiny of the returns has not been effective. The status of verification/checking of ST-3 returns furnished by 21 such commissionerates for the period for 2005-06 is given in the following table :- Table No. 13 Name of the service No. of commissionerate No. of returns received No. of returns verified Pending verification CAB 21 4189 3540 649 PGH 6521 6214 307 HFC 1743 1520 223 Total 12453 11274 1179 Figures furnished by cominissionerates Audit attempted to check some of the ST-3 returns including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es penalty of Rs. 3.61 crore. A case is illustrated in the following paragraph :- M/s. Ovira logistic India Pvt. Ltd., in Mumbai III commissionerate, engaged in photography service simultaneously availed of Cenvat credit and exemption upto 60 per cent on the value of services, while discharging service tax liability for the month of March 2006. This resulted in short payment of service tax to the extent of Rs. 17.24 lakh besides short levy of interest and penalty. On the mistake being pointed out in audit (March 2007), the department issued (April 2007) a show cause notice to the assessee. 3.7.1.3 Irregular benefit under Export of Service Rules, 2005 Under rule 3(2) of the Export of Service Rules, 2005, any taxable service shall be treated as export of service, which is exempt from the levy of service tax, when the following conditions are satisfied, namely :- (i) such service is delivered outside India and used outside India; and (ii) payment for such service provided is received by the service provider in convertible foreign exchange. M/s. Super Shuttle, M/s. Orix Auto and Business Solutions and M/s. Ovira Logistics engaged in rent-a-cab scheme operators servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd. (health club and fitness centre services) and M/s. One Touch Micro Computerised Colour Lab (photography service), in Bangalore and Patna commissionerates, revealed that these service providers had availed of credit on basic customs duty to the extent of Rs. 8.09 lakh and Rs. 3.21 lakh respectively. This was incorrect. On this being pointed out in audit (April 2007), the department intimated the reversal of credit of Rs. 3.21 lath in the case of M/s. One Touch Micro Computerised Colour Lab. 3.7.1.6 Non-levy of interest and penalty Section 75 of the Finance Act, 1994, stipulates that if a person fails to credit the tax due or any part thereof within prescribed period, it shall have to pay simple interest at prevalent rate. Section 76 of the Finance Act, provides for levy of penalty due for failure to pay service tax. Scrutiny of ST-3 returns of 312 assessees (CAB-155, PGH-127 and HFC30), in Mumbai and Meerut commissionerates, revealed that these assessees did not pay the applicable interest and penalty due to delayed payment of tax to the extent of Rs. 16.19 lakh. 3.7.1.7 Other cases Short levy of service tax of Rs. 3.08 lakh in seven other cases was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice issued by first stage dealer or second stage dealer. M/s. PR Combines, in Calicut commissionerate, is a registered dealer dealing with the inputs which are used for photography services. A scrutiny of the return filed by the dealer lii the Calicut commissionerate revealed that it had a cenvat credit of Rs. 10.35 lakh in its account as on 30 September 2006 for distribution by sale of inputs relating to photography service providers. A cross reference with the returns filed by the seven photography service providers in the same commissionerate who had purchased inputs from this dealer revealed that the dealer had distributed Rs. 21.68 lakh to these service providers as against Rs. 10.35 lakh available in its account for distribution. This resulted in excess utilisation of cenvat credit by seven output service providers to the extent of Rs. 11.33 lakh and consequential loss of service tax to the Government. (iii) Twenty six other cases involving irregular availing of Cenvat credit on inputs/capital goods in these services to the extent of Rs. 17.39 lakh were also noticed in audit. 3.7.4 Service tax code (STC) number based on permanent account number (PAN) not allotted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for further necessary action. 3.8 Conclusions Audit review has revealed certain risk areas owing to weaknesses in the systems as well as other compliance issues. The irregularities discussed in the report can easily go undetected due to ineffective internal control mechanism relating to (i) correspondence functionality (relationship) between the assessee base and revenue, (ii) surveys and registration, (iii) scrutiny of returns, (iv) detection of non-filers and stop-filers, (v) detection of evasion/suppression of taxable value, (vi) certain other compliance issues like Cenvat and ineffective internal audit (as none of the these irregularities pointed out by the external audit were detected by internal audit). The Government, therefore, needs to take appropriate steps in respect of the existing internal control mechanism in order to ensure that the Government dues are realised efficiently and revenue evasion are dealt with effectively. 3.9 Summary of recommendations * The Government needs to continually monitor the data on assessee base and revenues collected and investigate the reasons for decline in revenue from a particular service despite increase in the registe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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