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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 ..... r 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 to be strengthened, which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntify 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 short paid by the 398 registered service providers on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation 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 assessees Amt. No. of assessees Amt. No. of. assessees Amt No. of assessees Amt No. of assessees Amt 70 1593 10.04 2570 16.53 5658 22.78 10522 47.17 11672 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Table No. 6 Percentage growth(+) or (-) over previous year No. of Commissiorterates 2004-05 2005-06 No. of assessees Amt. No. of assessees Amt. 70 (+)60.62 (+)95.02 (-)2.91 (+)64.12 Audit observed that :- * During the year 2005-06, while the revenue from this service grew by 64.12 per cent over the previous year (2004-05), the corresponding tax base declined by 2.91 per cent. * In Lucknow commissionerate, revenue collection declined sharply by 76.25 per cent during the year 2005-06 over the year 2004-05, though the number of service providers had increased significantly by 73.20 per cent during this period. * In Ghaziabad commissionerate, the revenue collection fell by 50.40 per cent during the year 2005-06 over the previous year 2004-05though the assessee base remained the same. Reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate, in the absence of which the performance of the commissionerates could not be evaluated. * The number of surveys conducted during the year 2005-06 came down significantly from those conducted during 2004-05. * There was a continued and significant decline in achievement in terms of number of persons registered and additional revenue generated, as a result of surveys, during the years 2004-05 and 2005- 06, which is indicative of the fact that the surveys had been largely unfruitful. Recommendation * The Board should establish 'Key Performance Indicators (KPIs) 'for a commissionerate which should include minimum number of surveys to be conducted to identify/register assessees and garner additional revenue. Responding to the recommendation, the Ministry informed (December 2007) that the Board prescribes KPIs like revenue collection, recovery of arrears, disposal of pending adjudication, provisional assessment, refunds and performance in audit and anti-evasion work, etc. In relation to the KPI pertaining to 'number of surveys', it further stated that the jurisdictional commissioner, instead of the Board, would be in the best position to decide the optimal number of surveys ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , with a further interest liability of rupees ten crore upto 2005-06. The details are mentioned in the following table Table No. 8 (Amounts in crore of rupees) Name of the Service No. of commissionerates No. of service providers Amount of service Tax leviable but not levied Interest Payable Penalty CAB 26 831 7.65 2.94 7.65 PGH 12 182 20.67 5.66 20.67 HFC 26 27 5.72 1.40 5.72 Grand Total 1040 34.04 10.00 34.04 It is interesting to note that :- * The evasion of service tax under PGH identified by audit was more than half of the total revenue collections from this service (70 commissionerates) during the year 2005-06. * The amount of service tax evaded by the unregistered service providers in HFC was almost one fifth of the total revenue from the service during the year 2005-06 (70 commissionerates). Some illustrative cases are mentioned in the succeeding paragraphs (i) Scrutiny of income tax returns of M/s. Trans Specific Travels Pvt. Ltd., in Bangalore (ST) commissionerate, revealed that it had realised Rs. 5.46 crore for rendering 'rent-a-cab scheme operator services' during the period April 2002 to March 2003. The assessee, however, did not reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on this account would be much higher, if the payment made by the remaining chief electoral officers to the service providers is taken into account. (v) In the context of health club and fitness centre services, the CBEC in their circular dated 1 August 2002 clarified that 'therapeutic massage' would mean a massage performed by qualified professionals under medical supervision for curing diseases such as arthritis, chronic low back pain and sciatica, etc. Ayurvedic massage, acupressure therapy, etc. given by qualified professionals under medical supervision for curing diseases/disorders would come under the category of therapeutic massages. It was also clarified that if a massage is without any medical supervision or advice but for the general well being of a person, it would not come under the purview of 'therapeutic massage' and would be liable to service tax. In Kerala, many hotels and resorts have opened ayurvedic centres offering packages for rejuvenation of body (body massage, steam bath, dhara, etc.). From the literature of eight such ayurvedic health resorts/centres, in Calicut, Trivandrum and Cochin commissionerates, it was observed that these resorts were offering packa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted to estimate the quantum of evasion of service tax in respect of 7,354 out of 8,394 number of identified unregistered service providers by applying the parameter of average revenue yield from registered assessees from same services. This indicated evasion of an estimated service tax of Rs. 27.91 crore by these unregistered service providers during the year 2005-06 alone. Penalty of Rs. 27.91 crore is also leviable. The details are mentioned in the following table Table No. 9 (Amounts in crore of rupees) Name of Service No. of Commissionerates No. of other unregistered service providers Identified by audit No. of Registered service providers Total revenue Revenue yield per service provide Estimate of revenue loss Penalty CAB 25 5235 11622 48.72 0.0042 21.99 21.99 PGH 1591 33786 40.98 0.0012 1.91 1.91 HFC 528 3900 29.66 0.0076 4.01 4.01 Total 7354 27.91 27.91 The projections have been made on the basis of the details of registered service providers furnished by 70 commissionerates. Recommendations * The procedure for conducting surveys needs to be streamlined and strengthened in the commissionerates to collect information about potential ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y not levied CAB 44 29484 19038 17498 1540 10446 2.27 106.28 PGH 69926 38026 33795 4231 31900 3.34 348.51 HFC 9102 6623 6021 602 2479 0.38 28.21 Total 108512 63687 57314 6373 44825 5.99 483.00 Figures furnished by commissionerates Audit observed that * Action for levy of penalty of Rs. 4.83 crore on defaulting assessees was not taken. * Forty one per cent of the returns due were not received in respect of these three services. * Ten per cent of the returns received, were late. * All the photography and health club and fitness centre service providers, in Dera Bassi division of Chandigarh commissionerate, stopped filing returns after introduction of threshold exemption limit of rupees four lakh. The department did not take any action to ascertain/verify whether these service providers were eligible for exemption. 3.6.3.1 No mechanism to detect and take proactive action for 'stop filers', leading to evasion Audit assessed the number of service providers not filing returns as significantly high for want of proper watch by department over the submission of returns and inaction by department by way of imposition of penalty in cases of default. Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts, Kottayam, in Cochin commissionerate, engaged in health club and fitness centre services had not furnished returns during the period 2003-04 and 2004-05. But from the records of the Tourism department of the Government of Kerala, it was observed that the assessee had rendered service during the above period for a value of Rs. 1.22 crore. This resulted in evasion of service tax of Rs. 10.45 lakh, in addition to interest liability of Rs. 3.25 lakh and penalty of Rs. 10.45 lakh. Recommendation * The department needs to devise an appropriate and effective mechanism to detect in time 'stop-filers' of returns and collect the Government revenue wherever due, by effective monitoring of the receipt of returns from registered service providers. The Ministry agreed with the recommendation and stated (December 2007) that an appropriate and effective mechanism to identify the 'stop filers' in an automated environment will be implemented through the ACES (automation of Central Excise and Service Tax) project. 3.6.4 Taxable value suppressed The power vested in superintendent of central excise to call for any records from the assessee for verification was withdrawn, when section 71 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 38.52 lakh. (ii) Cross verification of ST-3 returns with the records of M/s. Oil and Natural Gas Corporation revealed that 15 rent-a-cab service providers, in Visathapatnam-I and Visathapatnam-II commissionerates, had realised Rs. 5.56 crore during the period from 2002-03 to 2004-05 on which service tax to the extent of Rs. 43.39 lakh was not paid. Interest of Rs. 15.59 lakh was also liable to be paid besides the penalty of Rs. 43.39 lakh. On the mistake being pointed out (September 2006) in audit, the department in the case of M/s. Raja Taxi Service, in Visathapatnam-I commissionerate, issued (December 2006) a show cause notice for Rs. 19.42 lakh. (iii) Cross verification of returns filed by M/s. R.K. Foto Plaza and Studio, in Tirupathi commissionerate, with commercial tax department revealed undervaluation of photography services by the assessee in its ST-3 return to the extent of Rs. 3.03 crore during the period 1 April 2003 to 23 September 2006. This resulted in short payment of service tax to the extent of Rs. 38.74 lath. Additionally, interest of Rs. 8.62 lakh and penalty of Rs. 38.74 lakh were also leviable. (iv) Cross verification of income tax returns of M/s. Goyal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues. The verification/scrutiny broadly would consist of checking on the basis of : (i) the information contained in the ST-3 returns; and (ii) scrutiny of other supporting records such as commercial records, income tax returns, etc. of the assessee for ascertaining the correctness of the tax paid. Prior to 10 September 2004, section 71 of the Finance Act, 1994, provided for the verification of the correctness of the tax assessed by the assessee, on the basis of information contained in the returns filed by the assessee. This section also empowered the superintendent of central excise to call for any accounts, documents or other evidence in connection with such verification, though this power was sparingly exercised by range offices. After withdrawal of section 71 above (with effect from 10 September 2004), no departmental instructions were issued for verification/scrutiny of returns till 8 February 2007. The Board issued instructions on 8 February 2007 for scrutiny of ST-3 returns filed by large service tax payers on a selective basis. The verification with reference to the information available in ST-3 returns has assumed greater significance because of the following factors (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t I commissionerate, engaged in photography service had claimed exemption on value of goods and material which was actually consumed by them and not sold to the recipient of the service. This resulted in incorrect availing of exemption from payment of service tax to the extent of Rs. 1.11 crore. Interest of Rs. 7.58 lakh and penalty of Rs. 1.11 crore was also leviable. 3.7.1.2 Incorrect availing of exemption by rent-a-cab scheme operators Notification dated 1 March 2006 allows exemption on taxable service provided by a rent-a-cab scheme operator from so much of the service tax leviable, as is in excess of the service tax calculated on a value which is equivalent to 40 per cent of the gross amount, provided that no Cenvat credit of duty on inputs or capital goods or the cenvat credit of service tax on input services was taken. Scrutiny of ST-3 returns in audit indicated that 49 assessees, in eight commissionerates, had availed the benefit of this abatement as well as cenvat credit on inputs/capital goods/input services. This resulted in short payment of service tax to the extent of Rs. 3.61 crore. Interest of Rs. 46.89 lakh was also leviable in these cases besides penalty of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissionerates, revealed that though the assessees were utilising cenvat credit on inputs/input services for providing taxable as well as non-taxable services, they had not maintained separate accounts of inputs. The assessees, however, utilised cenvat credit exceeding 20 per cent of their tax liability towards taxable output service. This resulted in short payment of service tax to the extent of Rs. 1.76 crore (Rs. 98.18 lakh in respect of rent-a-cab scheme operator service and Rs. 77.62 lakh in respect of photography service), which is required to be paid in cash. The assessees were also liable to pay interest of Rs. 9.33 lakh. 3.7.1.5 Irregular availing of cenvat credit on basic customs duty. 3.7.1.5 Irregular availing of cenvat credit on the basic customs duty. Rule 3 of the Cenvat Credit Rules, 2004, provides that any output service provider shall be allowed to take credit of excise duty/service tax paid on any inputs, capital goods or any input service received in his premises. The basic customs duty paid on inputs is, however, not eligible for credit under the above rules. A scrutiny of ST-3 returns of M/s. Fitness One India Ltd. (health club and fitness centre services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 per cent of the Cenvat credit can be taken in respect of capital goods received in the premises of the provider of output service at any point of time in a given financial year and the balance 50 per cent in the subsequent financial year. Eight assessees providing photography service in Chennai, Trivandrum, Jalandhar, Calicut and l3hubaneshwar commissionerates, availed of, in the same year, Cenvat credit of Rs. 44.24 lakh during the period 2004-05 on capital goods. The credit so availed of was 100 per cent of the duty paid on those capital goods as against the permissible 50 per cent. This resulted in excess use of Cenvat credit of Rs. 22.12 lakh, which needs to be recovered. (ii) Rule 3(1) of the Cenvat Credit Rules, 2004 provides that a provider of taxable service shall be allowed to take Cenvat credit on the duty of excise paid on any input received in the premises of provider of output service on or after 10th day of September 2004. Further, rule 9(1) of the Cenvat Credit Rules, 2004 provides that Cenvat credit can be taken by the provider of output service on the basis of an invoice issued by first stage dealer or second stage dealer. M/s. PR Combines, in Calicut commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted even after a lapse of more than five years. * In Tirupathi commissionerate, 98 per cent of assessees in respect of photography services were not allotted service tax code numbers. * Information furnished by Nagpur commissionerate revealed that no service provider in these services was allotted service tax code number. * In Hyderabad I and Patna commissionerates, no service provider was allotted service tax code number in HFC service. * In Panchkula commissionerate, no service provider was allotted service tax code number in CAB service. Recommendation * Correlation of income tax data and service tax data is a key factor for correct evaluation of service tax liability. Allotment of PAN based STC numbers is a step in right direction. However, this aspect of implementation of this scheme has been slow and non-exhaustive, which needs to be corrected. The Ministry noted (December 2007) the above recommendation 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that only registered assessees provide services and pay applicable tax. This would mitigate the risk of evasion of tax by service providers to the Government sector, who may have the penchant of not registering voluntarily. * The department needs to devise an appropriate and effective mechanism to detect in time 'stop-filers' of returns and collect the Government revenue wherever due, by effective monitoring of the receipt of returns from registered service providers. * 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 selection of cases for detailed scrutiny may be made on a scientific basis after appropriate risk analysis and sample size determination. The detailed scrutiny should entail correlation with other available records/returns like IT, commercial records etc. * The department should investigate all cases identified by audit where suppression of taxable value was done wilfully and take appropriate action. * Correlation of income tax data and service tax da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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