8/26/2010

ISSUES ON VAT AUDIT –KARNATAKA AND RECENT AMENDMENTS MADE.

CA. Sanjay M Dhariwal

KVAT AUDIT
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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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8/26/2010

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
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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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8/26/2010 CERTIFICATE.CLAUSE 2) The total turnover of sales declared in the returns includes all the sales affected during the year.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. 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 3 .

Reasons for adjustment like Adjustment of taxes or credits. Accounting of all purchase invoices All kinds of purchases like local purchases(RD/URD). interstate purchases. - 4 .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. Cancellation of invoices. import.8/26/2010 CERTIFICATE. etc Variances of returns with books of Accounts CERTIFICATE. - Reconciliation adjustments like difference between contract receipts and total turnover Entries thorough debit /credit notes or journal entries.CLAUSE 3) - The total turnover of purchases declared in the returns includes all the purchases made during the year.

Commissioner Clarifications. - Conformity of deductions as per Rule 3(2) of KVAT Rules Evidence/Documentations for deductions Sales return. Exempted sale deductions. rate of tax applicable and computation of output tax and net tax payable as shown in the return is correct. Circulars - Computation of output tax and net tax payable as per KVAT law 5 .registered sub contractor Actual labour.Time span with support of Credit notes.8/26/2010 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. Central Excise Tariff. KVAT Schedules.Sale of exempted goods Sub contractor deductions. Notifications. Debit notes.Labour bills CERTIFICATE CLAUSE 6) - The classification of goods sold.

Notifications. usage. Commissioner Clarifications. 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. Registration certificates. CERTIFICATE CLAUSE 8) The utilization of statutory forms under the KVAT Act. Circulars - Purchases invoices and taxes paid on purchases Whether goods are purchased are eligible or ineligible for claim of input tax paid. 2003 and the CST Act.8/26/2010 CERTIFICATE CLAUSE 7) The classification of goods purchased. etc Co-relation of Acknowledged statutory forms with consolidated report (Electronically)– difficult - Valid purpose……? 6 . Central Excise Tariff. 1956 is for valid purposes. - Obtained statutory forms from department Statutory forms with the Invoices.

Ineligible input tax credit. etc CERTIFICATE  Summarize the additional tax liability or additional refund due to the dealer in his report.8/26/2010 CERTIFICATE CLAUSE 9) Other information given in the returns is correct and complete. Eligible input tax credit. - Verification of Entry tax Any adjustment of input tax credit against entry tax information other than the above clauses like excess tax collected. CST payable and other items. carry forward of credit. 7 .  The Summary sheet should disclose the difference between the monthly returns and the audited figure pertaining to output tax payable.

.???? Tax payment along with VAT 240-???? PART 1 CLAUSE 12    Whether registered under the KTEG Act.Opening and closing Revision of Returns along with VAT 240. 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. Bank book. General Ledger. 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??????? 8 . Purchase Register.8/26/2010 CERTIFICATE       Advice the dealer to file the revised return. Sales Register.6 months Tax liability with interest and penaltyRefund Input tax credit carry forward.

 Sales return beyond six months generally considered as sales and offered to tax. taxable turnover.  Stock transfer of capital goods ?  Advances received prior to commencement of the work in case of works contractor.8/26/2010 PART 2 .CLAUSE 1  Total and Taxable turnover  Refer Rule 3 for the purpose of both total and 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 9 .  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. 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.Not to be considered.

Imports .comments CLAUSE 5      Details of input tax paid on purchases  One needs to provide – description of goods. 10 . E-1 purchases and other interstate purchases in the monthly return. rate of tax and tax payable  All purchase which is covered within the definition of input needs to be disclosed.8/26/2010 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. 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. Input tax credit based on date of invoice or Accounting of Invoice in the books of Accounts. taxable turnover.

E-1 sales. 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.8/26/2010 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. Whether Unregistered purchase tax is to be paid on consumables. EOU.  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). Form I Sales 11 .

8/26/2010 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 12 .

8/26/2010 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 13 .

stock turnover ratios.change for 2009-2010 or 20102011 Details of inspection of the business premises / books of account of the dealer by departmental authorities on inspection / visit  Statement/ Notices from the departments. gross profit ratio.8/26/2010 CLAUSE 14 & 15   Details of returns filed along with revised return. Cost of goods sold ratio  The details of the transactions within the state and outside the state should be suitably computed and declared separately. 14 .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. It has to be declared separately in the profit and loss Account and the Balance sheet.

difficult to evaluate 15 . if any  Closing Balance. within/outside the state and or Agent/ principal.electronically filed Details of any misuse of forms.  Opening Stock  Forms obtained during the year from CTD  Forms utilized during the year  Loss.Compliance like industrial canteens. Government works contract and notified goods for that year.8/26/2010 PART 3 – CLAUSE 1. 2003 / CST Act.section 18-A struck down CLAUSE 4 & 5   Stock of declarations / certificates / delivery notes under the KVAT Act. within/outside the state Details of tax deducted at source from the amounts payable to the dealer  VAT 156 / 158 / 159  TDS deductions. 2 & 3   Details of sales / purchase as commission agent  Principal and Agent transactions where principal/Agent.

Form F E-I forms.deduction only on payment basis • Whether sub contractor are registered or not 16 .8/26/2010 CLAUSE 4 & 5…….        Compliance of Statutory forms: TDS certificates. 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 . E-II forms. Form –H. C form.

agreements. etc  Verification of relevant documentations  Verification of correspondence with departments if any  Discussion with the dealer on any relevant compliance. • 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. Monthly returns. Invoices. Rules. details of Statutory forms. Financial statements. Notifications. Circular.Legal or procedural 17 .8/26/2010 • 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. Clarifications applicable  Documentations required from the dealer like Registration certificates.

8/26/2010 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) 3) 4) 5) 6) 7) Total Turnover/Taxable Turnover Sale of fixed Asset/ Restricted capital goods Cost/ ineligible tax credit Non sale transactions (Goods on approval. sample. interstate with rate of tax in Trading account for KVAT Audit 18 . gifts) Payment of penalty/interest Disallowed labour and like charges OTHER ISSUES 8) 9) 10) 11) 12) 13) Closing work in progress Composition/Regular scheme TDS for works contractor. Stock transfer.IT/ VAT Adjustment as prior period items/post period items No provision of revision of IT Audit Report and VAT Audit Report Detailed classification of goods for sales and purchases which may be local.

When Input tax credit is adjusted against the entry tax payable.observations by the Auditor PROCEDURAL AMENDMENTS. 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. Gutkha.8/26/2010 OTHER ISSUES       Reliance on Books of Accounts maintained electronically. Hard copies should be obtained (consolidated) from the management after their conformations. Cigars and other manufactured tobacco is liable to pay tax on MRP if the consideration for sale exceeds rupees five hundred only.Rule 3(4) A registered dealer selling Cigarettes.KVAT RULES 2010 MRP Dealers. 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 19 .

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. 20 . any State government or others specified in section 9-A. the authority may permit such transfer.Rule 9(3) • Issue of registration certificate to specified persons under sub section 9-A(1) • It requires Central Government. • • There was no rule prescribing the procedure for the above.f.e. 1-04-2009. And after enquiry.Transfer of registration to legal heirs • Insertion of proviso to sub-section 1 of Section 27 w.KVAT RULES 2010 Rule 15 (4) . • 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. sworn affidavit etc. may permit transfer of his certificate of registration to the legal heirs subject to application made by the legal heirs for transfer of registration.8/26/2010 PROCEDURAL AMENDMENTS. PROCEDURAL AMENDMENTS.KVAT RULES 2010 Issue of TDAIN. any state government or any other specified bodies to deduct tax from the amounts payable by them to any works contractor. The prescribed authority may instead of cancelling the registration.

Output tax. 21 . Submission by Casual dealer When casual trader stops his occasional transactions during the course of a month.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 . debit notes and credit notes issued during the tax period The earlier requirement of entering the details in website is now removed. Rule 153(4) – Petitions.For Regular dealer. Keeping of Accounts (Rule 33(3)(b) The substituted Rule prescribes to maintain VAT Account by regular dealer with details of input tax.8/26/2010 PROCEDURAL AMENDMENTS.Proviso Inserted The proviso states that for specified classes of dealers as notified by the commissioner. then he shall submit Form VAT 110 which has replaced Form VAT 100. against any order passed by Advance Ruling authority shall be made in Form VAT 486. appeals and applications for review to High Court Appeal to High court.Total turnover not exceeding twenty five lakh earlier the limit was fifteen lakh.Tax period) Filing returns quarterly. the tax shall be paid through electronic remittance through internet. 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. PROCEDURAL AMENDMENTS.KVAT RULES 2010 Turnover changes (Rule 37.

• 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. The payment details have to be given along with return.KVAT RULES 2010 Rule 130-B – Claim of refund of tax (Inserted) • The buying dealer.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. Otherwise the E payment has to be made through notified banks and return can be filed electronically PROCEDURAL AMENDMENTS.charge of a goods vehicle shall carry proof of entering the details in the website along with other details.Inspection of goods The owner or person – in . Rule 159(3) . The Monthly returns may be filed through website by using the dept allotted username and password. not liable to get registered under the Act can claim the refund of excess tax paid to selling dealer (MRP). Along with Acknowledgement number return and Cheque the return can be filed with department if the e payment is not made. 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.8/26/2010 PROCEDURAL AMENDMENTS. 22 .

Definitions for the purpose of advance rulings with respect to clarification of rate of tax are given in rule 164.000/-.8/26/2010 PROCEDURAL AMENDMENTS. after examining the application. THANK YOU sanjay@dnsconsulting. But it shall not reject without giving an opportunity to the applicant to show cause against such rejection. 4.KVAT RULES 2010 Rules 164 & 165 – Clarification of rate of tax and Advance ruling 1. The authority. may either admit or reject it.1. If any rejection is made. Other conditions prescribed for such clarification to be provided. The authority shall not admit the application when the issue raised is already pending before any authority. Tribunal or any court. Advance Ruling Application under section 60 to be made in Form VAT 540 along with a fee of Rs. or relates to a transaction or issue which is designed apparently for avoidance of tax. 6. then the authority shall mention the reason thereof. The authority shall pass an order within three months of receipt of any application. 3. 2. 5.net 23 .

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