Speaker : Govind Goyal, C.A.
Venue : I.M.C. Hall, Churchgate, Mumbai.
Date : 21st January 2009
(1) While introducing the subject, the speaker said that
Notification of October 2008, introduced new Form No. 704 being Report of the
Auditor. The Commissioner of Sales Tax issued a Circular stating that all
Reports submitted after 10th November 2008 shall be in new Form No. 704 and not
in old Form.
(2) After studying the new Form, the WIRC of the Institute
made representation to the Commissioner of Sales Tax (CST) that certain clauses
in the new Form need to be changed, since they cannot be certified by Chartered
Accountants and are inconsistent with provisions of law. After discussion, the
Commissioner agreed that those clauses need to be changed. Another Circular was
issued in December 2008 clarifying that for year 2007-2008, the Auditor will
have an option to submit his Report either in the old Form or in the new Form
No. 704 and the same should be submitted before 31st January 2009.
(3) In Part-I of old Form No. 704, there were 9 statements to
be certified by the Auditor. This number is now increased to 15 certificates. He
has now to certify that he has read and understood the instructions given in the
new Form. He has also to certify that the dealer was carrying on his business
activity from the principal place and additional places registered with the
Sales Tax Department. It is difficult for the Auditor to issue such certificate.
His duty is to audit books with the supportings. Similarly, the new Form
requires him to certify that all transactions recorded in the books of accounts
are reflected in bank statements. This is not possible particularly when the
dealer followed mercantile system.
(4) In Part-II, general information about business of auditee
is required to be given. Now certain ratios are to be reported and they are :
à
Net turnover to total turnover
à
Cash Sales to Total Sales
à
Cash Purchases to Total Purchases
However, neither the MVAT Act nor the Central Sales Tax Act
defines Cash Sales or Cash Purchases. It is not clear whether they include
cheques, or credit card.
(5) The auditor has to certify details of purchases over
Rs.5,00,000 from new local suppliers. The term new local suppliers means persons
from whom no purchases were made in preceding year. This casts additional
responsibility to find out the position for preceding year also. This makes the
Auditor’s duty onerous.
(6) Part-III of Report contains schedules :
In one schedule, the Auditor has to certify figures of
Sales/Purchases per returns, the figure determined from books and
re-conciliation of differences with reasons.
(7) In reporting, the Auditor has to give details of the
Auditor who has certified the accounts statements under the Income-tax Act. The
speaker observed that this is again inconsistent because there may be cases
where audit is conducted under the Companies Act or Co-op Societies Act or Trust
Act; but those may not be required under the Income-tax Act.
(8) Determination of Gross Turnover of Sales and Purchases :
Turnover means aggregate of Sale Price or Purchase Price of
transactions effected during the year. Sales/Purchase includes not only
Sale/Purchases of goods traded or manufactured by the dealer, but also covers
spares, components, packing materials, fuel. It also includes Capital goods. Net
turnover will not include taxes collected or paid. However, the gross turnover
of Sales/Purchase will include tax collection. Labour charges are to be excluded
since they are not sale of goods. Deduction should also be made of goods
returned within 6 months from the date of sale. While determining the turnover
the Auditor must take note of sale/purchase of scrap, sale/purchase of capital
goods like plant and machinery and miscellaneous purchases included in printing
& stationery, in repairs and maintenance charges, and in sales promotion
expenses. The Auditor must keep in mind the accounting standards, and the
guidance note of the Institute states that taxes collected by dealer as well as
excise duty shall not form part of income. If any portion of collection of tax
and duty has remained unpaid, the same should be shown as liability.
(9) For determining turnover of inter-State sales, deduction
is also to be made of freight and transport charges included in sale price.
Thereafter for Gross turnover of sales, the taxes collected and excise duty is
to be added.
For quantifying taxable sales in Maharashtra, deduction is to
be made of inter state sales, exempt sales, labour charges and taxes and excise
duty collected, to arrive at net taxable turnover liable for MVAT.
Computation of Tax : The taxable turnover is to be
bifurcated into five Schedules according to their categories. The tax rates are
NIL for Sch. A (exempt goods), 1% for Sch. B Goods, 4% for Sch. C and specified
rate for petroleum and liquor referred in Sch. D and for residuary goods in Sch.
E the rate is 12.5%. The Auditor will determine and state net taxable sale under
each schedule giving entry No. and tax rate. If the dealer has collected excess
tax, the same stands forfeited in favour of Government.
(10) In turnover of purchases after necessary deductions, the
Auditor has to verify taxes paid on purchases for determining set-off or input
tax credit.
Conditions for allowance of set-off :
a) Goods purchased should be from registered dealers.
b) The entries in the register should be supported by tax invoices.
c) The purchase register and tax invoice should give the date, invoice No., name and address of supplier, registration No., net purchase price and VAT charged separately. The provisions of Rules 52, 53 and 54 dealing with set-off working should .be borne in mind. If the VAT charged is not mentioned separately, set-off will not be granted. The aggregate amount of set-off is subject to statutory deduction per Rule 53 and negative list per Rule 54.
11) Tax on purchase of goods and packing materials used for manufacture and packing of tax-free goods is not allowed for set-off.
12) Where there is difference in tax due or set-off claimable per working by Auditor and per returns of dealer, the auditee should be advised to file revised return and pay the difference before finalising and submitting Form No 704. A note should be taken of revised return. In the said report, the auditor should also state the period for which further set-off is due and resultant refund due.
13) Works contracts:
In works contracts, determination of taxable quantum of sale forming part of Final Bill and the tax rate applicable thereon is the most complicated region in M-VAT Audit.
14) Whether a particular contract is a works contract or a sale simpliciter is a matter of controversy. Judgments of the Apex Court on works contracts of almost similar nature vary from each other. Assuming a particular contract is a works contract, determination of sale component is equally challenging. The gross amount of bill is a composite figure involving sale of material and sale of services. Tax is not leviable on service element under MVAT. Rule 58 prescribes mode of determination of sale price. From gross amount of bill eight items of deduction are to be made; some of which are:
i) Architect’s or designer’s fees
ii) Labour and service charges in respect of contract
iii) Water charges
iv) Profit margin of dealer in respect of Labour/ service charges. The balance constitutes sale price on which tax is payable @4% or @12.5% (general rate) or @ 8% under the composition scheme, depending on category of goods involved.
15) In actual practice, dealers undertaking works contracts are reluctant to disclose items like expenses on services, architects fees and their profit margin. To overcome this, the State Government has evolved a table for various types of contracts, such as construction contract, fabrication, painting, air conditioning, repairing and annual maintenance contract. The rate of deduction for component of services are mentioned against each category of con-tract. To illustrate, in building construction contract the value of services will be taken” at 30% and the balance of 70% will be treated as sale of material liable to VAT.
16) In Practice, it was found that contractors felt that in spite of prescribed table, it is not possible for them to make invoice. A representation was made to design a scheme akin to composition scheme. So u/s.42 of the MVAT Act, composition scheme is designed providing 8% of total contract value will be regarded as MVAT payable. Another representation was made requesting for reduction of rate of 8% on construction contract which was reduced to 5% from 20th June 2006.
If construction contractor is opting for composition, then their set-off on purchases is reduced.
17) Where composition is not opted, the normal set-off as per Rule is permitted. If, it is opted, the set-off claim is scaled down, if composition is un-der 8% scheme, set-off amount will be reduced by 36%. If composition is under 5% scheme, set-off clause will be reduced by an amount being 4% of total purchase price. The normal composition rate is 8% applicable to all works contracts, whereas building contractors can opt for 5% for construction contract and 8% for contract other than construction contract. The set-off on works contract other than construction contract is to be scaled down by 3% of purchase amount and for construction contract this scaling down is by 4%.
18) Unlike the composition scheme applicable to hoteliers or retailers where entire turnover is required to be considered, construction contractors can opt composition @ 5% qua contract. Similarly, under other composition scheme the dealer is not permitted to collect tax from customers. But under the works contract composition scheme, the dealer can collect tax. These aspects must be kept in mind while determining gross turnover and net turnover. While going through profit & loss account, the Auditor should verify whether hire charges are credited to profit & loss account. These may be in respect of leasing of goods. Earlier there was a separate Act-‘Right to use goods Act’. All amounts received for leasing of goods, machinery, furniture were liable to MVAT atapplicable rates which are 12.5% for leasing of machinery, furniture and 4% for computers. So these receipts should be considered in determining gross and net turnovers.
19) Provisions applicable to mandap decorators, hotel industries, 2nd-hand car dealers, retailers and bakary dealers:
Though the composition scheme to mandap decorators was announced in 2007, the same was made applicable from 1-4-2005. All these dealers can discharge their tax liability by paying 1.5% tax on total turnover.
In case of dealers in hotel industries, second-hand car trade, retailers and bakery dealers, the Auditor should verify weather they have applied for in prescribed form to the Revenue authorities for coming under the composition scheme. Application has to be made either at the time of registration or at the beginning of financial years. Once the dealer opts for the scheme, he cannot come out of the scheme till the end of that financial year. Similarly these dealers are not permitted to collect tax from customers. This is a pre-condition. Therefore, sale price will not be treated as inclusive of tax. The tax @ 8% will be payable on entire sale price. In case of hotels charging rent for rooms, since rooms are immovable property, the rent earning is not liable to MYAT tax.
Where room hire charges are inclusive of breakfast or breakfast & lunch or breakfast, lunch & dinner, the charges attributable to these facilities are determined by applying the following table to gross rent collection, viz. :
For breakfast – 5% of total rent
For breakfast & lunch – 10%
For breakfast, lunch & dinner – 15%
The amount worked out at applicable rate to gross room rent will have to be considered for arriving at taxable sale price.
20) Determination of taxable turnover in case of C.F.I. Units located in backward area:
Where units are enjoying incentives whereby they do not have to pay any tax on turnover of sales, turnover of sales and purchases are determined in normal manner but set-off on purchases will not be allowed, but they are entitled to claim refund of taxes paid on purchase including tax paid on capital goods.
CFI unit in backward area, similar deduction is to be made. From final bill, the payment is made to CFI units for purchase of goods used in works contract. The remaining amount will be liable to tax @ 4% or 12.5% as the case may be.
21) As regards refunds till March 2007, the refunds due per return up to March 2007 were allowed to be carried forward. But refunds due for 2007-2008 cannot be carried forward. Refund due as per return or revised return for March 2008 or due as per Audit Report cannot be carried forward.
22) Re : Medicine dealers if pharmacies:
Till June 2007, turnover was determined as per MRP Scheme. From July 2007 the determination is to be made as done in normal dealers. Till June 2007 tax was collected from manufacturers on basis of MRP. The said scheme is discontinued. All medicine dealers had to submit stock statement as on 30-6-2007.
23) MVAT applicable to liquor licence dealers: S. 61:
Turnover limit of Rs.40 lakhs applicable to normal dealers does not apply to liquor licence dealers.
The dealer may permit other dealer to use his licence for liquor trading. The person using the licence has also to get his accounts audited, irrespective of the amount of turnover.
24) As regards Kirana merchants, they can opt for the composition scheme. If they have opted for the composition scheme, the tax rate will be 5% or 8%. If they have not opted, difficultly arises in determination of turnover of various categories of goods liable for different rates e.g., sugar, wheat, pulses are tax free, whereas on items like toothpaste, tax is 5% and on sale of dry fruit the rate is 4%. Very often he makes one cash memo for all these items, so also he does not make cash memo but records sales in his diary. As per Circular of the Commissioner and guidance note of WIRC, in all such cases, the turn-over of sales is to be determined in ratio of turnover of purchases as per purchase register. By applying above ratio, the sales turnover is determined.
25) Textile processors:
Till 31st March 2005, they were exempt from tax. This was withdrawn under the MVAT Act. Processing is a works contract. On basis of purchases of chemicals and other materials, the taxable turnover is determined. In response to representation of Textile Processors Associations, the Finance Minister in Budget speech, assured that textile processing will not be treated as works contract and their trade will be exempt. Notification was then issued granting exemption to textile processors. Set-off will not be allowed on taxes paid on purchase of materials and capital goods. However, per Notification of 23rd October 2008 as per Rule 53(10) they will be entitled to claim set-off on purchases of capital goods and taxes on material used for processing. The exemption being applicable from 1-4-2005, those textile processors who have paid VAT as works contractors, can revise their returns and claim refund of taxes paid.
The revised Audit Report will have to be submitted giving reasons for revision. Revised Report should be filed only after the revised returns are filed by the dealer.
26) Verification of CST Returns:
S. 5(1) to S. 5(3) describe three different categories of inter-State sale, export sale & export sale without taking delivery of import. In such cases the ultimate consumer should pay charges of Bill of Entry, Customs duty and forwarding charges. Otherwise claim u/ s.5(2) may get disallowed.
S. 5(3) deals with transaction where the sale is effected to actual exporter. Such dealer should furnish declaration Form H which can be given for inter-State purchases as well as local purchases. Sale on Form 11 is treated as inter-State sale even if exporter is located within Maharashtra.
Export of goods without taking delivery through negotiation of Railway receipt or lorry receipt. The movement of goods should not be broken, if the claim of inter-State sale is to be proved. Secondly all dealers in the transaction must be registered dealers. Under CST, it is also necessary to collect Form E-1 from the selling dealer and Form ‘C’ from the purchasing dealer. In the event the dealer negotiating the documents fails to collect Form E-1, but collects only Form C, then such transaction will be treated as inter-State transaction liable to CST. The dealer negotiating Railway or lorry receipt has to issue Form E-2 to the purchasing dealer.
S. 6A of the CST Act deals with branch consignment transfer.
(27) Branch transfer and consignment sales:
Where movement of goods from one State to another State is otherwise than under contract of sale, then it is to be considered as branch transfer or consignment transfer. The conditions for falling under category of branch transfer are:
a) Sale is not under contract of sale
b) The consignee or branch should furnish declaration in Form F.
The Auditor should make note of missing Form C and Form F, and if the same are expected to be received, tax difference need not be paid. The revised return also need not be filed if dealer is confident of receiving missing forms. Suffice if the Auditor clarifies his stand in final report on chances of receiving missing forms.
(28) Time limit for submitting Audit Report:
As regards due date for submitting Audit Report in Form-704 it is 31st January 2009; the speaker informed that representation is made to the Commissioner for extending the date up to 31st March 2009. The speaker advised that without waiting for such extension, the Auditor should file report by 31st January 2009.
The learned speaker then replied queries raised by some members. The meeting terminated with a vote of thanks to the learned speaker.
