Serious Lapses in Scrutiny of Returns by Central Excise - CAG
THE CAG in its latest Report to Parliament on Central Excise and Service Tax found serious lapses in the scrutiny of returns by the Department.
Preliminary scrutiny/Review and Correction
After the introduction of Automation of Central Excise and Service Tax (ACES), preliminary scrutiny of returns is being done by the system itself. The purpose of the preliminary scrutiny is to ensure completeness of information, timely submission of returns, time payment of duty, arithmetical accuracy of the amount computed as duty, closing and opening balance of CENVAT credit etc. The range superintendent is required to verify the returns thrown by the system for review and correction. He is also required to rectify the errors, if any, in the returns in consultation with the concerned assessee.
During scrutiny of 2,580 returns in selected ranges of 41 Commissionerates CAG observed in two cases, in Jamshedpur and Patna Commissionerates, that there were differences in the closing balance and opening balances of CENVAT credit as per the returns furnished by the assessees. Although the system had marked the returns for review and correction, the department did not verify the differences involving availing of CENVAT credit of Rs.14.01 lakh during the period of review.
Detailed scrutiny
The purpose of detailed scrutiny is to establish the validity of information furnished in the tax return and to ensure correctness of valuation, availing of CENVAT credit, classification and effective rate of tax applied after taking into consideration the admissibility of exemption notification availed etc. Unlike preliminary scrutiny, detailed scrutiny is to cover only certain selected returns, identified on the basis of risk parameters, developed from the information furnished in the returns submitted by the taxpayers.
Para 48 read with para 4.1A of Manual for the Scrutiny of Central Excise Returns, 2008, provides for selection of upto five per cent of total returns received for a detailed scrutiny of assessment on the basis of risk parameters. Paragraph 4.2A of the Manual for Scrutiny of Service Tax Returns, 2009 stipulates that upto two per cent of the returns need to be examined in detailed scrutiny.
Selected ranges of 21 Commissionerates out of selected ranges of 41 Commissionerates, stated that no detailed scrutiny of returns was undertaken by them. The reply from the remaining 20 Commissionerates is still awaited by Audit.
Verification of CENVAT credit availed
ER-1/ER-3 and ST-3 returns contain a table for details of CENVAT credit taken and utilised for furnishing information regarding various types of credit taken and its utilisation for different purposes during a month/quarter. It is very important on the part of the department to verify the amount of "credit taken" as shown in these returns with the source documents such as invoices, bill of entries etc. At present department verifies the amount of credit shown in the returns in course of detailed scrutiny and internal audit of the assessees.
Scrutiny of the figures as furnished by the department regarding verification through detailed scrutiny and internal audit done by department of CENVAT credit availed by the assessees falling under the selected ranges, revealed that on an average of 40 per cent of CENVAT credit availed by the assessees remained unverified. Specifically, during 2014-15, 16 ranges out of 38 ranges had not verified the correctness of CENVAT credit availed by the assessees to the extent of 90 per cent of the credit availed by them. Further, CAG also noticed that most of the selected ranges had not conducted detailed scrutiny of returns and CENVAT verification was being carried for selected units by internal audit of the department. As a result, a large portion of CENVAT credit which the assessees used for payment of duty/tax was not verified.
When Audit pointed this out, the Ministry stated (February 2016) that action has already been initiated.
Rs.2836 Crore CENVAT Credit by Reliance not verified: In Mumbai ST Commissionerate, Audit observed that CENVAT credit amounting to Rs. 2,835.80 crore availed and utilised by Reliance Communication Ltd., during the period of review remained unverified by the department as the department did not conduct internal audit of the unit for the period 2010-11 to 2014-15 despite the unit being one of the top service tax paying units and falling under mandatory category for internal audit. During audit, CAG observed non-reversal of CENVAT credit of Rs. 24.36 crore.
When Audit pointed this out, the Ministry stated (February 2016) that the assessee will be selected for internal audit in future.
During the exit conference, the Ministry stated that due to manpower constraints there is skewed coverage of internal audit and detailed scrutiny.
While acknowledging man power constraints, audit does not appreciate how such cases were left out from the 2,183 number of assessees paying more than Rs. three crore covered by internal audit during 2014-15.
Audit is of the view that there is a need for department to revisit the parameters for selection of cases for internal audit/detailed scrutiny keeping the existing man power constraints in view.