CAG’S ADVICE (read rap) TO REVENUE
Service Tax
Decline in revenue from a particular service, despite increase in tax base needs to be investigated and mechanism put in place to ensure that the decline is not due to evasion.
Survey is a key activity which helps to identify potential assessees and thereby augment Government revenues. However, performance indicators for this activity had not been prescribed.
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 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.
Approximately 41 per cent of returns due were not submitted by the registered service providers in 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. 2.55 crore was also leviable, besides penalty of Rs. 14.36 crore.
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 account of suppression of taxable value. Interest of Rs. 5.45 crore was also leviable besides penalty of Rs. 15.26 crore.
Checking of the ST-3 returns on the basis of information furnished by the assessees was not done properly as irregularities involving service tax to the extent of Rs. 7.16 crore were noticed.
Correlation of income tax data and service tax data is a key factor for correct evaluation of service tax liability. However, allotment of PAN based STC numbers to enable such correlation has been slow and nonexhaustive.
Customs
Promotional measures
The audit review of the three duty free credit entitlement schemes for
(i) status holders,
(ii) service providers and
(iii) vishesh krishi upaj yojana (VKUY)
revealed system as well as compliance weaknesses relating to issue of duty credit certificates/scrips and in ensuring their appropriate utilisation.
There was no mechanism to correlate declared export performance/foreign exchange earnings with other statutory records like annual accounts, foreign inward remittance certificate (FIRC), bank realisation certificate (BRC), income tax (IT) returns, etc. This facilitated issue of excess duty credit certificates/scrips. The Government may prescribe additional documents like annual accounts to be verified before tax benefits based on export performance are granted.
The inappropriate use of duty credit certificates/scrips subsequent to these being issued related to
(i) cases where end-use of the goods imported under the certificates was not verified,
(ii) payment of additional duty incorrectly through the certificates,
(iii) payment of duty through the credit certificates/scrips despite having insufficient credit,
(iv) import of inadmissible goods, etc.
There is an urgent need to put in place control mechanisms to plug the loopholes/lapses pointed out. Further, the existing controls to verify data furnished by exporters to obtain duty free benefits should be strengthened. The Ministry of Commerce in coordination with the Ministry of Finance needs to strengthen the internal controls governing issue of duty credit certificates/scrips under DFCE/SFIS/VKUY as well as those relating to subsequent utilisation of these credit certificates/scrips, to ensure that the benefits derived by the importers/exporters are the intended ones and commensurate with the duty foregone.
The duty credit incorrectly granted/used in the deficiencies noticed in the test check by audit was Rs. 349.67 crore. The Government needs to recover the applicable duty foregone wherever these credits had already been utilised inappropriately, in addition to initiating appropriate penal actions.
Target plus scheme (TPS)
The audit review has revealed system as well as compliance weaknesses relating to issue of duty credit certificates and ensuring their appropriate utilisation. The main cause of the irregularities noticed in audit is the complete reliance of the scheme on the declarations furnished by exporters and certified by the CAs for grant of TPS certificates. The noncorrelation of these declarations with other statutory documents like annual accounts, BRCs and IT returns, was a risk area which was left unmitigated by the department. The Ministry may consider prescribing additional documents (like P&L A/c, IT returns, etc.) to be verified before arriving at the trade benefits to be provided to the exporters under other existing or future similar schemes, where tax benefits are given based on export performance. This would mitigate the risk of obtaining of benefits fraudulently under the FTP/schemes.
The revenue implication of this review is Rs. 294.95 crore and this amount needs to be recovered/certificates withdrawn/amended.
Special economic zones (SEZs)
The audit review has revealed system as well as compliance weaknesses relating to policy and procedures governing the management and functioning of SEZ units in ensuring that these functioned as intended. There was no restriction on ‘deemed exports’ being reckoned as exports enabling the units to attain positive net foreign exchange earning (NFE)predominantly through deemed exports rather than actual exports. The Government may consider restricting reckoning of deemed exports for the purpose of calculating NFE by an appropriate scale.
The units under domestic tariff area (DTA) were put under disadvantageous position as no provision had been made to recover duty foregone on inputs procured by the SEZ units and used in the manufacture of products which were cleared at ‘nil’ rate of duty in DTA.
The Government needs to address this disparity to ensure a level playing field for the units in the DTA as well as in the SEZ. The SEZ scheme relies mainly on self-certification and does not require the ‘quarterly/annual performance reports (QPRs/APRs)’ to be supported by other statutory documents like annual accounts, customs records, income tax (IT) returns, bank realisation certificates (BRC), etc.
This facilitated a few units to provide incorrect/inconsistent data in their QPRs/APRs. The NFEs derived on the basis of this inconsistent data cannot be relied upon. The Government needs to address this concern.
While the revenue implication of this audit review is Rs. 246.72 crore, an additional Rs. 1,724.67 crore was foregone or could not be recovered in the absence of enabling provisions.