Provisions Pertaining to Business Audit Under MVAT and its Significance: A Detailed Study

I. Introduction

The best things in life are available free of cost until the government devises ways to tax them. A tax means a monetary burden imposed upon individuals or property holders to help support the government, a payment extracted by tax authorities. Taxes are a source of revenue for the government which can be utilized for the welfare of the public. A tax is neither a voluntary contribution nor donation, but a compulsory payment enforceable by law, the evasion of which amounts to legal action. In India, taxes can be categorized as direct tax and indirect tax.

Direct taxes are those taxes the impact and incidence of tax falls on the same person. He cannot shift the burden onto someone else. Example: Income tax, wealth tax etc. whereas indirect taxes are those taxes the impact of which falls on one person (seller) but he can shift the burden onto another person (buyer). Example: Excise duty, sales tax, service tax, VAT etc.

II. Tax structure in India

India has a well-planned and organized taxation structure. The tax structure in India is a three tier one wherein the Central, State Governments and the local government are entitled to impose tax and earn revenue. The indirect taxes continue to contribute more to the government treasury despite the fact that the economy is hit by pandemic. Shardul Amarchand Mangaldas & Co. Partner Rajat Bose said opines that the share of indirect tax collections has increased even during this tough times of pandemic and these taxes will fill the government coffers in the years to come because, the deficit in indirect tax collections is comparatively lower than the deficit in direct tax collections.

III. What is MVAT?

VAT is a one of the indirect taxes in our country. It is an easy and transparent system with hardly any scope of departmental control. The best thing about it is that dealers can do self-assessment. Yet another merit of VAT is that tax evasion becomes a rare phenomenon. In accordance with entry 54 in list II (State List) of schedule VII to Constitution of India, State governments are entitled to impose tax on sale or purchase of goods barring the newspapers. Nonetheless, India has different VAT system for each State. In Maharashtra, MVAT system is applicable for selling the goods.

A. Terms related to MVAT

Maharashtra Value Added Tax Act, (MVAT Act) was passed in 2002 whereby a dealer is supposed to pay tax on the basis of turnover of sales within the State of Maharashtra.

Dealer included under MVAT:

• The term dealer is defined u/s. 2(8) of MVAT. It includes all person(s) who buy or sell goods in the State whether for commission, remuneration or otherwise in the course of their business or in relation with or incidental to or as a consequence of being engaged in such business.
• Dealer includes a Broker, Commission Agent, Auctioneer, Charitable Trusts, Clubs, Departments of Union Government and State Government, Customs, Port Trusts, Railways, PWD, Insurance Companies, Transport Corporations, Local bodies, Shipping and Construction Companies, Aviation, Ad Agencies etc
• However, farmers, educational institution and transporters shall not be considered to be a dealer (subject to fulfilment of conditions).
• The Dealer has maximum Limit for VAT registration is Rs 10 Lakhs CT.

B. Provisions related to business audit under MVAT

The following business accounts have to be audited:

1) Every dealer is supposed to pay tax-

a. if his purchases or sales [exceeds rupees sixty lakh] in any year, or

b. [a dealer possessing license in-

(i) P.L.L form as per the Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966, or

(ii) B-RL form as per the Maharashtra Manufacture of Beer and Wine Rules, 1966, or

(iii) Form E as per the Special Permits and License Rules, 1952, or

(iv) Various forms like FL-I, FL-II, FL III, FL-IV as per the Bombay Foreign Liquor Rules, 1953, or

(v) Forms CL-I, CL-II, CL-III, CL/FL/TOD-III as per the Maharashtra Country Liquor Rules, 1973]

c. [if he possesses an Entitlement Certificate regarding any Package Scheme of incentives, granted under MVAT or, under the Bombay Sales Tax Act, 1959,]

The dealer has to get the accounts of such year audited by an accountant within the stipulated period from the end of that year and submit within that period the [complete report of such audit] in the prescribed form duly signed and verified by such accountant and furnishing such details and certificates as may be demanded

[Provided that, for 2017-18, the provisions of this subsection shall be apply to a dealer, whose registration is considered to have been cancelled under sub-section (6-A) of section 16, if the-

a) total of his sales turnover and the value of goods transferred to any other place of his business or of his agent or principal, situated outside the State, not by reason of sale, or

b) his purchase figures exceeds rupees twenty five lakh.

[It is further stated that, a dealer whose tax liability, in any year beginning on or after the 1st of April 2019 does not exceed Rs 25000, shall file such audit report.

Explanation: “tax liability” means the sum of all taxes payable by a dealer under VAT or, may be the tax payable under, the Central Sales Tax Act, 1956 (74 of 1956), after adjusting the amount of refund demanded by the dealer, if any, under the concerned Acts.]

[Explanation I]: [In accordance with this section and sub-section (1) of section 32A], “Accountant” means Chartered Accountant enshrined under Chartered [Accountants Act, 1949 or a Cost Accountant enshrined under the Cost and Works Accountants Act, 1959].

[Explanation II: For the sake of this Section, an audit report shall be considered to be the “complete audit report” only if all the items, details, certificates, tables, schedules, and annexures are duly filled and are numerically self-consistent.]²

2) If a dealer is expected to get his accounts audited under sub-section (1) fails to furnish a copy of such report within the stipulated time, the Commissioner may, after give sufficient time for hearing to the dealer, impose on him, penalty in addition to tax, which amounts to one tenth per cent, of the sales figures.

[Provided that, if the dealer fails to furnish a copy or such report within the period prescribed under sub-section (1), but files it within 30 days of the end of the aforesaid period, and the dealer satisfactorily proves to the Commissioner that the delay was on account of uncontrollable factors, then he shall not be penalized under this sub-section shall be imposed on him.]

[(2A) Where a dealer liable to file audit report under this section has purposely submitted the audit report which is incomplete, then the Commissioner may, after giving enough time of being heard, impose on him, in addition to any tax payable or any other penalty imposed under this section or any other section, a penalty equal to one tenth per cent., of the total sales turnover .]

3) Not withstanding sub-sections (1) and (2) shall apply to Departments of the Union Government, any Department of any State Government, local authorities, the Railway Department as mentioned in the Indian Railways Act, 1989), the Konkan Railway Corporation Limited and the Maharashtra State Road Transport Corporation constituted under the Road Transport Corporation Act, 1950.

C. Significance of MVAT audit

The Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) was implemented from 1st April, 2005. One of the features of this Act is that certain specific dealers are expected to furnish Audit Report as certified from the Auditor i.e. either Chartered Accountant or Cost Accountant.

This is in accordance with section 61 of the MVAT Act, 2002. For non-filing or delayed filing of the Audit Report, the business dealer can be penalized to the extent of 0.1% of the turnover of sales. Thus, to have genuine checking of the returns or to determine the nature of tax liability of the dealer, the VAT Audit provision has become imperative. The VAT Audit report Form 704 a remarkable step in this direction. However, the aforesaid Form is now substituted with a newly introduced Form since 2008-2009.

Business Audit Report under MVAT is generally based on the overall verification of the records. It is an opinion formed after certifying authenticity of the facts. For example, if a ‘debtors list’ is certified, as per the subsidiary books then such certification is expected to be factual, leaving no scope for errors in terms of Rupee or Paise. For example, in clause:

i. the Auditor certifies that ‘all such declarations and certificates are produced before me. I have verified the same and they are in conformity of the provisions related thereto’.

Due to such certification, it is apparent that the Auditor is supposed to check each and every declaration form, physically inspect the details as far as possible. Therefore, understanding the scope of Audit is important. It has to be kept in mind that though above is the mode of reporting, the report is still an expression of opinion only and it is not certification as understood in relation to Audit.

“Maintenance of books of accounts, sales tax related records and preparation of financial statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales tax related records based on our audit. We have conducted our audit in accordance with the standard auditing principles generally accepted in India.”

IV. Conclusion

MVAT seemed to be a silver lining in the dark cloud particularly when business dealers were overburdened with multi layered tax system in the State. There are certain specific businesses that require audit. Apparently, on the basis of the responsibility statement issued by the auditor (preferably a CA or ICWA). The business audit report is merely an opinion and not a certificate in the true sense of the word. Needless to say that the Auditor has to maintain his working papers to face the charges of negligence that may arise in the due process. The State government is trying to ensure that e governance will set the things right as suitable softwares are available to generate the necessary details. Business Audit under MVAT seems to be a complicated, time consuming and expensive affair that kills the time of the businesses and the audit team as well but in the long run it will become dealer friendly. The tax authorities are working rigorously to make tax procedures simple and user friendly as the procedures are facilitated by technological aids. Thus, MVAT is the right step in e-governance.

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V. Reference

• Provisions Related to Audit and Auditors Under Companies Act, 2013 (taxguru.in)
• Cost Records & Audit under Companies Act, 2013 & Rules thereto (taxguru.in)
• The Companies Act 2013 - Provisions relating to Financial Statements (caclubindia.com)
• Maharashtra Value Added Tax (bcasonline.org)
• Guidance Note on Maharashtra Vat Audit (MVAT Audit)
• GUIDANCE NOTE ON MAHARASHTRA VAT AUDIT(MVAT AUDIT) - Tax Baniya

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Footnotes

1. Author is an International Accredited Civil-Commercial Mediator; Multiple World Record Holder; Advocate; Researcher in India.

2. Maharashtra Value Added Tax (bcasonline.org) ↩