Relevance of taxation in Internal audit

Why to look into tax?

Component Value INR

Total Cost INR

Cost of raw materials/services 100.00 100.00

Input Excise duty/ Service Tax 12.5%/14%

12.36

112.36

VAT/CST on raw material 14.5%

16.85

129.21

Output Excise duty/ Service Tax 12.36%

15.97

145.18

VAT on Finished Good 14.5%

21.78

166.96

Tax on manufacture & sale of Good worth INR

100

66.96

Tax % 40%

Cost of production 100%

Tax component 67%

VAT-Value Added Tax

►VAT is Sales Tax levied on sales made within a particular state►Different VAT rates are prescribed such as 0%, 1%, 5% , 14.5% and other special rates based on the goods listed under VAT schedules►VAT is not to be paid for sales & transfers made from one state to another state

Input Tax Credit (ITC):-►Input Tax Credit is allowed for all eligible VAT purchases made in the state►Input is not allowed on certain goods such as fuel, coal, office maintenance expenses etc as per the negative list.►VAT Input is not allowed for First point of sale items in the state (FPOS)►Input is allowed proportionately for goods sold within the state only.

What and Why?

AP-VAT Act AP-VAT Rules

Additional study material

CST-Central Sales Tax

►CST is Sales Tax that is levied on sales made outside a particular state►No input Tax credit is available for CST Payments made►CST Act is a central Act. However the rules are prescribed by the respective states.►CST proceeds belongs to the state government and not the central government.

Vital CST Forms:-►Form-C to be obtained/ issued for all sales/purchases made outside the state ►Form-C can be issued only if the goods are purchased for resale or for use in the manufacturing process►Form- F to be obtained/issued for all inter-state transfers made within the company►Non-filing of these forms amounts to VAT sales along with non-availment of ITC

Additional study material

What and Why?

Hyderabad-Factory

Kolkata-Regional Office

Ahmedabad- Direct Dealer Sale

CST-Act CST (Andhra Pradesh) Rules

TOT & WCT

TOT- Turnover Tax:-►Turnover Tax on sale of goods to be paid by TOT dealers whose total turnover is less than the minimum turnover for VAT liability ( Ex: Above 5 Lakhs & Below 50 Lakhs in Andhra Pradesh)►The TOT is governed by state VAT Acts►The current rate of TOT is 1% in Andhra Pradesh►No input tax credit is allowed for Turnover tax

WCT- Works Contract Tax:-►“Works Contract” includes any agreement for any valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property►The WCT is governed by state VAT Acts►The tax is to be paid by the contractee in case the contractor does not levy►The current rate of WCT is 2.5% & 5% in Andhra Pradesh►No input tax credit is allowed for Works contract tax

Additional study material

What and Why?

WCT & TOT rules

Value Added Tax – Cycle from Input on raw materials to Vat Payment

VAT paid on Raw materials FACTORY Finished Goods Sale within State

Value Added Tax – Cycle from Input on raw materials to Vat Payment

Vat paid on Raw materials FACTORY Finished Goods Sale within State

Linking from Journal entry to Trial Balance in SAP

ABC Industries LimitedTrial Balance - 31 December 2012

Account Particulars Debit INR Credit INR  

1525101 Vat Input Credit 5,00,000 - 1525040 Service tax - Accumulation a/c - 664,100 1525042 Service tax - Remittance a/c - - 1531225 Pro-Vat West Bengal - 25,00,000 6607013 Consultancy Charges 250,000 - 1525033 CST Deffered a/c - 8,679,540

Grand Total 15,355,000 15,355,000

Calculation of landed Cost: Scenario 1 & 2

Particulars

Scenario 1 A company situated in Hyderabad plans to purchase good “X” on which the VAT rate is 14.5% in Hyderabad and input tax credit is allowed

 

Scenario 2 A company situated in Hyderabad plans to purchase good “X”- a special rate good on which the VAT rate is 22% in Hyderabad & no input tax credit is allowed as it falls under negative list

Option 1 (Purchase from Hyderabad Vat

14.5%)

Option 2 (Purchase from other state say

Mumbai CST 2%)  

Option 1 (Purchase from Hyderabad

Vat 22%)

Option 2 (Purchase from other state say

Mumbai CST 2%)

Basic cost of the good

100,000.00 105,000.00   100,000.00 105,000.00

(+) Cost of transportation

1,000.00 6,000.00   1,000.00 6,000.00

(+) VAT/ CST 14,500.00 2,100.00   22,000.00 2,100.00Gross Cost 115,500.00 113,100.00   123,000.00 113,100.00(-) Input Tax Credit

14,500.00 -   - -

Net Cost 101,000.00 113,100.00   123,000.00 113,100.00

Advisable Option

Buy locally from Hyderabad only even though the basic cost of the good is more since the net cost of the good inclusive of taxes is cheaper when compared to purchase from other state

  Consider buying from outside the state even though the basic cost of the good is more since the net cost of the good inclusive of taxes is cheaper when compared to purchase locally in Hyderabad

Calculation of landed Cost: Scenario 3Scenario 3:A company situated in Hyderabad plans to purchase good “X” on which the VAT rate is 14.5% in Hyderabad and input tax credit is allowed. Out of the total sales of the company 80 % are through regional offices in other states

Advisable Option: Consider buying from outside the state even though the net cost of the good is greater since the final cost of the good inclusive of taxes and disallowance

is cheaper when compared to purchase locally in Hyderabad

Particulars Option 1 (Purchase from Hyderabad)

Option 2 (Purchase from other state say

Mumbai) Basic cost of the good 1,000,000.00 1,020,000.00(+) Cost of transportation 10,000.00 20,000.00

(+) VAT (14.5%)/ CST (2%) 145,000.00 20,400.00Gross Cost 1,155,000.00 1,060,400.00(-) Input Tax Credit 145,000.00 - Net Cost 1,010,000.00 1,060,400.00(+) Input Tax Disallowed by VAT Act (80%)

116,000.00 -

Final Cost to the company 1,126,000.00 1,060,400.00

Questions - VAT

Can you compute the landed cost of the material from quotation or invoice?

What is the rate of CST?

What is the difference between circular & notifications?

What is the difference between Act & Rules?

GL Codes linked to transactions relating to VAT

• Raw materials GL• VAT Input Account• Fixed assets• Vendor master for state• Vendor Ledger• Fixed assets disposal Account• Turnover Tax• CST• Service tax• TDS• High Sea sales & Employee

reimbursements

Value added tax

FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document

Exception elimination

Objective Analysis Potential Issues

Vendor Ledger account Scrutiny Compare the transactions of the vendors against the Vat Input GL

Instances of under availment of VAT

General Ledger account Scrutiny Compare the transactions accounted in the specified GL's against the TDS GL

Instances of under availment & excess availment of VAT Input credit

Eliminate the transations exception elimination Compare the exceptions noted from the above analysis to other specified GL to eliminate exceptions

Instances of under availment & excess availment of VAT Input credit

Differential Vat Rates for same material Analyze the PO's raised material-wise with vat rates applied Excess payment of VAT output

VAT Analysis

Potential Issues in Value added tax

Under availment of Vat Input credit Procurement from VAT or CST Vendor to save cost Restructuring of Trade promotion schemes resulting in Vat

Savings Inconsistencies in landed cost Comparisons Dealer reimbursements to be routed through trade

discounts schemes Differential vat rates levied by vendor for same nature of

products

Cost Savings

Tax Invoice not received/issued as per Vat requirements Vat Input availed on procurement of Goods in Negative list Excess vat Input availed Vat input availed on CST purchases Vat Invoices not authorized as per the requirements Vat Provisions not made on debit notes passed for

recognizing the sale

Non compliances

TDS-Tax Deduction at source

►TDS is not a type of Tax or a contribution►It is merely one of the modes of payment of Income Tax►It is an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.”►TDS to be deducted at prescribed rates by the payer

► Benefits to Government:► Regular source of revenue► Greater reach► Covers wider base► Ensures payment of income tax

►Benefits to Taxpayer:►Distribution of total tax liability over a period►Most comfortable mode of payment

What and Why?

TDS Rates

Additional study material

TDS other than salaries

TDS on salaries

PAN-Permanent Account Number

►PAN is a UID number for Tax payers

►A valid PAN is mandatory in all payments liable to TDS

►Non mentioning/Incorrect PAN attracts TDS deduction @ 20 % or

applicable TDS rate, whichever is higher

►TDS rates differ for corporate and non-corporate entities in some

cases

►PAN is a 10 digit number. Ex: AGRPS1234J where the first five and

last character is an alphabet and the remaining four are numeric digits

►The fourth character is an entity identifier.

Ex: C-Company, P-Individual, F-Firm, H-HUF,T-Trust, B-BOI, A-AOP,

G-Government etc

►The Fifth character is the first alphabet of the surname in case of

individuals and in case of others, the first alphabet of any one part in

the name

►Other important PAN based registration numbers are Excise Number

and service tax number

What and Why?

Additional study material

PAN-Macro

Linking from Journal entry to Trial Balance in SAP

ABC Industries LimitedTrial Balance - 31 December 2012

Account Particulars Debit INR Credit INR  

6607002 Office & Godown rent 15,105,000 - 1525040 Service tax - Accumulation a/c - 664,100 1525042 Service tax - Remittance a/c - - 1522004 Withholding tax – 194I - 225,000 6607013 Consultancy Charges 250,000 - 1525032 Entry tax - 5,786,360 1525033 CST Deffered a/c - 8,679,540

Grand Total 15,355,000 15,355,000

Tax Deduction at Source – Deduction payment to authorities

Questions - TDS

What would be the risk implication of Duplicate vendor codes?

What would be the base amount for TDS, if invoice includes both sales & service?

What section would you apply, if you have paid for renovation of your house?

What percentage of TDS is applied on reimbursement to employees for expenses?

Document linking in SAP for TDS Journal Entry

Rent payable Document no 190001660

Reflects in Vendor Ledger

Reflects in TDS payable GL

Reflects in rent GL

In the document header text

Document linking in SAP

GL Codes linked to transactions relating to TDS

• Consultancy, Technical fees & Audit Fee

• Rent payable• Maintenance & repairs,

AMC• Professional charges• TDS accumulation GL• Leaf processing Charges

GL• WCT• VAT Input• CST• Excise duty & TOT• Employee reimbursements

Tax deducted at source

TDS ledger - TDS transactionsFBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document

Exception elimination TDS Analysis

GL Codes linked to transactions relating to TDS

Objective Analysis Potential Issues

Updation of incorrect PAN To validate PAN against the criteria as prescribed

Incorrect PAN resulting in short deduction of TDS 20%

Duplicate vendor codes resulting in short deduction of TDS

Incorrect updation of tax masters

Verify the percentages of TDS updated against each section as per the TDS rate

chart

Incorrect updation of TDS rates resulting in short deduction or excess deduction of TDS

Vendor Ledger account Scrutiny

Compare the transactions of the vendors against the TDS GL

Instances of short deduction of TDS for all transactions of specific vendors

General Ledger account Scrutiny

Compare the transactions accounted in the specified GL's against the TDS GL

Instances of short deduction of TDS for all transactions of specified GL’s

Eliminate the transactions with exception elimination analysis

Compare the exceptions noted from the above analysis to other specified GL to

eliminate exceptionsInstances of short deduction of TDS

Potential Issues in Tax deduction at Source

Incorrect PAN updation of the vendors

Incorrect updation of tax masters resulting in incorrect deduction of

TDS

Incorrect section applied for deduction of TDS resulting in incorrect

deduction of TDS

Duplicate vendor codes resulting in short deduction of TDS

Incorrect date considered for TDS exemption certificates

Exemption allowed beyond the limits prescribed in TDS Exemption

certificates

Delay in payment & filing returns for TDS

Under payment or excess payment of TDS

TDS not deducted on the advances paid to vendors

Incorrect base amount considered for deduction of TDS

Incorrect TDS deduction as a result of incorrectly designating the

deductee as company/individual

Inconsistencies in TDS

deductions

Service Tax

►Service Tax is tax levied on the services provided in India based on Finance Act ,1994.(Except Jammu & Kashmir)►The word “India” includes land, air and water limits of the country►Service Tax is levied on all services other than those mentioned in the Negative list as declared through notifications►There is a single rate for service tax which currently is 14 %►Liability: The Service Provider is primarily responsible for collection & payment of Service Tax. However in certain cases the service receiver is required to remit service tax under the “Reverse charge mechanism”►CENVAT Credit is available against the service tax paid for services received for goods manufactured or for providing further services►Service Tax No. is a 15 digit number based on the 10 digit PAN number followed by the letters like “ST” and 3 digit code of the unit of the entity. Ex: AVRCV2222MST001

Additional study material

What and Why?

Additional study material

The Finance Act,1994

Service Tax rules

Notification-Reverse charge

Negative List of Service Tax

Excise- The Manufacturing Tax

►Excise duty is a duty on goods produced or manufactured in India.► The basic conditions for levy of Excise duty is as follows:

► There must be goods;► The goods must be excisable► The goods must have been produced or manufactured► Such production or manufacture must be in India► The Commodity should be ‘marketable’ and ‘movable’► Actual sale is not necessary

► Excise payable at the point of removal of goods from the factory

► CENVAT Credit allowed for excise paid on raw materials used in manufacture of goods

► ECC No. is a 15 digit number based on10 digit PAN number followed by the letters “XD” and 3 digit code of the unit of the entity. Ex: AVRCV2222MXD001

► Examples of Manufacture :► Oil produced from oil seeds► Making of pan masala by mixing various Ingredients► Stitching of cloth to make clothes

Additional study material

What and Why?

Central Excise Act Central Excise rules

Excise Tariff Central Excise overview

CENVAT-Not a brother of VAT

►CENVAT Credit implies the input that can be availed on the excise duty paid on raw materials as well as service tax paid on services received►Further CENVAT Credit Rules, 2004 permit availment of CENVAT credit across goods and services, broadly in the following manner :

► Manufacturer can avail CENVAT credit of service tax paid on input services which can be set off against excise duty payable on final products manufactured i.e., excisable products.

► Service provider can avail CENVAT credit of duties paid on inputs/capital goods which can be set off against service tax payable on output services i.e., taxable services.

►”input” means all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.

Additional study material

What and Why?

CENVAT Credit Rules

Document linking in SAP for Service tax Journal Entry

Vat Input GL account Document no 190004488

Reflects in Vendor Ledger

Reflects in ST Accumulation GL

a/c

Reflects in Office & Godown rent

Reflects Header text

Document linking in SAP

Document linking in SAP for Service tax reverse charge - Journal Entry

Vat Input GL account Document no 190004488

Reflects in Vendor Ledger

Reflects in ST Accumulation GL

a/c

Reflects in ST Expense remittance

GL

Reflects in Professional fee -

GL

Document linking in SAP

GL Codes linked to transactions relating to Service tax

• List of transporters with vendor codes

• Transport vendor ledger account• Service tax accumulation GL account• Service tax• Taxi Hire GL a/c• Vendor ledger of vendors reflecting in

Taxi Hire GL• Legal charges• Director fees• Insurance Agent• Supply of manpower• Vat Input • TOT• CST• Cenvat

Service tax (GTA – Reverse charge

method)

FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document

Exception elimination Service tax Analysis

GL Codes linked to transactions relating to Service tax

• Service tax accumulation GL a/c• Legal charges• Professional fee & Consultancy charges• Insurance Agent• Hotel Stay• Supply of manpower• Technical services• R&D Charges• Advertising charges• Vat Input & TOT• CST• Cenvat

Service tax (Cenvat Credit)

FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document

Exception elimination Cenvat Credit Analysis