RCM on Audit Fee

[VENU K]

In case of Cooperative Banks in Kerala audit is done by the Kerala State Cooperative Department auditors. The department collects audit fee from the banks relating to the salary cost of staff auditors assigned for the work.

The Audit Fee paid to cooperative department is an item of expenditure in the financial statements of the respective societies.

Is this amount liable for RCM ?

[KALLESHAMURTHY MURTHY K.N.]

Sri Kasturi Sethi Sir, 

I do agree with the contents in Sl. !8.  Regarding Regulatory Bodies and other Autonomous Entities, for example, the Bengaluru Development Authority and similar authorities like the Delhi Development Authority are not constitutionally established units.  They can't enjoy the status of either the Central Government or State Government or Union Territories. But the Registrar of Co-Operative Societies is a part of the State Government.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, This is w.r.t. your query at serial no. 12 above addressed to Sh. Kalleshamurthy Murthy Ji.

Exemption at serial no. 6 Notification No. 12/2017 dated 28/06/2017 is admissible to the subject services, only if these service qualify the definition of 'Government 'as per GST laws i.e. services provided by Central Govt., State Govt., U.T. or a Local Authority (here State Govt.). Otherwise not. It is obvious that the terms, 'Govt. Authority and Govt. Entity' both do not exist in the exemption notification at serial no.6.

Now it is up to the querist to prove that the subject services conform to the definition of Govt.ie. subject services have been provided the Kerala State Govt. If exemption is admissible, there will be no issue of applicability of RCM.

[Sadanand Bulbule]

Dear all

In the State of Karnataka, there are two exclusive departments under the Ministry of Co-Operation.

1. The Registrar of Co- Operative Societies.

2' The Directorate of Co-Operative Audit.

The functions of these two are defined separately. So the appointed officers under the supervision and guidance of the Director of Co-Operative Audit conduct the statutory audit of all such registered entities periodically and certain amount of fees fixed are to be paid to the Director of Co-Operative Audit, which is 100% Government entity.

More or less similar dual system is prevailing PAN India.

[VENU K]

Dear Experts

Thank you all for your enlightening views.

In this matter 

Notification No. 12/2017- Central Tax (Rate) at Sl No 6  says in case of  Services by the Central Government, State Government, Union territory the  tax rate shall be NIL except in case of 

a

b

c

(d) any service, other than services covered under entries (a) to (c) above, provided to business entities. 

NOTIFICATION No. 13/2017   Serial Number 5 says

 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding ............. is liable for Reverse Charge.

Notification 13/2017 declares services provided to a business entity as liable for RCM. Once we accept this proposition and look at Notification 12/2017 we understand that NIL rate is not applicable if services are supplied to Business entity and the tax rate ought to be 18%

Since all cooperative societies are business entities, naturally the services provided to them by Govt becomes taxable and liable for RCM.

So, in my opinion the only way for such societies to escape RCM is to prove that  the Service provided by  Department of Cooperative Audit is liable for Forward Charge Mechanism as it cannot be considered as State Govt. and as such the Cooperative Department should pay the same under Forward Charge.

[Sadanand Bulbule]

Dear all

As already I have stated, Co-Operative department is the part and parcel of the State Government. The reason for doubting its such status be clarified. 

[Sadanand Bulbule]

Dear all

To expand the discussion, I reproduce the relevant provisions relating to statutory audit of Co-Operative Societies :

THE KARNATAKA CO-OPERATIVE SOCIETIES ACT, 1959.

CHAPTER VIII AUDIT, INQUIRY, INSPECTION AND SURCHARGE.

 Section 63 Audit.-

(1) Every Cooperative society shall get its accounts audited at least once in a year before the first of September following the close of the cooperative year by an auditor or an auditing firm appointed by the general body of the cooperative society from a panel of auditors or auditing firms approved by the Director of cooperative audit; provided that the Director of co-operative audit shall be the authority competent to prepare and maintain a list of auditors and auditing firms who satisfy the prescribed qualification and experience for undertaking the audit of accounts of co-operative societies in the state. Provided further that, the National Bank shall prepare a list of auditors and auditing firms who satisfy, the prescribed qualification and experience for undertaking the audit of accounts of State Co-operative Bank and District Central Co-operative Banks.

Analysis:

In terms of the mandatory audit of the Co-Operative Societies/entities [supra], the audit shall be conducted by a team of auditors approved by the Directorate of Co-Operative Audit. Normally the Chartered Accountants holding DISA Certificates are appointed for this purpose. Meaning. the audit is being conducted by the private audit teams which are duly approved by the Directorate and not by the Directorate itself. 

Since the Directorate  of Co-Operative Audit,being integral part of the State Government, does not conduct the audit by itself, there is no supply of services by the State Government to the taxable person. As such, in my personal opinion. the recipient of such services is not liable to pay GST under RCM.

Experts to add further.

[Sadanand Bulbule]

Dear all

As per the list available with me, 272 audit firms are approved by the Directorate  of Co-Operative Audit,Karnataka to conduct audit of the Co-Operative societies/entities under Section 63 of the Karnataka Co-Operative Societies Act.

This information is to supplement my last post.

[KALLESHAMURTHY MURTHY K.N.]

Sir, 

There were my friends in the Co-Operative department appointed as auditors and they performed their functions. Their nature of audit work is different from that of Chartered accountants' audits. CA's conduct audits for the preparation of balance sheets. As I have stated in my previous post, the amount of the audit fee is determined by the turnover involved in the audit.

[VENU K]

Thank you experts for the scholarly discussions on the topic.

As regards audit of Cooperative Societies in Kerala are concerned, audit is conducted even today  by Department of Cooperative Audit,Government of Kerala.

Audit by Chartered Accountants are applicable only in the case of Urban Cooperative Banks and other cooperative banks coming under Banking Regulation Act.This shift happened because of insistence of RBI. Even they were subjected to dual audit for some time. A departmental audit as well as a CA audit. Now department audit has been stopped in case of these banking establishments coming under Banking Regulations Act

For all other cooperative societies , including Service Cooperative Banks (These Primary Agricultural Credit Societies (PACS) doing banking business  are not under Banking Regulation Act) audit is done by Department of Cooperative Audit ,Government of Kerala. They also collect a fee from these cooperative societies and it is expensed in the profit and loss account of these societies under the head "Audit Fee"

Since Department of Cooperative Audit is a part and parcel of the Government of Kerala, I feel RCM should be applicable on the transaction.

[Sadanand Bulbule]

Dear Venu Sir

Looking at the track of discussion, there is frequent fluctuations in your understanding. Plz say whether it is taxable or otherwise to come out of confusion. 

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, In response to your observations at serial no. 26 above, my views are as under :-

(i) Auditing of Co-operative Society is mandatory as per Section 64 of Kerala Co-operative Societies Act, 1969. Section 64 starts with the word, 'SHALL' and hence the word, 'SHALL' signifies mandatory requirement of auditing of Co-operative Society. Section 64 is pari materia to Section 63 of Karnataka Co-operative Societies Act mentioned by you.

(ii) Auditing is a statutory duty/function/responsibility of the Registrar Co-operative Societies of Kerala State Govt. Co-operative Societies department who further appoints Director of Audit for the purposing of auditing of the statutory records and other related records. It is also administrative control, supervision and monitoring by Kerala State Government via Office of the Registrar of Co-operative Societies Department. It is verification and examination of the records of the Co-operative Society. Hence Auditing is not service at all.

(iii) In view of (i) & (ii) above, the Auditing is covered under Clause 3-(b) & (c) of Schedule-III under Section-7 of CGST Act. (Neither supply of goods nor a supply of services). This Schedule is, by and large, Negative List of erstwhile Service Tax law (Finance Act, 1994), under GST Regime. For example ; If CAG Office conducts the audit of the records of office of Central Excise Department, Customs Department etc., it is NOT a service. It is a statutory duty/function/responsibility of the CAG Office in order to safeguard revenue. Similarly, if CGST department conducts the audit of the units registered with CGST/SGST department, it is not a service. Thus the department performs its statutory duties/functions/responsibilities.

(iv) Further, to fall under RCM, Services or Goods or both must conform to the scope of supply under Section 7 of CGST Act and those services and goods must be taxable. Exempted goods and services cannot be brought under network of RCM. Needless to say, under RCM tax lability is shifted upon the recipient in place of supplier. If there is no supply and no consideration, how those services and goods can be brought under RCM ?

(v) Now the issue arises of fee charged by the Audit wing of the Kerala Co-operative Societies Department of Kerala State Govt. Whether it is a consideration ? As per Section 64 (6) the amount of fee charged for auditing is cost of conducting the audit. Fee is always in lieu of service but here as per Section 64 (6) fee is the expenses incurred for conducting the audit. Such fee is not merged with General Public revenue. For example : Fee is paid for filing application with Advance Ruling Authority. Fee is paid for filing appeal with GST Tribunal. These are expenses incurred.

(vi) Since there is no supply of service, fee charged for expenses incurred cannot be treated as consideration.

(vii) Cooperative Society is a body corporate and a business entity and not wing of the State Govt. Department.

In view of the above, in my view RCM is not applicable in this scenario. I am flexible. Views of the experts are welcome.

DISCLAIMER : These are my personal views meant for education purpose and not meant for any court proceedings.

[Sadanand Bulbule]

Dear  sh. Sethi Sir ji

Your illustrative clarification has convinced me. Further welcoming point is you have widened the scope for all other experts. True sportsmanship.

I seek the opinion of  all other experts to make it more clear for all the stakeholders. 
Deeply obliged Sir. 

[KALLESHAMURTHY MURTHY K.N.]

Dear Sirs,

The audit fee is not like the fee prescribed to pay in advance and get the services thereafter. The audit fee is calculated after the conduct of the audit in a society based on the turnover involved in the audit. It is not a lump sum amount. That means it is a fee payable to the Government for the supply of service in the form of an audit. That report is a base for the further transactions of the Society. Therefore, it is a taxable service and I agree with Sri Venu Sir, for the opinion expressed at Sl. No. 29.

With regards.

[Sadanand Bulbule]

Dear Murthy

Let the churning of thoughts continue tiil the nector comes. Let’s wait till the evening to see how day has been going. 

[KASTURI SETHI]

Dear Sirs,

Not to speak of taxability and RCM, auditing can never be service at all. In simple words, it is one of the statutory administrative actions which is clear from the definition of 'audit'. It is pertinent to peruse the following definitions of 'audit'.

As per Section 2(13) of CGST Act, “audit” means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder.

Other definitions

Howard on Auditing-6th ELBS Ed. : The common dictionary meaning of audit is an inspection, correction and verification of business accounts by a qualified accountant.

Leading lexicographer Henry Black: Audit is a systematic inspection of accounting records involving analyses, tests and confirmations.

Eric L. Kohler, a renowned accountant and auditor defines audit as the examination of contracts, orders, and other original documents for the purpose of substantiating individual transactions before their settlement;= pre-audit, voucher audit, administrative audit. Any systematic investigation or appraisal of procedures or operations for the purpose of determining conformity with prescribed criteria. Any inspection of accounting or other records of the past or projected management activities in order to provide a basis for third-party evaluation or appraisal. This may involve analysis or test of records and supporting documents. It may also involve interrogation of management and others for the purpose of securing confirmations or proofs of evidence that can be documented for third-party evaluation-such evaluation extending to inspection and possible evaluation by other auditors.

Source : Excise & Service Tax Audit Manual 2nd Edition 2008-09 by K.S.Ravi Shankar & M.N. Hiregange Publisher : CENTAX PUBLICATIONS (Page No. 52 refers.

Legal dictionary meanings of 'audit' cannot be changed because these are internationally accepted.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, My above post is the result of 'churning of thoughts' as motivated by you in your post at serial no.34 dated 14.10.2024. 

Not concerned about 'nectar'. However, your further motivation will be translated into practice in the interest of all visitors of this forum of TMI. I treated your motivation as a 'big plus'.

Thanks & regards.                     

[Sadanand Bulbule]

Dear Sir

Nectar is there in every drop of noble thought. It is bottled this way for relishing the TMI visitors to have a larger picture. We need to clean our tounge to taste pure nectar. This is selfless discussion forum and nectar is freely available. So kind of you Sir

Profound regards

[KASTURI SETHI]

Sh. Kalleshamurthy  Murthy Ji,

Sir, In your post at serial no.11 dated 11.10.24, you have mentioned that the auditing is a statutory function and hence service and audit fee is a consideration.

Will you please clarify the difference between a statutory function and a statutory duty ?  

Thanks a lot.

[KASTURI SETHI]

In continuation to my above post, 

In my view, a statutory function is wider term than a statutory duty and it includes duty also.

        

[KALLESHAMURTHY MURTHY K.N.]

Dear Sir,

A statutory function is a job or duty established by a law or rule. It can also refer to the powers and duties that an Act imposes.

AI Summary

Reverse charge on audit fees: applicability hinges on whether statutory government audits are taxable services or non supply.
The dispute asks whether audit fees paid by cooperative societies to a State cooperative audit department attract reverse charge. The question hinges on whether the audit is a supply (taxable service) or a statutory governmental function (non supply under Schedule III), whether the department qualifies as Government for GST exemptions, and whether operational facts (departmental officers performing audits versus approval of private auditors) change characterization. If the audit is a taxable supply to a business entity, RCM may apply; if it is a statutory function or covered by government-service exemption, RCM would not apply.