TaxTMI 
TaxTMI 
Comptroller and Auditor General of India's Report on Indirect Taxes -Service Tax Performance Audit -2006-2007 (Extracts)
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....nce could not be evaluated. Consequently, a large number of active unregistered service providers were escaping from the service tax net and audit could identify 8,394 of these, with actual loss of service tax of Rs. 34.04 crore and further an estimated service tax leakage of Rs. 27.91 crore. (This is approximately 37 per cent of the total revenue collected from these services). There was a need for the Board to establish KPIs for a commissionerate which should include minimum number of surveys to be conducted to identify/register assessees and garner additional revenue. Further, the procedure for conducting survey needs to be streamlined to collect information about potential assessees from various sources including from income tax department. In all the cases identified by audit, of service providers who had escaped the tax net by not registering and not paying the applicable service tax, the department should do a detailed scrutiny/investigation of the service tax evaded by these service providers and take appropriate action. Additionally, inter-governmental and inter-departmental coordination and control mechanism to ensure that only registered assessees provide services and....
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....on. (Paragraph 3.6.1) * Survey is a key activity which helps to identify potential assessesand thereby augment Government revenues. However, performance indicators for this activity had not been prescribed. (Paragraph 3.6.2) * 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 these 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. (Paragraphs 3.6.2.2 and 3.6.2.3) Approximately 41 per cent of returns due were not submitted by the registered service providers in these 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. 255 crore was also leviable, besides penalty of Rs. 14.36 crore. (Paragraphs 3.6.3 and 3.6.3.1) * Verification of returns was ineffective and policy for scrutiny of these ....
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....under audit was from the year 2003-04 to 2005-06. 3.5 Acknowledgement The Indian Audit and Accounts Department acknowledges the cooperation extended by the Ministry of Finance in providing the necessary information and records for audit. The draft review was forwarded to the Ministry in November 2007 and an exit conference was conducted with the Ministry officials in November 2007. All the eleven recommendations given by audit in this review were agreed (December 2007) to by the Ministry. The written responses of the Ministry to these recommendations have been incorporated appropriately. AUDIT FINDINGS AND RECOMMENDATIONS 3.6 System issues 3.6.1 Trend of revenue Total service tax collected during the year 2005-06 was Rs. 23,053 crore. The three services viz. CAB, PGH and HFC contributed Rs. 68.39 crore, Rs. 58.37 crore and Rs. 39.51 crore during 2005-06, which constituted 0.30, 0.25 and 0.17 per cent respectively of the total revenue collection from all the services during the year 2005-06. Table Nos. 1 to 6 indicate the trends of revenue in respect of 70 commissionerates 3.6.1.1 CAB Table No. 1 (Amounts in crore of rupees) No of Commissionerates ....
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....nificantly by 14.21 per cent and 43.46 per cent respectively during this period. * In Nasik commissionerate there was a significant fall in the revenue collection by 37.67 per cent during the year 2005-06 over the previous year 2004-05 though the assessee base remained the same. * In Cochin, Trivandrum and Pondicherry commissionerates, there was decline of 76, 81.75 and 73.20 per cent respectively in the assessee base during the year 2005-06 over the previous year 2004-05. The revenue in these commissionerates had also declined by 35, 28 and 76.25 per cent respectively. 3.6.1.3 HFC Table No. 5 (Amounts in crore of rupees) No. of commissionerates 2003-04 2004-05 2005-06 No. of assessees Amt. No. of assessees Amt. No. of assessees Amt. 70 2501 9.27 4017 18.07 3900 29.66 Figures furnished by commissionerates. Table No. 6 Percentage growth(+) or (-) over previous year No. of Commissiorterates 2004-05 2005-06 No. of assessees Amt. No. of assessees Amt. 70 (+)60.62 (+)95.02 (-)2.91 (+)64.12 Audit observed that :- * During the year 2005-06, while the revenue from this servi....
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....gust 2004. Status of surveys undertaken by commissionerates during the year 2003- 04 to 2005-06 and its impact on revenue is given in the following table Table No. 7 (Amounts in crore of rupees) Year No. of Commissionerates No. of Surveys No. of new registrations for all services based on surveys Total additional Revenue realised 2003-04 35 2382 10194 3.42 2004-05 41 3217 7526 2.50 2005-06 58 1153 349 0.97 Figures furnished by corninissionerates Audit observed that :- * No target of surveys was fixed for any commissionerate, in the absence of which the performance of the commissionerates could not be evaluated. * The number of surveys conducted during the year 2005-06 came down significantly from those conducted during 2004-05. * There was a continued and significant decline in achievement in terms of number of persons registered and additional revenue generated, as a result of surveys, during the years 2004-05 and 2005- 06, which is indicative of the fact that the surveys had been largely unfruitful. Recommendation * The Board should establish 'Key Performance Indicators (KPIs) 'for a commiss....
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....rvice providers identified by audit In order to identify unregistered service providers, the income tax records and other connected secondary records, wherever possible, were cross verified. Audit was able to verify income tax records and other related records (such as annual financial statements, departmental/public sector undertaking contracts records, etc.) of 1,040 service providers out of 8,394 such identified unregistered services providers. The service tax evaded by them was to the extent of Rs. 34.04 crore. Additionally, penalty of Rs. 34.04 crore was also payable under section 76 of the Finance Act, 1994, with a further interest liability of rupees ten crore upto 2005-06. The details are mentioned in the following table Table No. 8 (Amounts in crore of rupees) Name of the Service No. of commissionerates No. of service providers Amount of service Tax leviable but not levied Interest Payable Penalty CAB 26 831 7.65 2.94 7.65 PGH 12 182 20.67 5.66 20.67 HFC 26 27 5.72 1.40 5.72 Grand Total 1040 34.04 10.00 34.04 It is interesting to note that :- * The evasion of ser....
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....ICs) to the voters. The EPICs were prepared using digital photography by close circuit devices (CCD) or digital cameras alongwith data management, printing and lamination at developing and processing laboratory (DPL). All these services were in the nature of 'photography services'. The records of only 16 out of 35 chief electoral officers of the states/union territories indicated that an amount of Rs. 79.03 crore was paid to 101 such agencies for preparation of EPICs, These agencies, however, had not registered themselves with the department and had not paid estimated service tax of Rs. 6.36 crore. Penalty of Rs. 636 crore and interest of Rs. 2.13 crore was also leviable. The actual evasion of service tax on this account would be much higher, if the payment made by the remaining chief electoral officers to the service providers is taken into account. (v) In the context of health club and fitness centre services, the CBEC in their circular dated 1 August 2002 clarified that 'therapeutic massage' would mean a massage performed by qualified professionals under medical supervision for curing diseases such as arthritis, chronic low back pain and sciatica, etc. Ayurvedic massage, acup....
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.... the second recommendation above for further necessary action. (vi) Scrutiny of income tax returns of M/s. India Realistic Health Centre, Bangalore commissionerate revealed that the service provider had realised Rs. 4.34 crore from their customers on account of health and fitness centre services during the period 2002-03 to 2004-05. The service provider, however, did not register itself with the department thereby evading service tax to the extent of Rs. 38.11 lakh. The service provider also liable to pay interest of Rs. 13.16 lakh and penalty of Rs. 38.11 lakh. 3.6.2.3 Estimated loss of service tax in respect of other unregistered service providers identified by audit In the absence of related records, audit attempted to estimate the quantum of evasion of service tax in respect of 7,354 out of 8,394 number of identified unregistered service providers by applying the parameter of average revenue yield from registered assessees from same services. This indicated evasion of an estimated service tax of Rs. 27.91 crore by these unregistered service providers during the year 2005-06 alone. Penalty of Rs. 27.91 crore is also leviable. The details are mentioned in the following t....
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....er the amended section 77 of the said Finance Act, a person failing to furnish the returns in due time was liable to a penalty subject to a maximum of one thousand rupees. This return is one of the critical tools with the department for effective administration of service tax and to combat evasion of service tax by registered service providers. It is, therefore, important for the department to watch and ensure that the returns are regularly submitted by all active registered service providers. The position of submission of returns by registered service providers, during the period from 2000-01 to 2005-06 has been mentioned in the following table :- Table No. 10 (Amounts in crore of rupees) Name of the Service No. of Commissionerates No. of returns Due No. of Returns received Returns Received by due date Returns received late No. of Returns not received Penalty levied Penalty not levied CAB 44 29484 19038 17498 1540 10446 2.27 106.28 PGH 69926 38026 33795 4231 31900 3.34 348.51 HFC 9102 6623 6021 602 2479 0.38 28.21 Total 108512 63687 57314 6373 44825 ....
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....Large Format Digital Imaging Pvt. Ltd., in Hyderabad II commissionerate, engaged in providing photography service had not filed any ST-3 returns during the period from 2002-03 to 2004-05. Verification of its income tax returns, however, revealed that it continued to render photography services during the above period with gross value of service being Rs. 3.28 crore. This resulted in evasion of service tax to the extent of Rs. 27.24 lakh. Interest of Rs. 9.46 lakh and penalty of Rs. 27.24 lakh were also leviable. (ii) Verification of income tax returns of M/s. Mahalakshmi Travel, in Visakhapatnam I commissionerate, revealed that the assessee had realised Rs. 2.20 crore for rendering rent-a-cab service during the period 2004-05 and 2005-06. However, no returns were filed by the assessee during this period. Applicable service tax was neither paid nor was it demanded by the department. This resulted in non-payment of service tax to the extent of Rs. 21.90 lakh. Interest of Rs. 5.69 lakh and penalty of Rs. 21.90 lakh was leviable, additionally. (iii) M/s. Kurnarakom Lakes Resorts, Kottayam, in Cochin commissionerate, engaged in health club and fitness centre services had not furni....
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.... Service Tax payable Interest Penalty CAB 28 181 8.25 3.16 8.25 PGH 30 173 6.64 2.17 6 HFC 20 44 0.37 0.12 0.37 Total 398 15.26 5.45 15.26 Figures furnished by commissionerates Further, the suppression of value with consequent short payment of service tax noticed by audit by cross verification of income tax returns of 181 and 173 assessees in rent-a-cab scheme operator and photography services, respectively was more than one sixth of the total revenue generated from these services (from 70 commissionerates) during the year 2005-06. Some illustrative cases are mentioned in the succeeding paragraphs :- (i) Cross verification of the income tax returns of M/s. Cosy Cab's, in Hyderabad-Il commissionerate, providing rent-a-cab scheme operator service revealed that the assessee had undervalued services to the extent of Rs. 6.51 crore in ST-3 returns during the period from 1 April 1997 to 31 March 1999 and from 1 April 2000 to 31 March 2005. This resulted in short payment of service tax to the extent Rs. 38.52 lakh besides applicable interest of Rs. 26.95 lakh and penalty of Rs. 38.52 lakh. ....
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.... Board may consider putting in place a mechanism for checking/verification of returns on regular basis. This checking may be reinforced by detailed scrutiny. The selection of cases for detailed scrutiny may be made on a scientific basis after appropriate risk analysis and sample size determination. The detailed scrutiny should entail correlation with other available records/returns like IT, commercial records etc. * The department should investigate all cases identified by audit where suppression of taxable value was done wilfully and take appropriate action. The Ministry while agreeing to the above recommendations informed (December 2007) that the RMS (risk management system) under preparation in their department would enable selection of returns on a scientific basis for detailed scrutiny, 3.7 Compliance issues: 3.7.1 Ineffective verification and scrutiny of returns The scrutiny of returns filed by the service providers is the most important element of the enforcement strategy of tax administration. The overriding aim of such verification/scrutiny is to provide a credible deterrence to wilful suppression of assessable value as well as to realise appropriate Governm....
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....onerates Audit attempted to check some of the ST-3 returns including those verified/checked by department on the basis of the information furnished by the assessees. Records of ST-3 returns were not maintained properly and service- wise in the department, making it difficult for audit to obtain ST-3 returns of these three services selected in audit. On scrutiny of some of the ST-3 returns with reference to information contained in those which audit could obtain, it was noticed that service tax of Rs. 7.16 crore had been short paid. This indicated that basic checks with reference to the available information in ST-3 return were not exercised. This resulted in even mistakes apparent from records going undetected by the department. These cases are mentioned in the succeeding paragraphs:- 3.7.1.1 Incorrect availing of exemption on goods and material consumed by assessee Notification dated 20 June 2003 allows exemption from service tax on the value of goods and material sold by the photography service provider to the recipient of the service on the condition that there is documentary proof in support of the value of goods and material sold, Scrutiny of ST-3 returns in audit ....
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....tions and M/s. Ovira Logistics engaged in rent-a-cab scheme operators service, in Mumbai (ST) commissionerate, did not pay service tax of Rs. 54.03 lath by declaring their services as 'export of service' during the period from October 2005 to March 2006. Since one of the above two conditions viz, such service was delivered outside India and used outside India was not met by these service providers, their services could not be treated as 'export of service'. Exemption from payment of service tax of Rs. 54.03 lakh was, therefore, inadmissible. On this being pointed out in audit (March 2007), the department replied (May 2007) that show cause notices have been issued to all the three assessees. 3.7.1.4 Excess utilisation of cenvat credit Rule 6(3)(c) of the Cenvat Credit Rules, 2004 stipulates that the provider of output service, opting not to maintain separate account for input service intended to be used for taxable services as well as exempted services, shall utilise credit only to the extent of an amount not exceeding 20 per cent of the amount of service tax payable on taxable output service. Test check of the service tax records of four assessees engaged in rent-a- cab....
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....ort levy of service tax of Rs. 3.08 lakh in seven other cases was noticed in audit. 3.7.2 Service tax collected but not remitted to the Government Section 73A of the Finance Act, 1994 (as amended with effect from 18 April 2006), provides that any person who is liable to pay service tax and has collected any amount in excess of the service tax assessed shall forthwith pay the amount so collected to the credit of the Central Government. Twenty assessees providing rent-a-cab scheme operator service and 13 assessees providing photography services, in nine commissionerates, did not remit to the Government account Rs. 33.73 lakh and Rs. 8.87 lakh respectively service tax collected by them from the customers in excess of what was paid by them to the Government. 3.7.3 Cenvat credit In terms of rule 4 of the Cenvat Credit Rules, 2004, credit is allowed to a provider of taxable service of excise duty or service tax paid on any input or capital goods or any input service. Credit can be utilised towards payment of service tax subject to the fulfilment of certain conditions. A few cases of incorrect availing of Cenvat credit noticed in audit have been mentioned in the following para....
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....sed on permanent account number (PAN) not allotted The Board in their letter dated 27 August 2001 issued instructions for allotment of service tax code numbers based on PAN allotted by income tax department to all service providers. The work was to be completed latest by 15 November 2001. The progress was to be monitored by the DGST on a weekly basis. The Board, vide circular dated 21 February 2002, had issued further instructions for allotment of PAN based service tax code numbers. As a part of electronic tax administration programme, the department has also developed allotment of service tax payer code number programme. Audit, however, found that the progress made in this regard was not encouraging and was indicative of lack of monitoring and appropriate corrective action by the department. Position of allotment of PAN based service tax code number as on 31 March 2006 in 46 commissionerates is given in the following table :- Table No. 14 Name of service No. of commissionerates No. of service providers No. of service tax providers allotted STCNS Percentage CAB 46 8628 3290 38.13 PGH 19297 11221 58.15 HFC 2139 930 ....
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....ure that the decline is not due to evasion. * The Board should establish 'Key Performance Indicators (KPIs)' for a commissionerate which should include minimum number of surveys to be conducted to identify/register assessees and garner additional revenue. * The department should verify the nature of the services being rendered by the service providers of HFC including therapeutic massage on an all India basis and recover the applicable service tax. * The department should also review the exemption granted to therapeutic massage in view of the widespread misuse pointed out by audit. * The procedure for conducting surveys needs to be streamlined and strengthened in the commissionerates to collect information about potential assessees from various sources including from income tax department. The surveys should be conducted iii a professional manner after collection, collation and analysis of information. * In all cases of service providers identified by audit, who had escaped the tax net by not registering and not paying the applicable service tax, the department should do a detailed scrutiny/investigation of the service tax evaded by not only these service providers b....