Firms in the services sector are set to face a flurry of special audit notices — from not only the service tax authorities but also the Comptroller and Auditor General of India (CAG) — after the finance ministry changed rules recently to override a few court rulings preventing such audits, especially by the CAG on private-sector service providers.
A weaker provision for CAG audit struck down by judiciary has now been replaced with a stronger one backed by an enabling provision introduced as part of the Finance Act, 2014. The change is the latest instance of the apex auditor’s ambit being widened, its treading more decisively into private companies’ books, citing implications for the exchequer.
The Service Tax (Third amendment) Rules, 2014, give statutory backing for the CAG to audit private entities for service tax compliance, overriding a Delhi High Court order that struck down CAG’s move to audit a private service provider as well as the service tax rule that the auditor had relied on. The change in rules get force from an amendment to service tax law — the Finance Act 1994 — introduced this July by finance minister Arun Jaitley. This amendment to the Act bolstered government’s rule-making powers relating to submission of records by service providers and more importantly, how they shall be ‘verified’.
Using this power, finance ministry’ December 5 amendments to service tax rule section 5 A(2), has brought back CAG audit on private sector service providers. The high court had in August struck down CAG’s audit proposal on Travelite India, saying it did not have the force of law. The Finance Act, 2014, had received President’s ascent only in August.
CAG’s constitutional role is primarily to oversee and vet the accounts of the Centre, state governments and union territories, with the purpose being to ensure prudence in their spending and revenue management. It also has powers to scrutinise the disbursal of funds to states by the Centre from the divisible pool. But, with the changes in the funding pattern of government schemes and enhanced roles of the private sector in projects where the government has direct stakes, the top auditor’s ambit is becoming larger. Alerady, it is auditing private telecom and oil & gas companies as well as public-private partnerships as these entities use public resources on a revenue-sharing basis or under other systems like licence fees. The auditor is seeking changes in the CAG’s Duties, Power and Conditions of Service Act, 1971, to enable the makeover.
The amended rules not only give statutory backing for the CAG audit of service providers, but also make it compulsory for businesses to share their cost audit reports with the accountants nominated by the CAG or the Commissioner. Cost audit reports consist of sensitive operational details, including of power consumption and manpower that give a sense of a business’ efficiency and hence are kept closely guarded. The government has been relaxing cost audit requirement for industries over the last decade as it is not in sync with a competitive free-market economy. But this remnant of the control raj is again gaining currency from a tax perspective, especially in service tax and in cases of excise duty demand on car sales at a discount.