CAG will observe now all private service sector firms

CAGFirms 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.

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