Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates

Cir­cu­lar No. 995/2/2015-CX

F. No. 206/03/2014-CX.6

dat­ed the 27th Feb., 2015

Sub­ject:   Cen­tral Excise and Ser­vice Tax Audit norms to be fol­lowed by the Audit Commissionerates-reg

1.    Audit Com­mis­sion­er­ates have been cre­at­ed with an objec­tive to improve the func­tion­al effi­cien­cy of audit in the field for­ma­tions.  An effec­tive tax­pay­er audit plays a key role in improv­ing com­pli­ance and aug­ment­ing tax rev­enues.  It is one of the impor­tant com­pli­ance ver­i­fi­ca­tion tools avail­able to the tax admin­is­tra­tion to ver­i­fy the cor­rect­ness of the tax­es self-assessed and report­ed in the tax returns besides com­ply­ing with oth­er legal obligations.

2.    In the past, norms / guide­lines were issued by the Board for con­duct of audit by the Com­mis­sion­er­ates. The exist­ing norms / guide­lines for selec­tion of units for audit are based on a sin­gle cri­te­ri­on, name­ly, the thresh­old lim­it of tax­es paid in the pre­vi­ous Finan­cial Year.  Tax­pay­ers are cat­e­go­rized­in­to manda­to­ry and non-manda­to­ry units based on tax­es paid and the units are required to be audit­ed as per the fre­quen­cy norms stip­u­lat­ed for each cat­e­go­ry.    The cri­te­ria adopt­ed do not take into account the risk fac­tors and the resources avail­able for under­tak­ing audit.  The uni­form norms and fre­quen­cy pre­scribed for con­duct­ing audits across the Com­mis­sion­er­ates also do not fac­tor in cru­cial inputs such as the assessee base, avail­abil­i­ty­of man­pow­er and the risk indi­ca­tors for selec­tion of units for con­duct­ing audit.  The audit cov­er­age in Ser­vice Tax has been below the sat­is­fac­to­ry lev­els on account of huge tax­pay­er base and lim­it­ed avail­abil­i­ty of man­pow­er in major cities such as Mum­bai, Del­hi, Ben­galu­ru, etc.

3.    In the back­ground of cre­ation of exclu­sive Com­mis­sion­er­ates to deal with audit and hav­ing regard to the dif­fi­cul­ties faced, and also the expe­ri­ence gained with regard to audit cov­er­age in the past, it has been decid­ed to revise the exist­ing norms for con­duct of audit and issue fresh norms / guide­lines tak­ing into account the avail­abil­i­ty of man­pow­er in the Audit Com­mis­sion­er­ate. The new norms move away from the con­cept of manda­to­ry and non-manda­to­ry audits and do not pre­scribe any fre­quen­cy for con­duct­ing audits. The new norms intro­duce risk based selec­tion of assessees for audit based on identified/quantified risk para­me­ters and also intro­duce juris­dic­tion­al spe­cif­ic cri­te­ria (as opposed to uni­form norm across the coun­try) for seg­ment­ing the tax­pay­er into large, medi­um & small categories.

4.   In this regard, the fol­low­ing guide­lines are issued in super­s­es­sion of the ear­li­er guidelines:

Annu­al plan for Audit Coverage:

5.0    The Audit Com­mis­sion­er­ate would release an Annu­al plan by 31stMay, indi­cat­ing the names of Assessees that are pro­posed to be audit­ed dur­ing the course of the year (peri­od between 1st July to 30th June of the next year) and the month in which the Audit offi­cers would vis­it the units for ver­i­fi­ca­tion of records. The Audit cov­er­age (i.e. num­bers of units select­ed for Audit in a year) may be cal­i­brat­ed with the man­pow­er avail­abil­i­ty in a Com­mis­sion­er­ate. The work­ing strength of offi­cers in Audit Com­mis­sion­er­ate would be tak­en as the basis for calibration.

5.1   In order to ensure ade­quate cov­er­age, the Assessees/Taxpayersshall be grouped in three cat­e­gories name­ly Large, Medi­um and Small units.Given the past expe­ri­ence in detec­tion of non-com­pli­ance and recov­ery of duty through Audits, it is sug­gest­ed that Audit­groups may be deployed to cov­er­Large, Medi­um and Small units as follows:

a)    40 % of man­pow­er to Large units

b)    25 % of man­pow­er to Medi­um units

c)    15 % of man­pow­er to  Small units

d)    20 % of man­pow­er for plan­ning, coor­di­na­tion and fol­low up.

5.2    The com­po­si­tion of Audit­Group­sto cov­er Large, Medi­um and Small units may be done as follows:

a)    2 — 3 Super­in­ten­dents and 3 — 5 Inspec­tors for the con­duct of audit of Large assessees / taxpayers.

b)    1 — 2 Super­in­ten­dent and 2 — 3 Inspec­tors for con­duct of audit of Medi­um assessees / taxpayers.

c)    1 Super­in­ten­dent and 1 — 2 Inspec­tors for Small assessees / taxpayers.

Assis­tant / Deputy Com­mis­sion­ers may lead the Audit Groups in select cases.

5.3    The indica­tive dura­tion for con­duct of audit that is inclu­sive of desk review, prepa­ra­tion and approval of Audit plan, actu­al Audit and prepa­ra­tion of Audit report wher­ev­er nec­es­sary, for each cat­e­go­ry would be as under:

a)    Large assessees / tax­pay­ers — 6 to 8 work­ing days

b)    Medi­um assessees / tax­pay­ers — 4 to 6 work­ing days.

c)    Small assessees / tax­pay­ers — 2 to 4 work­ing days

5.4    Giv­en that there are around 249 work­ing days in a year, the num­ber of Audits that can be approx­i­mate­ly con­duct­ed in a year are as follows:

a)    31 Large units (cal­cu­lat­ed at 8 days per unit) by one Audit party

b)    42 Medi­um units (cal­cu­lat­ed at 6 days per unit) by one Audit par­ty and

c)    62 Small units (cal­cu­lat­ed at 4 days per Audit) by one Audit party

5.5   The afore­men­tioned num­ber of Audits could be then mul­ti­plied by the num­ber of Audit teams pre­pared for each cat­e­go­ry to arrive at the total num­ber of Audits that can be con­duct­ed by each Com­mis­sion­er­ate dur­ing the year.

5.6    The man­ner of deploy­ment of offi­cers as men­tioned above and cal­cu­la­tion of num­ber of units that can be audit­ed dur­ing the year are illus­trat­ed below:

1. Sup­pose the work­ing strength of an Audit Com­mis­sion­er­ate is 60 Super­in­ten­dents and 80 Inspectors.The deploy­ment of offi­cers would be: 24 Super­in­ten­dents and 32 Inspec­tors for large units, 15 Super­in­ten­dents and 20 Inspec­tors for medi­um units and 9 Super­in­ten­dents and 12 Inspec­tors for small units and 12 Super­in­ten­dents and 16 Inspec­tors in Head­quar­ters.  To the extent pos­si­ble, the man­pow­er dis­tri­b­u­tion amongst the Cir­cles with­in an Audit Com­miss­sion­er­ate should be pro­por­tion­al to the large, medi­um and small Assessee base in the Cir­cle. In oth­er words, the 24 Super­in­ten­dents and 32 Inspec­tors des­ig­nat­ed for large Assessees would be divid­ed amongst the Cir­cles pro­por­tion­al to the num­ber of large Assessees under each Circle.The deploy­ment has to be done in sim­i­lar man­ner for medi­um and small units.
2. Using the man­pow­er as above, there would be around 10teams for large units, 12 teams for Medi­um units and 6 teams for Small units in the Com­mis­sion­er­ate. The total num­ber of units that could be audit­ed in a year thus works out to around 310 large units, 504 medi­um units and 372 small units i.e. 1186 units in all.  The Com­mis­sion­ers could exer­cise nec­es­sary real­lo­ca­tion of offi­cers to Medi­um units, if the audit of Large units is com­plet­ed. Thus, each Com­mis­sion­er­ate can car­ry out the cal­cu­la­tions based on the work­ing strength.

5.7    The cri­te­ria for cat­e­go­riz­ing an assessee / tax­pay­er as large, medi­um or small would be(a) annu­al val­ue of clear­ances and total duty paid in case of Cen­tral Excise and/or(b) val­ue of ser­vices ren­dered and ser­vices received (which are dutiable on reverse charge basis)and total duty paid in the case of Servce Tax. The thresh­old lim­its of val­ue of clear­ances / val­ue of ser­vices for cat­e­go­riz­ing the units into large, medi­um and small would be depen­dent upon (i) the avail­able man­pow­er in the Audit Com­mis­sion­er­ate and (ii) the Assessee base, turnover and duty paid by each Assessee in the juris­dic­tion of the Audit Com­mis­sion­er­ate. It may be not­ed that thresh­old lim­its may vary from one Audit Com­mis­sion­er­ate to anoth­er Audit Com­mis­sion­er­ate in view of vary­ing num­ber of Assessees and quan­tum of val­ue of clear­ances / ser­vices and duty paid in case of each Assessee. The Audit Com­mis­sion­er­ateswould obtainthe req­ui­site data from EDW / ACES / EASIEST for cat­e­go­riza­tion of Assessees into large / medi­um / small with­in their Com­mis­sion­er­ate. The cat­e­go­riza­tion would be done based on the method­ol­o­gy pre­scribed by the Direc­torate Gen­er­al of Audit.The method­ol­o­gy for cat­e­go­riza­tion would be com­mu­ni­cat­ed to the Audit Com­mis­sion­er­ates by Direc­torate Gen­er­al of Audit dur­ing the month of March / Aprilevery year.

5.8    The Audit Com­mis­sion­er­ates shall con­sult zon­al units of Direc­torate Gen­er­al of Audit while final­iz­ing the Annu­al plan ofAu­dit cov­er­age with the avail­able man­pow­er at the begin­ning of the finan­cial year. The sched­ul­ing can be reviewed half year­ly for nec­es­sary adjust­ments, if any.The Direc­torate Gen­er­al of Audit will also peri­od­i­cal­ly review and revise, wher­ev­er nec­es­sary, the cri­te­ria for cat­e­go­riz­ing the units into large, medi­um and small with­in each Zone / Com­mi­sion­er­ate, man­pow­er deploy­ment in each cat­e­go­ry, com­po­si­tion of audit team and num­ber of days required for audit in each cat­e­go­ry. The review / revi­sion would be done in con­sul­ta­tion with the Audit Com­mis­sion­er­ates so as to ensure that Audit cov­er­age by offi­cers is made optimal.

5.9    The Chief Com­mis­sion­er may allow tem­po­rary real­lo­ca­tion / diver­sion of offi­cers amongst the Audit Com­mis­sion­er­ates to ensure ade­quate Audit cov­er­age of all cat­e­gories of Assessees / Tax­pay­ers falling under the juris­dic­tion of the zone.

Selec­tion methodology:

6.0    The selec­tion of Assessees would be done based on the risk eval­u­a­tion method pre­scribed by the Direc­torate Gen­er­al of Audit. The risk eval­u­a­tion method would be sep­a­rate­ly com­mu­ni­cat­ed to the Audit Comis­sion­er­ates dur­ing the month of March / April every year. The risk assess­ment func­tion will be joint­ly han­dled by Nation­al Risk Man­agers (NRM) sit­u­at­ed in the Direc­torate Gen­er­al of Audit and Local Risk Man­agers (LRM) head­ing the Risk Man­age­ment sec­tion of Audit Commissionerates.The Risk Man­age­ment sec­tion of Audit Com­mis­sion­er­ate would ensure avail­abil­i­ty of Assessee / Tax­pay­er wise data for a peri­od of last three years,which would facil­i­tate risk assess­ment and prepa­ra­tion of the list of assessees that would be audit­ed in the cur­rent year.

6.1    The Audit Com­mis­sion­er­ates could also select few units at ran­dom or based on local risk per­cep­tion in each cat­e­go­ry of large, medi­um and small tax pay­ers. The results of Audit and the feed­back from ran­dom selec­tion would help in eval­u­at­ing para­me­ters used for selec­tion process.

6.2    The Audit Com­mis­sion­er­ates after prepar­ing the annu­al plan ofAu­dit cov­er­age as indi­cat­ed above, would also pre­pare a list of units where risk can be mit­i­gat­ed through detailed scruti­ny of returns and con­vey the details to the Exec­u­tive Com­mis­sion­ers for tak­ing nec­es­sary action. The selec­tion of such units can be car­ried out at zon­al lev­el so that the Audit and detailed scruti­ny com­ple­ment each oth­er. The list of such units and rea­son for selec­tion should be shared with the Direc­torate Gen­er­al of Audit.

6.3   The above norms would become oper­a­tive from 1st July 2015. Direc­torate Gen­er­al of Audit will review the effi­ca­cy of the above para­me­ters as well as fre­quen­cy of audits in con­sul­ta­tion with Audit Commissionerates.

Theme based coor­di­nat­ed Audits

7.0    Theme based coor­di­nat­ed Audits at all India lev­el would be con­duct­ed by con­cerned Audit Com­mis­sion­er­ates in a syn­chro­nized man­ner. The theme would be select­ed by the Direc­torate Gen­er­al of Audit based on sys­tem­at­ic and method­i­cal risk analy­sis of inter­nal tax­pay­er data (from ACES and EDW), eco­nom­ic indi­ca­tors, third par­ty infor­ma­tion from tax and oth­er reg­u­la­to­ry author­i­ties and oth­er rel­e­vant sources of data. Direc­torate Gen­er­al of Audit would also con­sult trade, indus­try and ser­vice providers from time to time, wher­ev­er nec­es­sary. The theme would be inti­mat­ed well in advance, say four to six months, to the field for­ma­tions. Detailed ques­tion­naires would be pre­pared as guid­ance to the Audit par­ties. The dates for such Audits would be fixed in advance, say some­time in Decem­ber every year, so that they can be blocked by the Com­mis­sion­er­ates. The num­ber of such Audits will be one or at best two in a year. The selec­tion of theme / issue, coor­di­na­tion and dis­sem­i­na­tion would be done by DG(Audit) in con­sul­ta­tion with the field formations.

7.1    The theme based coor­di­nat­ed Auditswould also be car­ried out at the Zon­al lev­el. The theme for the Audit, which could be a sen­si­tive com­mod­i­ty or a ser­vice, would be select­ed at the zon­al lev­el and simul­ta­ne­ous and coor­di­nat­ed Audit would be car­ried out with­in the zone. The num­ber of such Audits will again be one or two in a year. The theme for the Audit would be select­ed based on analy­sis of data pro­vid­ed by ACES, EDW and rel­e­vant third par­ty infor­ma­tion iden­ti­fied from time to time. The Chief Com­mis­sion­er may involve the zon­al units of Direc­torate Gen­er­al of Audit in selec­tion of theme, plan­ning and exe­cu­tion of theme based Audit.

Audit of Mul­ti Loca­tion­al Units

8.   In case of mul­ti-loca­tion­al units and mul­ti-loca­tion­al Ser­vice Providers, as pre­scribed in the Cen­tral Excise Audit Man­u­al and Ser­vice Tax Audit Man­u­al respec­tive­ly, the zon­al units of the Direc­torate Gen­er­al of Audit will con­tin­ue to coor­di­nate the audit of mul­ti-loca­tion­al man­u­fac­tur­ing units and mul­ti-loca­tion­al ser­vice providers.  In case of mulit-loca­tion­al units locat­ed with one zone under dif­fer­ent Audit Com­mis­sion­er­ates, the coor­di­na­tion will be car­ried out at the zon­al lev­el by one of the Audit Com­mis­sion­er­ates.  For this pur­pose, wher­ev­er there are more than one Audit Com­mis­sion­er­ate in a zone, the Prin­ci­pal Chief Com­mis­sion­er / Chief Com­mis­sion­er may des­ig­nate one of the Audit Com­mis­sion­er­ate for under­tak­ing such coor­di­na­tion and for iden­ti­fy­ing units based on com­mon PAN for the pur­pos­es of inte­grat­ed Audit.

Accred­it­ed sta­tus for defer­ring fre­quen­cy of Audit

9.   There can be a seg­ment of Assessees, who could be giv­en “accred­it­ed” sta­tus, sim­i­lar to the one giv­en in Cus­toms, based on their proven track record of com­pli­ance with tax laws and pro­ce­dures. Such iden­ti­fied assessees need not be sub­ject­ed to Audit in every cycle. It has been decid­ed that the fre­quen­cy or peri­od­ic­i­ty of audit in their case would not be less than 3 years.  The pro­ce­dure and cri­te­ria for accred­i­ta­tion are under exam­i­na­tion and would be com­mu­ni­cat­ed separately.

Audit of LTUs

10.   In case of LTUs, 80% of the man­pow­er may be used for­con­duct­ing audits and 20% of the man­pow­er may be used for head­quar­ters func­tions. The Audit Group would com­prise 2–4 Super­in­ten­dents and 3–6 Inspec­tors. The indica­tive dura­tion for con­duct of audit that is inclu­sive of desk review, prepa­ra­tion and approval of Audit plan, actu­al audit and prepa­ra­tion of Audit report is 8 to 10 work­ing days. Based on the rec­om­mend­ed dura­tion, the num­ber of units that could be audit­ed in a year would be 25 LTUs (cal­cu­lat­ed at 10 days per Audit) by one Audit group. The Audit groups from LTU Audit Commissionerate’s Cir­cles would con­duct the audit of LTUs and wher­ev­er addi­tion­al man­pow­er assis­tance is required the same can be sought from oth­er LTUs or the juris­dic­tion­al Cen­tral Excise/Service Tax Audit Com­mis­sion­er­ate. Fur­ther, audit of the LTU should be con­duct­ed in a coor­di­nat­ed man­ner i.e., the audit of Head Office and group units should be con­duct­ed simul­ta­ne­ous­ly. For this pur­pose, the audit dates should be decid­ed in con­sul­ta­tion with the LTU. The total num­ber and selec­tion of indi­vid­ual assessees for audit would be done as per the risk eval­u­a­tion method rec­om­mend­ed by the Direc­torate Gen­er­al of Audit.

Removal of difficulty

11.   Past guide­lines and instruc­tions on the sub­ject stand mod­i­fied to the extent they are in con­flict with these guide­lines. Dif­fi­cul­ties faced, if any in the imple­men­ta­tion of above instruc­tions may be brought to the notice of the Board and Direc­torate Gen­er­al of Audit at an ear­ly date. The Prin­ci­pal Chief Com­mis­sion­ers and Chief Com­mis­sion­ers are autho­rized to issue appro­pri­ate instruc­tions, to be valid for tem­po­rary peri­ods, to remove any dif­fi­cul­ty in con­duct of audits which are impor­tant from the per­spec­tive of aug­men­ta­tion of revenue.