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Drafting of New MVAT Audit Form 704.

Drafting of New MVAT Audit Form 704. By CA Umesh Sharma. Why New 704?. Old 704: contains 24 pages i.e., Very long to fill in. ready comparison of returns and books figure was not available.

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Drafting of New MVAT Audit Form 704.

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  1. Drafting of New MVAT Audit Form 704. By CA Umesh Sharma

  2. Why New 704? • Old 704: • contains 24 pages i.e., Very long to fill in. • ready comparison of returns and books figure was not available. • Final computation of Tax liability and advise to file revised return was not adequate to present data in Part I. • Particulars, Verification, Observation and Remarks were misleading and confusing in Section of Part III. • Or rectification of mistake by Sales Tax Dept or Others reasons like changes in law,..,

  3. Lets have a look at New 704, which is very attractive or..,,,

  4. Highlights of New 704 • 10 Instructions List. • 3 Parts. • Part 1 of Audit Report, 15 point certification, computation of tax, etc • Part 2 of General Information, profession tax and ratios. • Part 3 of 1 to 5 Schedules of sales and purchases as per returns under MVAT and 6th for CST. • 1 Annexure of setoff with Schedules.

  5. New 704 Part I- Heading • Its Start With New heading “ Audit and Certification” • Old Forms was not having such heading. • We were already giving opinion as auditor and certifying the disclosures. • Now Specific wording of “Certification” leads greater responsibility. • New Form 704 contains some disclosures which are there in the old 704 and some new. Out of them some disclosures are prominent which leads to verification and auditing and some are certifying paras.

  6. Part 1 Clause 11. *I/We report that the statutory audit for the year __________________ of _______________________ (mention name and address of the dealer) …., • Here statutory audit would mean audit conducted in pursuance of the provisions of the Income Tax Act, 1961? • Statutory audit means Company Act, Co-op Trust Act, etc. • The details of the income tax auditor along with date of audit report has to be given. • It means VAT audit is compulsory to be signed after the completion of Tax Audit.

  7. Part 1 Clause 11. *I/We report that the statutory audit for the year __________________ of _______________________ (mention name and address of the dealer) …., • Issue: • In many cases the dealer is not required to carry out the statutory audit in pursuance of the provisions of the Income Tax Act, but is required to carry out the VAT Audit as per Section 61 of the Maharashtra Value Added Tax Act, 2002. • e.g. liquor dealer having turnover below forty lakhs, or dealer having a turnover less than forty lakhs but effected the Capital Assets purchases more than forty lakhs. • In these cases VAT Auditor should state “Not Applicable” wherever the details of statutory auditor has been asked. • Suggested Notes to Audit Report” • “ On the basis of Information and explanation provided by the dealer Audit provisions under Income tax act, 1961 are not applicable and he is not required to get his books of account audited. Under MVAT Act, the dealer is a Liquor dealer, were audit u/s 61 is mandatory. Hence the books of account are unaudited under any law and our this Report and disclosure in Para 1 of Part 1 is based on the same.”

  8. PART 1 Clause 2:Maintenance of Books of Accounts' Sales Tax related records and Financial Statements are the responsibility of the Entity's Management……, NEW • This is a new para inserted in Form 704 by recommendation of ICAI. Prior to that old 704 was open on this view, thus created unsafe environment for auditor. • It safeguards the responsibility of the auditor and states the responsibility of the management. • It gives emphasis on the basis and Limitations of Audit on which the opinion has been given by the auditor. • It is inspired by format of Statutory Audit Report under the Companies Act, 1956. It prescribes the responsibility of an auditor to comply auditing standards.

  9. PART 1 Clause 2:Maintenance of Books of Accounts' Sales Tax related records and Financial Statements are the responsibility of the Entity's Management……, NEW • Further it includes.., • “The audit includes examining' on a test basis' evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates by management as well as evaluating the overall Financial Statement presentation. We believe that our audit provides a reasonable basis for our opinion.” • This is welcome para and gives the overall picture of basis on which audit opinion are given. • Thus our other Professional brothers are put on hold to perform Audit due to this Para.

  10. Part 1 Clause 3(A)- For verification of returns as per Table below: OLD • Clause 3 (A). Is old clause, now the words “Subject to the limitation of the audit indicated in above para,” has been added for verified correctness and completeness of the below mentioned Sales Tax Returns. • In some cases CST returns are not filed for all period being turnover is NIL. Necessary disclosure will have to be made. We will see it further.., • Table of General Information and returns is there, e-mail address in newly asked.

  11. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Renewed • Clause 3(B): • and subject to *my / our remarks about non-compliance, shortcomings and deficiencies in the returns filed by the dealer as given in the Table 3 of Part 1 of this report , certify that, • Table 3 of Part 1 is most important aspect of New Audit Report, all non-compliance, shortcomings and deficiencies are to be mentioned there in only. • But there are shortcoming otherwise than Table 3, were to be mentioned? • Earlier there were 9 Points now 15, 6 new points are added. • New Points should be included in Management Representation letter. • Lets see 6 new points some renewed points one by one..,

  12. NEW Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., • 1st New Point : • a) *I/We have read and understood the instructions for filling up this audit report and the Auditor is required to fill in schedule I / II / III / IV / V/ VI (score out whichever is not applicable) and the Annexures if required. *I/We have obtained all the information and explanations which' to the best of *my / our knowledge and belief' were necessary for the purposes of our audit.

  13. Renewed Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., • ISSUES: • Thus Instruction becomes integral part of this audit report, which is required to be sign by auditor and attach the same with audit report. • The 10 Instruction becomes the scope of Audit, cognizance of the same is required in Audit programme. • Lets check the Instructions..,

  14. NEW 10 Instructions to Audit Report • 1. Please read these instructions carefully before filling up the report. • 2. No additional enclosure unless prescribed orunless it is essential for furnishing the information is to be filed with this report. • ISSUE • An Auditor may attached “Notes to Audit Report” beside the “Reconciliation Statement”. As it is essential for furnishing the information and Table 3 of Part 1 is insufficient and correlates with Schedules only.

  15. NEW 10 Instructions to Audit Report • Do not leave any field or box blank. In case any field or box is not applicable' enter 'zero' (0) in numerical fields and write 'N.A.' for 'Not Applicable' or as the case may be' 'Nil' in other fields. • This report is divided in three parts. Part 1 is mainly related to verification and certification. Part 2 is mainly related to general information about the dealer under audit. The auditor is expected to ascertain the various parameters in part 2 and supply the details required. Part 3 is about the various schedules and their Annexures.

  16. NEW 10 Instructions to Audit Report • The auditor MUST give his remarks in brief in table 3 of Part I' wherever difference is found between Amount as per returns and Amount as per audit. This is essential to make the report complete and transparent. It will also prevent avoidable queries by the Department. • Filling of Part 1 and Part 2 of this report is mandatory in respect of all the dealers. It is mandatory to fill in the relevant schedule's of part 3 as also the Annexures wherever required.

  17. NEW 10 Instructions to Audit Report • If the dealer has multi-State activities' then ratios related to gross and net profit may be given at all India level and other ratios should be given at State level. • But the table of Ratio is incomplete, which we will deal later on. • The tax liability is to be computed as required by law wherever documents are not made available to the auditor or are insufficient. ISSUE • Term ‘Document’ is defined in Section 2(10) which is inclusive definition and relates to records but does not include declaration. Thus, whether for wanting declaration tax liability is to be calculated? What about wanting Declaration? • - Whether it leads to calculate Tax Liability of “C” Forms or Other Forms not received and disclose the same as payable?

  18. NEW 10 Instructions to Audit Report • Third part of the report is linked with the type of return/s filed by the dealer and is to be filled in accordingly. Instructions provided for filling in information in the return/s are applicable to respective items of the schedules' as shown in following table.If' while filing returns' these instructions have not been followed' the auditor should ensure that they are followed in the audit report. ISSUE • See how the auditor is trapped or guided: • From Part 1 -to- Instruction to 704- then to- Instruction to Returns- then to- Returns Forms. • Some figures in schedules are not disclosed in returns format, in such cases what to do?

  19. NEW 10 Instructions to Audit Report ISSUE • A dealer doest files CST returns, being turnover is NIL and takes cognizance of Circular No.15 of 1981, in such case whether Schedule VI is to be attached? - The same issue was raised in circular No.26T of Sept 2006, there dept has clarified that “Appropriate disclosure should be made”. • Schedule VI need not be attached, but disclosure should be made in Report in Part I. Suggested Remark: • “During the period, the dealer has not effected any sales in the course of inter State trade or exports and as therefore not filed returns under the CST Act,1956 in accordance with the administrative concession granted vide Trade Circular No. 15 of 1981 dated 2.7.1981”

  20. NEW 10 Instructions to Audit Report • 10. Auditor is requested to sign and put his seal on every page of the report. ISSUE Is signature of Dealer necessary? • No specific mention is there in Audit Report either old or new, but it is recommend to take signature of dealer on Reconciliation Statement and/or at end of each schedule. As it safeguards the interest of auditor and keep binding on dealer. • Further some dealers may not be friends, on whom we can trust, they may mislead.. We auditor are watchdogs and they..,,

  21. Old definition of Friend:Friend in Need is friend in deed. New Definition of Friend:Friend is a person who can tolerate your success and ignore your failure.

  22. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., RENEW • Renewed Point: • In *my / our view the books of accounts' purchase and sale invoices as also cash memos and other sales tax related records and registers maintained by the dealer are sufficient for verification of correctness and completeness of the returns. The records relating to receipts and dispatches of goods are properly maintained. The tax invoices issued are in conformity with the provisions of law.

  23. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., RENEW • Renewed Point: • New disclosure which leads the change in Audit documentation are of : • The records relating to receipts and dispatches of goods are properly maintained. - Additional disclosure which correlates with Point O and requires to verify: • Which are records relating to receipts and dispatches of goods? Does any law required, maintenance of such record? -GRN, Lorry Receipts, Stock Transfer Notes, Delivery Challans, etc.

  24. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., RENEW • Renewed Point: • f) The deductions from the gross turnover of sales and other adjustments thereto including deduction on account of goods returned, adjustments on account of discounts as also debit/credit notes issued or received on account of other reasons, claimed in the returns are supported by necessary documents. • Further, the deductions and adjustments not claimed or made in the returns, are neither required nor authorized to be claimed or made in the returns under the provisions of relevant Act. • One can certify that deductions claimed are in accordance with provisions of law but how one can certify that deduction which are not claimed are not claimable or not authorized to be claimed. Therefore, the sentence ‘Further, ----- relevant Act be deleted’.

  25. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., RENEW • Renewed Point: ISSUES • Does this not violate the Fundamental right of dealer U/s 24 “Rectification of Mistakes” which provides time of 2 yrs time to dealer and powers to Commissioner to rectify? • If the dealer is yet to file revise return on the basis of advice of auditor then is the disclosure tenable? • In Such type of cases Can a Auditor give such opinion? What type of disclosure needs to be give to save the auditor or dealer? • Suggested Remarks: • “ The dealer is advised to file return according to Clause 5 of Part 1 of this report. Dealer is of opinion that above discloser doest effect the right to file revise return U/s 20 and rectification of mistake U/s 24 in case of the deductions and adjustments not claimed or made in the returns .”

  26. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., NEW • 2nd New Point: • j) The quantum of tax payable /claim of refund are correct. • This is newly inserted. • Suggested Remark: • If there is difference in amount of tax payable / claim of refund as per return and as per audit, the word “Subject to differences mentioned in Table 2 & 3 of Part 1 of the report” may be inserted.

  27. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., NEW • 3rd New Point: • L) The dealer is conducting his business from the place/places declared by him as his main place of business/ and the additional places of business. • This is newly inserted, which seems unnecessary as how an auditor will disclosed this in absence of information out of books. • Verify the copy of R. C. of the dealer or any other document (i.e change of address application) for principal place of business and additional places of business declared by him. • If there is deviation, then mention the same in Notes to Audit Report.

  28. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., NEW • 4th New Point: • m) The bank statements have been examined by *me/us and they are fully reflected in the books of accounts. Excepting in so far as transactions recorded in the cash book, the transactions recorded in the books of accounts are fully reflected in bank statements during the period of review. • This clause is unnecessary in MVAT Audit and is out of preview of taxation of MVAT as per Act and Rules. • Mavt Auditor may rely on the Statutory Audit of the dealer, with a suitable disclosure that: • How does, other transaction, like sales/purchase transaction, debit notes/credit notes, adjustment entries like accounts written off, assets written off, etc. various provisions like depreciation/tax provision, etc., recorded in books of accounts will get reflected in bank statements • “ We have relied on the Statutory Books Audited by the Auditor as mentioned in Part 1 of clause 1 of this report and further cognizance of limitation as mentioned in clause 2 of Part 1 of this report have been considered for above disclosure”

  29. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., NEW • 5th New Point: • n) Whether dealer has maintained stock register. (Yes/No) • Here auditor is expected to give answer in Yes/No only, hence if stock register is maintained but not adequate, the same may be given in Notes to Audit Report and for reference of maintenance of stock register or quantities details, VAT auditor can rely of the report given by Tax Auditor. • Reason for Non maintenance need not be given, but same should be taken on records in working papers. • Further there are no setoff calculation based on input and output ratio in MVAT, like in excise law, then what purpose is served is not know?

  30. Part 1 Clause 3(B)- For certification of 15 Points of Opinion.., Lets Check New 6 Points.., NEW • 6th New Point: • o) Whether dealer has maintained proper record relating to receipt, dispatch and delivery of goods. (Yes/No) • Here also auditor is expected to give answer in Yes/No form only. Also Refer the comments given for clause (b) above. • Reason for Non maintenance need not be given, but same should be taken on records in working papers. • ISSUE • No standard records has been prescribed under MVAT law, then even if some records like delivery challans or GRN, etc been maintained, whether Auditor has to put Yes. • If a Trader, maintains Purchase Invoices for receipts and Sales Invoices for dispatch, showing qty of goods, then whether it is proper record or maintenance of delivery challans on receipts and dispatch is necessary. • Opinion may defer on case to case basis.

  31. PART 1 Para 4: New Table No. 2 of Differences in Computation of tax in returns and audit. NEW • Table 2 is refined & simplified with reference to Old Form for Computation of Tax liability. • It is divided into 3 parts., • Part 1 is for MVAT tax liability. • Part 2 is for CST Tax liability. • Part 3 is for CQB. • Part 1 figures are to be linked with Schedules I to V for MVAT. • Part 2 figures are to be linked with Schedule VI for CST. • Part 3 figures are to be linked with Schedule IV for CQB. • Interest Amount is newly inserted. • ISSUE • There is no space in Schedules III for “Credit of tax as per tax deduction at source certificates”.

  32. PART 1 Para 5: Advise to file revised return- Clause A RENEW • Total 6 options are given in to advise out of which 2 are old and 4 are new. • (a) file revised returns for the period from ……………to ………….. and - • (i) Pay additional tax liability of Rs. ……………… or • ( earlier it was differential tax liability (+/- as the case may be) • (ii) Pay back excess refund received of Rs. …, or (New/ applicable for RAO)) • (iii) Claim additional refund of Rs. ……………….…, or • (iv) Reduce the claim of refund by Rs. …………,or (New) • (v) Reduce tax liability by Rs. …………………, or (New) • (vi) Revise closing balance of CQB by Rs. ………., • ISSUE Now a questions arsis on following facts that “How a dealer can file revised return in 9 month when the audit report is to be submitted in 10 months.?” • MVAT and CST figure are to clubbed or shown separately?

  33. PART 1 Para 5: Advise to file revised return- Clause B NEW • (B) Following other recommendations are made to the dealer (Please Specify) • 1) This is newly inserted disclosure; here auditor can specify his recommendations on the compliance of MVAT and CST Act by the dealer. • What is mean by recommendation: • As per COD “ a suggestion or proposal as to the best course of action” thus Notes to Audit report may not fall under this clause. It will be a professional judgment of each one to recommend any thing in absence of guidelines in this regard. • 2) If Notes to Audit report are to be enclosed, then such notes to audit report may be given in Separate Sheet along with reconciliation statements attached at the end of each Schedule I to VI.

  34. PART 1 Para 6: New Table 3 for Remarks and Observation on diff, in returns and audit as per schedule. NEW • This table could have been avoided, if the last column of “Remarks..,” have been added in Schedules 1 to 6, it self after difference column. • Earlier observation and remarks were asked against the compliance of instruction given in Verification column in each section of old 704. Now instruction for verification has been completely waived off. • Prefect linking of Schedule and Row reference is required. (Possible in excel or software if any).

  35. PART 1 Last Para for Sign, Attachments.., NEW • Status of Auditor as ‘Proprietor/ Partner” is newly inserted. • Address of Auditor is newly inserted. • MVAT Auditor may refer “Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss as mentioned in Tax Audit report for MVAT effect on sales and purchases.”

  36. PART 2 General Information Contains New disclosures, lets check them,,,

  37. Part II- 1. General Information. NEW • 1.A. b) Specify the divisions or units under same constitution for which separate books of accounts are maintained. • Check that such division/ units and address is covered in RC. For e.g., any branch, etc. • Check whether single return is filed for all places or any permission under section 20(2) for filing separate returns has been obtained by the dealer.

  38. Part II- 1. General Information. NEW • 1.B) Name and version of accounting software in use . • Obtain a copy of Purchase Invoice or License copy of Software to check the name and version of accounting software. • What if pirated versions are used of tally? • Still mention it. • For Corporate clients, been a technical matter auditor can check the same with the Information Technology Dept of dealer and obtain a certificate for the same.

  39. Part II- 1. General Information.(This information was covered in Part 1 in old 704) NEW • 1.C: The following are the major changes made during the period of review - Short description of change • iii) Changes in the accounting software . • Obtain a certificate from dealer for change in accounting software i.e, Version, New Company, etc. Materiality concept may be followed to disclose the change. • iv) Change in Product line. • Check the major products line change. Materiality concept may be followed to disclose the change. • v) New business activity. • Earlier it was Changes in Business model. • vi) Other changes, if any [ Please specify] • If there are any other changes then materiality concept may be adopted for disclosure.

  40. Part II- 2. Business related information. NEW • 2C: Class of goods sold • Earlier “Product” word replaced by “Goods”. • 2D: Address of Place of Business where the books of accounts are normally kept. • Usually books of account are to be maintained at principal palace of business. • If maintained at separate place, check whether permission has been obtained by the dealer from commissioner U/s 20(2) • Management Representation Letter to include this new information.

  41. Part II- 2. Business related information.Profession Tax Disclosure NEW • 2G(1): R.C. No. and date of effect under Profession Tax Act, if any. • (2) Profession Tax Returns filed and payments as per returns made during the period of Audit (Please tick the appropriate box.) Yes/ No • Section G deals with Deduction by Employer of Employees. • Management Representation and Working Notes to be extended to secure auditor against this material disclosure. • A person (Employer) liable to deduct tax shall get registration certificate (RC) and every person liable to pay tax shall get a certificate of Enrollment certificate (EC). • Lets see in brief the provision of Profession Tax:

  42. Part II- 2. Business related information.Profession Tax Disclosure NEW • The Maharashtra State Tax on Professions, Trades, Callings and Employments Act, 1975 ( Profession Tax Act) is enacted by State Government under the powers of Articles 276 of Constitution, for levy and collection of Profession Tax in State of Maharashtra. • Profession Tax Act is administered by the Local Sales Tax Department.It is a separate enactment, which have no co-relation with Maharashtra Value Added Tax Act. • Profession Tax is applicable to State of Maharashtra and contains 30 Sections, 33 Rules and Schedules of Rate of Tax. There are numbers of Circulars, Notification issued time to time by the Sales Tax Department for the governance of the Act.

  43. Part II- 2. Business related information.Profession Tax Disclosure NEW • As per Section 5 (1) of Profession Tax Act. 1975 such every employer, who is liable to pay Tax U/s 4, has to obtain certificate of Registration from the prescribed authority within the prescribed time. • Every Employer is liable to pay tax under this tax, on payment of salary or wages to his Employee in excess of Rs.2500 per Month as per specified in Schedule, has to get himself registered under this Act. Registration is to be obtained within 30 days form the date he becomes liable to pay the tax. • As per section 2(ba) Employees means a person employed on salary or wages and includes government servants, etc.

  44. Part II- 2. Business related information.Profession Tax Disclosure NEW • When to deduct the Profession Tax by Employer from the Salary or wages of employee: • From 1-4-2006 Onwards:

  45. Part II- 2. Business related information.Profession Tax Disclosure NEW • 1.6) Returns and Payment of Tax by Employers: • Section 6(1) deals with the period, time and form of Return in which the employers has to file the return. • (1) Every Employer registered under the Act, shall pay the amount of tax due from him according to the return on or before the date prescribed for filing of such return. • (2) The return shall be in Form III. The registered employer shall furnish the same, duly filled in and signed by him or by a person authorized by him in this behalf

  46. Part II- 2. Business related information.Profession Tax Disclosure NEW • Every registered employer whose tax liability during the previous year or a part thereof— • Annual Return • is less than Rs. 5,000 shall furnish an annual return on or before the 31st of March, of the year to which the return relates. • such return shall contain the details of the amount of tax deducted by him in respect of the twelve months comprising of the month of March of the immediately preceding year and the eleven months from April to February of the year to which the return relates.

  47. Part II- 2. Business related information.Profession Tax Disclosure NEW • Quarterly Return • Tax Liability is Rs. 5,000 or more but less than Rs. 20,000 shall furnish quarterly return on or before the last date in respect of the quarter to which the return relates. Applicable also in case of First year. • Such return shall contain the details of the amount of tax deducted by him in respect of the three months immediately preceding that last month of the quarter to which the return relates as shown in the table below.,

  48. Part II- 2. Business related information.Profession Tax Disclosure NEW • Quarterly Return

  49. Part II- 2. Business related information.Profession Tax Disclosure NEW • Monthly Return • Tax liability is Rs. 20,000 or more, shall furnish a monthly return on or before the last date of the month to which the return relates. • Such return shall contain the details of the salaries and wages and the arrears, if any, paid and the amount of tax deducted by him in respect of the month immediately preceding the month to which the return relates and the arrears, if any, for any period preceding such month.

  50. Part II- 2. Business related information.Profession Tax Disclosure NEW • Issue • In case of a dealer who have not taken registration although tax liability of EC arises, then what shall be disclose by the Auditor? • “Not Applicable” on G1. • “No” in G2 subject to Notes to Audit Report. • Common note to Audit Report: • “Information is provided on the basis of explanation and records of registration and returns of The Maharashtra State Tax On Professions, Trades, Callings and Employments Act, 1975provided by the dealer with specific reference to the Information asked in Part II-2G(2).”

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