Value Added Tax (VAT)

Meaning of VAT Audit:

VAT will replace the present sales tax in India. Under the current single-
point system of tax levy, the manufacturer or importer of goods into a State
is liable to sales tax. There is no sales tax on the further distribution channel.
VAT, in simple terms, is a multi-point levy on each of the entities in the
supply chain with the facility of set-off of input tax that is, the tax paid at the
stage of purchase of goods by a trader and on purchase of raw materials by a
manufacturer. Only the value addition in the hands of each of the entities is
subject to tax. For instance, if a dealer purchases goods for Rs 100 from
another dealer and a tax of Rs 10 has been charged in the bill, and he sells
the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per
cent, the tax payable by the dealer will be only Rs 2, being the difference
between the tax collected of Rs 12 and tax already paid on purchases of Rs
10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value
addition in his hands.

Purchase price - Rs 100

Tax paid on purchase - Rs 10 (input tax)
Sale price - Rs 120
Tax payable on sale price - Rs 12 (output tax)
Input tax credit - Rs 10
VAT payable - Rs 2
VAT levy will be administered by the Value Added Tax Act and the rules
made there-under.

VAT can be computed by using any of the three methods detailed below:
 The Subtraction method:- The tax rate is applied to the difference
between the value of output and the cost of input.
 The Addition method: The value added is computed by adding all the
payments that is payable to the factors of production (viz., wages,
salaries, interest payments etc).
 Tax credit method: This entails set-off of the tax paid on inputs from tax
collected on sales.

India opted for tax credit method, which is similar to CENVAT.

VAT law introduces words and concepts which have a special meaning for
VAT administration purposes. For business enterprises, and especially for
those who must register for VAT purposes, it is important to understand and
appreciate the meaning of these definitions and concepts. These are dealt
with in Section 2 of the Act. The following concepts are the most important.

Many states in India have started asking the professionals (sometimes

Chartered Accountants only) to carry out a VAT audit similar to the Tax
audit as envisaged under Income Tax. This is a move towards distancing the
tax administration form the erstwhile hold of the Sale Tax officers also a
move to trust the tax payers more. In central excise regime the self
assessment scheme which has been working for some time now has result,
which indicate that 97 % of the monies are collected on voluntary
compliance by tax compliant assesses. A mere 3% is out of the audits/
investigation etc.

The VAT audit assignment is an opportunity for providing extraordinary

service to the client. The statutory requirements of the audit could be
covered and the compliance of the Act and rules confirmed or reported.
While doing so the context of the verification can be expanded to examine
and report any value addition which is possible for the client. In the audit
program which is designed the areas where value addition is possible can be
added as per the experience of the auditor. The areas where value addition
normally could be possible as per the authors among many others are as
under:

 Ensuring that the goods are properly classified under proper schedule so
that the tax rates are proper and correct. The cost of an incorrect tax rate
is that there is risk of a demand from the department or being
uncompetitive in the market. Both the results are equally disastrous.
Educating the client to any error/ exposure in this area could be important
as the impact of the same may not be appreciated by a business man
where no such demand has been made till date.

 Ensuring that the concern has a policy goods of procured only from
registered dealers and avoid procuring from unregistered dealers. This
would save on transaction cost of compliance in that area along with
avoiding the additional risk denial of the credit/ deduction. Where the
dealer is an exporter ensuring that the input setoff is claimed on inputs
 even if they are used in exempted goods which are exported or exported
as such.

 Ensuring that input setoff is properly claimed in case of Schedule V items

especially on electronic or electrical items. Confirm that where they are
used in relation to manufacturing activity, storing information, for issuing
invoices, set off can be claimed.

 There are a number of options under works contract, each with its own
restriction/ conditions and benefits. Confirming that these were
considered when opting in every year. Possibility of having another
concern for availing the alternative may also be a possible solution.

 Ensuring that the deduction for labour charges is claimed for works
contract either on actual basis is higher and on standard basis is not
ascertainable.

 Proper planning for the extent of consignment sales within the state. The
sales mix between direct sales and those through the agent.

 Reviewing the customer profile for methodology of selling by stock

transfers to depot/ consignment agents outside the state rather than direct
sale or vice versa.

 Reviewing the supplier’s location for optimizing the tax credits.

 Confirming that the refund claims are made from time to time
appropriately to avoid unnecessary locking up of funds for working
capital.

 Examining the option of supply of materials to job workers / contractors

free of cost to optimise the tax cost.

 Confirming that the job worker does not add the value of materials sent
by the principal for discharging VAT/CST.

As the audit is being done many more areas where value could be available
would unfold. That maybe added to this list. The auditor could then be a
profit centre instead of a cost centre and could also be adequately
compensated for the same. If the value addition were established the clients
would require the audit without any statutory requirement.
 Advantages & Disadvantages of VAT

Advantages of VAT:
In the advantages part we will first look after the broad coverage of VAT in
the Indian market. Then we will consider the level of security the Indian
VAT is having on our revenues. Obviously the selection of items to be
covered by VAT in India will be given a bullet to think upon and at last we
will check out the co-ordination VAT in India will be having with our
existing direct tax system.

1) Coverage :

If the tax is carried through the retail level, it offers all the economic
advantages of a tax that includes the entire retail price within its scope, at the
same time the direct payment of the tax is spread out and over a large
number of firms instead of being concentrated on particular groups, such as
wholesalers or retailers.

If retailers do evade, tax will be lost only on their margins because

customers that are registered firms gain nothing if their suppliers fail to
collect tax, except delay in payment; they will pay more to the government
themselves. Under other forms of sales tax, both seller and customer gain by
evading tax. One particular advantage is that of the widening of the tax base
by bringing all transactions into the tax net. Specifically, VAT gives the new
government the opportunity to bring back into the tax system all those
persons and entities who were given tax exemptions in one form or another
by the previous regime.

2) Revenue security:

VAT represents an important instrument against tax evasion and is superior

to a business tax or a sales tax from the point of view of revenue security for
three reasons.

In the first place, under VAT it is only buyers at the final stage who have an
interest in undervaluing their purchases, since the deduction system ensures
that buyers at earlier stages will be refunded the taxes on their purchases.
Therefore, tax losses due to undervaluation should be limited to the value
added at the last stage. Under a retail sales tax, on the other hand, retailer
and consumer have a mutual interest in underdeclaring the actual purchase
price.

Secondly, under VAT, if payment of tax is successfully avoided at one stage

nothing will be lost if it is picked up at a later stage; and even if it is not
picked up subsequently, the government will at least have collected the VAT
paid at stages previous to that at which the tax was avoided; while if evasion
takes place at the final stage the state will lose only the tax on the value
added at that point.

If evasion takes place under a sales tax, on the other hand, all the taxes due
on the product are lost to the government.
A significant advantage of the value added form in any country is the cross-
audit feature. Tax charged by one firm is reported as a deduction by the
firms buying from it. Only on the final sale to the consumer is there no
possibility of cross audit.

3) Selectivity:

VAT may be selectively applied to specific goods or business entities. We

have already addressed essential goods and small business. In addition the
VAT does not burden capital goods because the consumption-type VAT
provides a full credit for the tax included in purchases of capital goods. The
credit does not subsidize the purchase of capital goods; it simply eliminates
the tax that has been imposed on them.

4) Co-ordination of VAT with direct taxation:

Most taxpayers cheat on their sales not to evade VAT but to evade personal
and corporate income taxes. The operation of a VAT resembles that of the
income tax more than that of other taxes, and an effective VAT greatly aids
income tax administration and revenue collection.
Disadvantages of VAT:

1) VAT is regressive:

It is claimed that the tax is regressive, i.e its burden falls disproportionately
on the poor since the poor are likely to spend more of their income than the
relatively rich person. There is merit in this argument, particularly if it
attempts to replace direct or indirect taxes with steep, progressive rates.
However, observation from around the world and even Guyana has shown
that steep tax rates lead to evasion, and in the case of income tax act as a
disincentive to effort.

Further, there is now a tendency in most countries to reduce this

progressivity of taxes as has been done in Guyana where a flat rate of
income tax has been introduced. In any case VAT recognises and makes
room for progressivity by applying no or low rates of tax on essential items
such as food, clothes and medicine. In addition it allows for steep rates of tax
on luxury items, although this can create problems for administration and
open opportunities for evasion by way of deliberate misclassification, a
problem incidentally not peculiar to VAT, and which takes place extensively
in the area of customs duties.

2) VAT is too difficult to operate from the position of both the

administration and business:

(a) The administration: It is often argued that VAT places a special burden
on tax administration. However, it is worth noting that wherever VAT was
introduced one of its effects was the rationalization and simplification of the
previous indirect tax system and its administration. Each of the previous
indirect taxes such as customs duties, purchase tax and excise duties
replaced by VAT had its own rate structure as well as a different tax base
and separate administrative procedure. The consolidation and incorporation
of numerous indirect taxes into the VAT would simplify the rate structure,
tax base, and administration of the indirect tax system, thereby eliminating
the overlapping auditing practices that had plagued those systems.

In addition, the abolition of a number of alternative indirect taxes releases

experienced personnel to focus on a single tax. It also means reduction in the
number of forms used, legislation to be applied and returns and accounts
with which the business person has to contend.

(b) Business: It is true that the VAT is collected from a larger number of
firms than under any form of income tax or single state sales tax; to the
typical smaller firms the complexities of the tax and the need for more
extensive records (for example, to justify deductions) are likely to prove
serious.

However, it is often overlooked that businesses already function with

considerable administrative responsibility for a number of laws including the
National Insurance
Act and the Income Tax Act.

Under the Income Tax (Accounts and Records) Regulations of 1980 every
person, without exception is required to maintain detailed and extensive
records of all its transactions. Compliance with this will certainly ensure
compliance with VAT regulations, and since there is an actual benefit to be
derived from accounting for VAT paid on input there is an incentive for
proper record-keeping.

As we have noted before, VAT also allows for the exemption of small
businesses from the system.

Under any form of sales taxation, small businesses have to be granted special
treatment because of their inability to cope with the requirements of keeping
adequate records which larger enterprises can handle at a reasonable cost.
The intent of the special treatment is to reduce the administrative burden on
small enterprises, but not the taxes that normally would be charged on the
goods and services they supply. The revenue loss at the final link in the
commercial cycle is limited only to the value added at that stage, whereas in
the case of income tax or sales tax the entire tax is lost. To recover the loss
from exemptions, a flat tax on turnover may be applied.

3. VAT is inflationary:

Some businessmen seize almost any opportunity to raise prices, and the
introduction of VAT certainly offers such an opportunity. However,
temporary price controls, a careful setting of the rate of VAT and the
significance of the taxes they replace should generally ensure that there is no
increase if any in the cost of living. To the extent that they lead to a
reduction in income tax, any price increases may be offset by increases in
take-home pay.

In any case, any price consequence is one time only and prices should
stabilise thereafter.

4. VAT favours the capital intensive firm:

It is also argued that VAT places a heavy direct impact of tax on the labour-
intensive firm compared to the capital- intensive competitor, since the ratio
of value added to selling price is greater for the former. This is a real
problem for labour-intensive economies and industries.

Items Covered in Indian VAT

550 items covered 270 items of basic needs, Rest 12.5% VAT. Gold &
like medicine, drugs, agro & silver jewellery - 1%
industrial inputs, capital &
declared goods 4% VAT

Tea-producing states options Petrol, diesel, liquor, lottery Sugar, textile & tobacco
either percentage VAT not included * excluded for one year

Traders with turnover of less than 500,000 rupees are exempt from the new tax.

Note: Some states like Delhi have imposed VAT on diesel at

20%, which is higher than the 12% sales tax
charged earlier. Similarly, Delhi imposed VAT on LPG at
12.5%, which is also higher than the previous sales tax rate
of 8 percent.

"More than 550 items would be covered under the new Indian VAT regime
of which 46 natural and unprocessed local products would be exempt from
VAT", a PTI report quoted West Bengal Finance
Minister and VAT panel chairman Asim Dasgupta as saying.

About 270 items including drugs and medicines, all agricultural and
industrial inputs, capital goods and declared goods would attract four per
cent VAT in India.
The remaining items would attract 12.5 per cent VAT. Precious metals like
gold and bullion would be taxed at one per cent.
Considering the difficulties faced by the tea industry, it was decided that tea-
producing states would be given an option to levy 12.5 per cent or four per
cent subject to review in 2006. Petrol and diesel would be kept out of VAT
regime in India, which covers only marketable items. Dasgupta was quoted
as saying that the panel was yet to take a view on CNG.

Following opposition from some of the states, it was decided that states
would have option to either levy four per cent or totally exempt food grains
but it would be reviewed after one year. Three items - sugar, textile and
tobacco - covered under Additional Excise Duties, will not be under VAT
regime for one year but the existing arrangement would continue.

The Indian VAT panel relaxed the threshold limit for traders coming under
VAT regime from Rs 5-50 lakh of turnover from the previous stance of Rs
5-40 lakh.
Traders within this limit can pay a composite VAT rate of one per cent but
would not be entitled to input tax credit.
 The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation.

The existing sales tax structure allows for double taxation thereby cascading
the tax burden. For example, before a commodity is produced, inputs are
first taxed, the produced commodity is then taxed and finally at the time of
sale, the entire commodity is taxed once again. By taxing the commodity
multiple times, it has in effect increased the cost of the goods and therefore
the price the end consumer will pay for it.
The transaction chain under VAT assuming that a profit of Rs 10 is retained
during each sale.

SALE 'A' OF CHENNAI 'B' OF SALE 'C' OF

@ Rs. 100/- BANGALORE @ Rs. 114/- BANGALORE
»» »» »» »»
SALE 'D' OF SALE CONSUMER
@ Rs. 124/- BANGALORE @ Rs. 134/- IN
»» »» »» BANGALORE
Tax implication under Value Added Tax Act
Seller Buyer Selling Tax Rate Invoice Tax Tax Net
Price value Payable Credit TaxOutflo
(Excludin (Incl Tax) w
g Tax)
A B 100 4% CST 104 4 0 4.00

B C 114 12.5% 128.25 14.25 0* 14.25

VAT

C D 124 12.5% 139.50 15.50 14.25 1.25

VAT

D Consumer 134 12.5% 150.75 16.75 15.50 1.25

VAT

Total to Govt. VAT CST 16.75

4.00
 Necessity of VAT in India
India, particularly the trading community, has believed in accepting and
adopting loopholes in any system administered by the state or the Centre. If
a well-administered system comes in, it will close avenues for traders and
businessmen to evade paying taxes. They will also be compelled to keep
proper records of their sales and purchases.
Many sections hold the view that the trading community has been amongst
the biggest offenders when it comes to evading taxes.

Under the VAT system, no exemptions will be given and a tax will be levied
at each stage of manufacture of a product. At each stage of value-addition,
the tax levied on the inputs can be claimed back from the tax authorities.

At a macro level, there are two issues, which make the introduction of VAT
critical for India. Industry watchers say that the VAT system, if enforced
properly, forms part of the fiscal consolidation strategy for the country. It
could, in fact, help address the fiscal deficit problem and the revenues
estimated to be collected could actually mean lowering of the fiscal deficit
burden for the government.

The International Monetary Fund (IMF), in its semi-annual World Economic

Outlook released on April 9, expressed its concern over India's large fiscal
deficit - at 10 per cent of the GDP.

Further any globally accepted tax administrative system will only help India
integrate better in the World Trade Organisation regime.

Fraud detected by auditor:

Fraud in the North Woods - how an internal auditor detected fraud in the
Northwest - Fraud Findings Internal Auditor , June, 1994 by Richard A.
Morley.

The construction site was in the woods on the shore of a large bay. The
project to build a huge structure of concrete and steel had just begun. A
young engineer on the project called his father, a senior vice president at the
home office of the large construction firm, to convey some misgivings he
had about some of the transactions he had observed at the project site.

On Monday morning, an internal auditor was on a plane to the Northwest to

conduct a "routine audit." After the usual friendly, cooperative greeting, the
auditor told the office manager he would like to start by looking at the petty
cash fund.

The first snake to crawl out from under the rocks was a gasoline charge card
receipt copy in the current batch of items for reimbursement -- the original of
which was in the last month's batch, already reimbursed. Next, there was a
receipt for a cash payment to a trucker for hauling logs. The auditor asked
where the logs went and whether they were sold. He then listened to a rather
bizarre story about the logs being from the shore and too full of salt to be
useful. The office manager said that they were hauled away for burning.
Then the auditor came upon a gasoline card receipt for three expensive
automobile batteries purchased from the local service station. A company
policy required that all batteries and tires be purchased from one major
manufacturer that provided a substantial volume discount. The office
manager explained that there was no dealer available locally for the
preferred brand. The auditor was not satisfied with this explanation, knowing
there was a major city nearby, and he asked to see the batteries. The office
manager was unable to recall just where the batteries were. He directed the
auditor to one pickup truck after another and eventually told the auditor that
the batteries were on a barge out in the bay. The auditor rowed a boat out to
the barge and determined that the batteries were not there either.

When confronted, the office manager explained that the store that sold the
batteries also sold sporting goods and that the batteries were really fishing
equipment for workers to use on breaks. He further explained that the fishing
equipment was invoiced as batteries to avoid challenge in the home office.
The auditor's request to see the fishing equipment yielded the response that it
was around somewhere office manager or lose the contract to a competitor.
Next, the auditor looked through the accounts payable files. A file for the
vendor supplying ready-mixed concrete for the project held seven truckload
receipts and the paid invoice copies to cover seven loads. Six of the seven
receipts were wrinkled, a bit dirty from handling, and were signed by the
yard foreman. The seventh was fresh, clean, and signed by the office
manager.
The concrete received up to that point had been used to lay pads for
construction buildings and sheds. None of the thousands and thousands of
cubic yards to be used in the major structure had been received. When the
auditor asked the engineer to estimate the volume of concrete already used
on the site, the estimate indicated that the concrete used was one load short
of what was billed and paid for.

The auditor was by now suspicious of everything. He toured the area and
climbed up to look in the trash dumpster, where he saw cut pieces of
sheetrock. It struck him that he had not seen a single piece of sheetrock used
on the project. That afternoon he drove by the project manager's home and
saw a pile of sheetrock that appeared to be part of some home remodeling.
The accounts payable files held documentation for several hundred dollars'
worth of sheetrock.

The auditor flew home and presented his evidence to the vice president of
finance, and the two went immediately to the office of the firm's president.
The following day, the auditor and the vice president in charge of the project
were on a plane back to the project site. They visited the concrete vendor,
who advised that he had been pressured by the contractor's project manager
and office manager to submit invoices for loads not shipped. The vendor was
to kick back the total overpayment to the project manager and

Faced with the vendor's confession of collusion and other evidence gathered
by the auditor, the project manager and the office manager confessed to
defrauding the company. They admitted receiving the kickback on the
concrete. They also admitted that the receipt for hauling logs was for trees
cleared from the project site. The trees had been sold to a local lumber
company for cash, which they pocketed. They admitted the batteries were in
the personal vehicles of the office manager and his family, and that the
sheetrock was used at the home of the project manager. The sheetrock scraps
were brought back to the construction site dumpster to save the crooks the
cost of disposing of them themselves.

The employees were fired and made restitution of over $3,000. The concrete
vendor was reprimanded, but he was allowed to retain the contract because
management believed that he had acted reluctantly after their own
employees had corrupted him.

Auditing Pronouncement
1) Prounouncement:

Proposed auditing pronouncement, ISA 200 (revised and redrafted), has

overall objective of the independent auditor, and the conduct of an audit in
accordance with International Standards on auditing.

The Exposure Draft reflects the application of the IAASB's clarity drafting
conventions to extant ISA 200, Objective and General Principles Governing
an Audit of Financial Statements. The Supplement to Exposure Draft
demonstrates how the material of the Preface to the International Standards
on Quality Control, Auditing, Review, Other Assurance and Related
Services (issued January 2007) has been reflected in the proposed ISA, and
includes a draft summary of the objectives for all of the ISAs as of April
2007. These documents have been prepared by IAASB staff and are for
information purposes only. It does not form part of the Exposure Draft. The
IAASB has not approved, disapproved, or otherwise acted upon the
Supplement.

This exposure draft of the proposed standard, Objective and General

Principles Governing an Audit of Financial Statements, issued by the
IAASB of the International Federation of Accountants (IFAC), is released
for public comment in South Africa by the
Committee for Auditing Standards (CFAS) of the Independent Regulatory
Board for Auditors (IRBA).

Comments received on the proposed standard will be considered by the

CFAS in drafting
its comment letter to the IAASB. Comment preferably by e-mail, or on a
computer disk or in writing should be addressed

2) Pronouncement:

Proposed auditing pronouncement, ISA 500 (redrafted), considering the

Relevance and reliability of audit evidence May 2007.

The Exposure Draft reflects the application of the IAASB's clarity drafting
conventions to extant ISA 500, Audit Evidence. The Supplement to
Exposure Draft demonstrates how the material in extant ISA 500 has been
reflected in the proposed redrafted ISA. It has been prepared by IAASB staff
and is for information purposes only. It does not form part of the Exposure
Draft. The IAASB has not approved, disapproved, or otherwise acted upon
the Supplement.

This exposure draft of the proposed standard, Audit Evidence, issued by the
IAASB of the International Federation of Accountants (IFAC), is released
for public comment in South Africa by the Committee for Auditing
Standards (CFAS) of the Independent Regulatory Board for Auditors
(IRBA).
Comments received on the proposed standard will be considered by the
CFAS in drafting
its comment letter to the IAASB. CFAS, please indicate accordingly in your
written comment.

3) Pronouncement:

Proposed auditing pronouncement, ISA 501 (redrafted), audit evidence

additional considerations for specific Items January 2008.

The Exposure Draft reflects the application of the IAASB's clarity drafting
conventions
to extant ISA 501, Audit Evidence-Additional Considerations for Specific
Items. The Supplement to Exposure Draft demonstrates how the material in
extant ISA 501has been reflected in the proposed redrafted ISA. It has been
prepared by IAASB staff and is for information purposes only. It does not
form part of the Exposure Draft. The IAASB has not approved, disapproved,
or otherwise acted upon the Supplement.

This exposure draft of the proposed standard, Audit Evidence-Additional

Considerations
for Specific Items, issued by the IAASB of the International Federation of
Accountants
(IFAC), is released for public comment in South Africa by the Committee
for Auditing
Standards (CFAS) of the Independent Regulatory Board for Auditors
(IRBA).

Comments received on the proposed standard will be considered by the

CFAS in drafting
its comment letter to the IAASB.

4) Pronouncement

The IAASB follows a rigorous due process in developing its

pronouncements. Input is obtained from the IAASB's Consultative Advisory
Group, national auditing standard setters, IFAC member bodies and their
members, and the general public. Exposure drafts of proposed
pronouncements are placed on the website and widely distributed for public
comment.
To access electronic copies of the IAASB pronouncements free-of-charge or
to purchase printed documents, go to the IFAC online bookstore. Matters
relating to copyright and translation are addressed in the relevant IFAC
policy statements.

Standards

 International Standards on Auditing (ISAs) are to be applied in the

audit of historical financial information.

 International Standards on Review Engagements (ISREs) are to be

applied in the review of historical financial information.

 International Standards on Assurance Engagements (ISAEs) are to be

applied in assurance engagements dealing with subject matters other
than historical financial information.

 International Standards on Related Services (ISRSs) are to be applied

to compilation engagements, engagements to apply agreed upon
procedures to information and other related services engagement as
specified by the IAASB.
 International Standards on Quality Control (ISQCs) are to be applied
for all services falling under the ISAs, ISAEs and ISRSs.
Practice Statements

The IAASB issues International Auditing Practice Statements (IAPSs) that

provide interpretive guidance and practical assistance to professional
accountants in implementing ISAs and to promote good practice.
International Review Engagement Practice Statements (IREPSs),
International Assurance Engagement Practice Statements (IAEPSs), and
International Related Services Practice Statements (IRSPSs) are issued to
serve the same purpose for implementation of ISREs, ISAEs, and ISRSs
respectively.

Authority

The authority of the IAASB pronouncements is set out in the Preface to the
International Standards on Quality Control, Auditing, Review, Other
Assurance and Related Services (Approved December 2005).
The IAASB approved amendments to the Preface in December 2006. The
amended Preface establishes the conventions to be used by the IAASB in
drafting future ISAs and the obligations of auditors who follow those
Standards. The amended Preface contains important statements about the
authority of the IAASB pronouncements.

Types Of Assessment In Which Audit Are Applicable:

Different Types of Assessment Notices
Assessment notices are usually sent by the IRS to inform you that you made
a math error, were not given credit for all the tax payments you claim you
made, used the wrong tax table or form, did not pay the taxes you owe or
owe a penalty. The CP series of forms (general assessment notices) is used
by the IRS to inform you that your refund is being reduced or eliminated.
The IRS can intercept your tax refund and apply it to other taxes you owe,
defaults on student loans or nonpayment of child support, to name a few.
You may also receive a CP series form general assessment notice to inform
you of a penalty for filing or paying late, failing to report all income,
overstating credits or deductions on your return or for your failure to make
estimated tax payments on a timely basis.

 Form CP-2501 - Income Verification Notice

Income verification notices are generally received when there is a dispute

between how much you claimed in income and deductions on your return
and the income and deductions reported to the IRS by your employer, banks
and brokerage firms. The IRS most often automatically assumes that the W-
2s and Form 1099s they have received from the businesses contain the
correct information and that you are the one that made a mistake on your
return. If the notice you receive is wrong or unclear, you need to contact the
IRS. Don't ignore these notices! If you do you will receive another notice
billing you for additional tax, interest and penalties.

 CP-515 and CP-518

CP-515 is the first, and CP-518 the last, notices received by non-filers
informing that a return is overdue. Over 1.8 million of these noticed went out
asking why these people didn't file. There are a few lessons to be learned
here. First and most importantly, always file your tax returns within the
deadlines. If you need more time, request an extension. But never opt to not
file at all. That's just asking for trouble. Take the initiative to file late returns
before the IRS nabs you. You'll be better off in the long run.

 CP-2000 - Notice of Proposed Adjustment for

Underpayment/Overpayment

This notice informs you that the IRS is proposing changes be made to your
tax return. It assumes that the information that they received regarding your
income is correct and that the information you provided on your return is
wrong. No questions are asked and you are billed for additional tax and interest. If
you fail to report all of your income, you can expect to receive either a CP-2501 or CP-
2000 within 12 to 18 months after you filed your return.

 Backup Withholding Notice

If you failed to furnish a payer of taxable income with your social security
number you may be subject to the backup withholding system. Likewise, if
you failed to report interest and dividend income on your tax return, backup
withholding can also be started. If the IRS determines that backup
withholding is in order, the payer is instructed to withhold taxes at a rate of
31%. Backup withholding usually targets interests and dividends, stocks and
bonds and annual royalties. Other payments are subject to withholding if you
do not provide a payer with your social security number. If you get hit with
backup withholding, file all delinquent returns, start reporting all your
income or pay what you owe. If you do, the IRS will automatically stop the
withholding on January 1 as long as everything is in order by October 15 of
the prior year.

There are a few circumstances under which you may be able to stop backup
withholding :
1. You did not underreport your income
2. You did underreport, but have since paid additional tax, interest and
penalties
3. The withholding will cause you unnecessary hardship, and it is
probable that the underreporting will never happen again.

 Form 6355 - Worksheet to Determine Withholding Allowances

If you claimed more than 10 withholding exemptions on your W-4, or if you

earned more than $200 per week and claimed an exemption from all
withholding, your employer must submit your W-4 to the IRS. If the IRS
then determines that you overstated the amount of exemptions you are
entitled to take or are not eligible to be exempt from tax withholding, then
you will receive a Form 6355 Worksheet to Determine Withholding
Allowances. This form asks you to explain why you believe you are eligible
for the extra exemptions you claimed. The IRS then reviews this form. If
they determine that you are not entitled to the number of exemptions you
have previously been taking, they will notify your employer to disregard
your W-4 and to start withholding tax based on the number of exemptions
the IRS has determined is correct for you. If you do not have a reasonable
basis for the number of exemptions you had claimed, the IRS can slap you
with a $500 penalty. However, if there it was a simple error or honest
mistake which caused the discrepancy, the penalty will not be enforced.

 Form 668(F) - Federal tax lien notice

When you neglect or refuse to pay the taxes the IRS demands is owed, a
statutory lien automatically goes into affect. A federal tax lien covers all of a
taxpayer's property, including automobiles, real estate, bank accounts and
personal property. Upon payment of the taxes owed, you should receive
Form 669-B, Certificate of Discharge of Property for Federal Tax Lien
Under Section 6325 of the IRC. The IRS is required to release the lien within
30 days after payment.
Keep in mind - once a lien has been filed against you, credit agencies pick up
on it. Your credit is then marked as lousy and the lien, even if paid, will
remain on your credit history for seven years.

 Form 668-A (c) - Property levy notice

This notice is sent to inform you that the IRS is coming to seize your
property and gives you 30 days to prepare for the eventuality. This notice of
levy is usually a last ditch effort by the IRS and they only use it after they
have exhausted all other collection possibilities. There are some assets that
are exempt from being levied:
• Your principal residence - unless ordered in writing by a US district
court judge.
• Property used in your business - unless approved by a district director
or an assistant district director, or if the collection of taxes is in
jeopardy.
• 85% of unemployment benefits
• Tools and books valued at up to $3,125 if related to taxpayer's trade or
business.
• Schoolbooks
• Clothing
 • Court-ordered child support payments
• Furniture and personal affects totaling $6,250.
• 85% of worker's compensation and welfare payments
• Military service disability payments

 Form 668-W (c) - Notice of Levy on Wages, Salary and Other Income

This notice is to inform you that your wages are going to be seized. It is a
continuing levy, meaning it applies to all wages, salaries and commissions
owed, as well as all future wages, commissions and salaries. However, part
of every taxpayer's wages is exempt from levy. This exemption is calculated
based on the taxpayer's standard deduction plus the number of exemptions
the taxpayer is entitled to, divided by the number of weeks in a year. For
example, a married taxpayer with four deductions (husband, wife and two
children) would compute the exempted wages as follows:

Standard Deduction - $7,200

Exemptions (4 * $2,750) $11,000
$18,200
$18,200 / 52 = $350 per week

Assessment of Fair, Mela, etc.

1. While assessing a non-resident dealer doing business temporarily by way
of a fair or mela under the provisions of section 30 the authority specified
in rule 62 shall take into account:
 a. The value of goods kept in stock, or
b. The estimate of daily sales effected by such dealer, or
c. The place of such business, or
d. The number of people visiting such fair or mela, or
e. The cash in hand at any point in time during such fair or mela, or
f. Any combination of the above, or
g. Any other information that, in the opinion of the specified
authority, is relevant in arriving at an estimate of the tax payable
by such dealer.
Provided that no such assessment shall be made unless the dealer has been
given an opportunity of being heard.

2. The specified authority shall, for the purpose of this rule, assess any
dealer doing business in such fair or mela every week in respect his
transactions for the week.

Hearing under Section 32 and 33

1. The notice of hearing in the matter of proceedings under 32 and 33

shall be in Form N-VI and From N-VII respectively.
2. On the date fixed for hearing the person proceeded against shall be
allowed to rebut the accusations leveled against him, but shall not
ordinarily be allowed an adjournment. If an adjournment becomes
necessary, the authority specified in rule 62 shall record reasons there
for.
3. After giving a hearing, the authority referred to in sub-rule (2) shall
record an order containing precisely and clearly the gist of
accusations, the manner in which the person proceeded against was
made aware of that, the reply, if any, furnished, and the decision
thereon.
4. A true copy of order shall be made over to the person proceeded
against

Assessment on Audit Objections

1. If any irregularity relating either to fact or law committed in the

course of any proceedings is pointed out by the Comptroller and
Auditor General, the authority specified in rule 62 shall, upon being
satisfied about the lawfulness of such objection and after giving the
 dealer an opportunity of being heard, proceed to reassess the tax due
from the dealer.
2. If the specified authority is not satisfied about the lawfulness of the
objection, he shall communicate his views to the Commissioner with a
copy of the original order and the audit objection, a copy of which
shall also be forwarded to the Comptroller and Auditor-General.
3. The Commissioner or any other officer especially empowered by him
in this behalf, after the receipt of the communication mentioned in
sub-rule (2) and after applying his mind to the questions involved
shall pass appropriate order in this regard:
Provided that no such order shall be passed without serving upon the
dealer concerned a notice requiring him to file, within one month of
the date of the service of notice, a reply to the objection raised by the
Comptroller and Auditor General.

Intra-State Stock Transfer

1. Where any dealer claims that he is not liable to pay tax under the Act in
respect of any goods, on the ground that the movement of such goods
from one place to another within Bihar was occasioned by reason of
transfer of such goods other than by way of sale, the burden of proving
the claim shall be on that dealer and for this purpose he shall furnish to
the authority specified in rule 62 authority along with the statement
required to be furnished by him under sub-section (2) of section 24:

a. A true and complete declaration in Form D-V obtained from the

consignee.
b. Correct and complete record of the Name, Address, Taxpayer
Identification Number, if any, of the Person to whom the goods
were transferred incorporating therein the quantity of the goods
and the value thereof.
c. Copy of Accounts rendered by the agent or the office to whom the
goods were transferred, and
d. Copy of the Railway or the Lorry Receipts relating to such transfer.

2. The transferor shall issue to the transferee a challan in Form D-VI.

Payment of Tax, Interest and Penalty

1. A notice of demand under sub-section (2) of section 39 and sub-section
(3) of section 25 shall be in Form N-VIII and notice under sub-section (3)
of section 43 shall be in Form N-IX.
2. Every dealer or any other person required to pay any tax or interest or
penalty under the Act shall pay the amount of tax or interest or penalty
into Government Treasury, or any Bank authorized by the Commissioner
in this behalf, by Challan in Form CHI:

Provided that if the Circle In-charge is satisfied that a dealer has been and is
maintaining adequate funds in his bank account he may permit him to pay
the amount of tax or interest or penalty, if any, through a crossed cheque
drawn on a bank functioning at the place where the Government Treasury is
situated or to any Bank to be specified by the Commissioner. Such
permission may, at any time, be revoked without assigning any reason.

Provided further that where a dealer is permitted to pay the amount of tax or
interest or penalty, as the case may be, by a crossed cheque or crossed bank
draft such cheque or draft, shall be drawn by the dealer in favour of the
Deputy Commissioner or the Assistant Commissioner or the Commercial
Taxes Officer in charge of the circle, as the case may be, to which the
payment relates.

Explanation: For the purposes of calculating penalty, if any, under the Act
and the rules, the date of receipt of cheque or draft, as the case may be, by
Bank or the treasury or the Circle concerned, as the case may be, shall
ordinarily be deemed to be the date of payment by the dealer, save in the
case of a cheque, which is dishonored.

3. If the authority specified in rule 62 is satisfied that owing to

circumstances beyond the control of a dealer, he is not in a position to
pay the full amount due under sub section (2) of section 39, he may, on
application from the dealer and for reasons to be recorded in writing,
permit the dealer to pay the amount due in installments, if the dealer
agrees to pay an amount which is not less than one-third of the amount
payable on the date of the application.
Provided that, such installments shall not ordinarily extend beyond the
expiry of a period of twelve months from the date of receipt of the
application.
4. (a) The Bank authorized to receive payments under sub rule (2) shall
forward, to the Circle Incharge, a list of all payments received along with
such other documents directed by the Commissioner in this behalf each
day by the end of the next following day.
(b) The list referred to in clause (a) shall also be posted by the bank on
the website of the department when so required.

5. Not withstanding anything contained in sub-rule (1), the Commissioner

may, by a notification issued in this behalf empower any authority
appointed under section 10 for the purpose of receiving payment of tax or
interest or penalty in cash. Such order shall be subject to such conditions
and restriction as may be imposed by the notification.

6. The challan in Form CH-I shall be filled up in five copies. The portion of
the challan marked Original shall be sent by the Treasury Officer to the
concerned Circle In-charge. The portion of the challan marked Duplicate
shall be retained by the treasury and the portion marked Triplicate and
Quadruplicate shall be returned to the dealer or the taxpayer after being
duly receipted. The dealer or the taxpayer shall retain the portion marked
Triplicate and shall furnish the portion marked Quadruplicate along with
his return to the authority specified in rule 62.

Issuance of Tax Clearance Certificate

1. The application for the tax clearance certificate under section 42 shall be
submitted in duplicate before the Circle In-charge in Form A-IV. The
 Circle In-charge, after making such inquiry as is deemed fit, shall either
reject or accept the application within seven days of the receipt of the
application.
2. An application referred to in sub-rule (1) shall be rejected if the dealer:
i. Has not furnished a return for any period, or
ii. Is in arrears of admitted tax or interest, or
iii. Is in arrears of unstayed amount of any penalty or tax assessed or
reassessed.

a. Provided that no such application shall be rejected on the ground of

arrears of such unstayed amount of any penalty or tax assessed or
reassessed in relation to which no stay order has been passed
within a period of four months from the date of passing the order
levying penalty or tax, as the case may be, by any superior court.
b. Where an application is rejected, the Circle In-charge shall specify
the amount of arrears outstanding against the dealer or the period
for which the return has not been filed. If the arrears are paid or the
return is furnished, as the case may be, the Tax Clearance
Certificate shall be granted to the dealer, which shall be in Form C-
IV.
c. The tax clearance certificate granted under this rule shall ordinarily
be valid for a period of one year from the date of its issue or for
such lesser period as may be specified in the certificate.

3. The copy of the tax clearance certificate marked Original shall be handed
over to the applicant, and the copy marked Duplicate shall be retained in
the concerned circle.

4. A register in Form VR-VI shall be maintained in each circle and the

details of each application referred to in sub-rule (1) shall be entered in
the said register.

5. If any contract is awarded to the contractor on the basis of such Tax

Clearance Certificate, the applicant shall inform the Circle In-charge
within seven days of award of the contract.

Purpose of vat
India, particularly the trading community, has believed in accepting and
adopting loopholes in any system administered by the state or the Centre. If
a well-administered system comes in, it will close avenues for traders and
businessmen to evade paying taxes. They will also be compelled to keep
proper records of their sales and purchases.

Many sections hold the view that the trading community has been amongst
the biggest offenders when it comes to evading taxes.

Under the VAT system, no exemptions will be given and a tax will be levied
at each stage of manufacture of a product. At each stage of value-addition,
the tax levied on the inputs can be claimed back from the tax authorities.

At a macro level, there are two issues, which make the introduction of VAT
critical for India.

Industry watchers say that the VAT system, if enforced properly, forms part
of the fiscal consolidation strategy for the country. It could, in fact, help
address the fiscal deficit problem and the revenues estimated to be collected
could actually mean lowering of the fiscal deficit burden for the government.

The International Monetary Fund (IMF), in its semi-annual World Economic

Outlook released on April 9, expressed its concern over India's large fiscal
deficit - at 10 per cent of the GDP.

Further any globally accepted tax administrative system, will only help India
integrate better in

the World Trade Organisation regime.

 Qualification Required for an Auditor
Most accountants and auditors need at least a bachelor's degree in business,
accounting, or a related field. Many accountants and auditors choose to
obtain certification to help advance their careers, such as becoming a
Certified Public Accountant (CPA).

Education and training. Most accountant and auditor positions require at

least a bachelor's degree in accounting or a related field. Beginning
accounting and auditing positions in the Federal Government, for example,
usually require 4 years of college (including 24 semester hours in accounting
or auditing) or an equivalent combination of education and experience. Some
employers prefer applicants with a master's degree in accounting, or with a
master's degree in business administration with a concentration in
accounting. Some universities and colleges are now offering programs to
prepare students to work in growing specialty professions such as internal
auditing. Many professional associations offer continuing professional
education courses, conferences, and seminars.

Some graduates of junior colleges or business or correspondence schools, as

well as bookkeepers and accounting clerks who meet the education and
experience requirements set by their employers, can obtain junior accounting
positions and advance to accountant positions by demonstrating their
accounting skills on the job.

Most beginning accountants and auditors may work under supervision or

closely with an experienced accountant or auditor before gaining more
independence and responsibility.

Licensure and certification. Any accountant filing a report with the

Securities and Exchange Commission (SEC) is required by law to be a
Certified Public Accountant (CPA). This may include senior level
accountants working for or on behalf of public companies that are registered
with the SEC. CPAs are licensed by their State Board of Accountancy. Any
accountant who passes a national exam and meets the other requirements of
the State where they practice can become a CPA. The vast majority of States
require CPA candidates to be college graduates, but a few States will
substitute a number of years of public accounting experience for a college
degree.

Certification and advancement. Professional recognition through

certification, or a designation other than the CPA, provides a distinct
advantage in the job market. Certification can attest to professional
competence in a specialized field of accounting and auditing. Accountants
and auditors can seek credentials from a wide variety of professional
societies.

The Institute of Management Accountants confers the Certified Management

Accountant (CMA) designation upon applicants who complete a bachelor's
degree or who attain a minimum score or higher on specified graduate
school entrance exams. Applicants must have worked at least 2 years in
management accounting, pass a four-part examination, agree to meet
continuing education requirements, and comply with standards of
professional conduct. The exam covers areas such as financial statement
analysis, working-capital policy, capital structure, valuation issues, and risk
management.

The Institute of Internal Auditors offers the Certified Internal Auditor (CIA)
designation to graduates from accredited colleges and universities who have
worked for 2 years as internal auditors and have passed a four-part
examination. The IIA also offers the designations of Certified in Control
Self-Assessment (CCSA), Certified Government Auditing Professional
(CGAP), and Certified Financial Services Auditor (CFSA) to those who pass
the exams and meet educational and experience requirements.
 Forms Which Auditor Has To Fill Up:
FORM NO. 3CB

Audit report under section 44AB of the Income Tax Act, 1961 in the case of a person
carrying on business
*I / We have examined the balance sheet of ______________________________
[ name and address of the assessee ]
[Permanent A/C. No.____________ as at _____________ and the profit and loss
account for the year ended on that date which are in agreement with the books of account
maintained at the head office at____________________________and
branches at_________________________

*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 the audit. In *my/our opinion,
proper books of account have been kept by the head office and the branches of the
assessee so far as appears from *my/our examination of books, subject to the comments
given below:
In *my/our opinion and to the best of *my / our opinion and to the best of * my / our
information and according to explanations given to *me / us, the said accounts give a true
and fair view-
(i) in the case of the balance sheet, of the state of the above named assessee’s affairs as
at_____________________
and,
(ii) in the case of the profit and loss account, of the profit or loss of the abovenamed
assessee for the accounting year ending on__________________________

The prescribed particulars are furnished in Form No. 3CD annexed hereto. In *my / our
opinion and to the best of *my / our information and according to explanations given to
*me / us, these are true and correct.
Place :
Date :
______________ Signed
Form No. 3 CC

Audit report under section 44AB of the Income-tax, Act, 1961, in the case of a person
carring on profession

I / We have examined the balance sheet of __________________________________

as at __________________________ and the profit and loss account / the income
and expenditure statement For the year ended on that date which are in agreement with
the books of account maintained at the haed office at
_______________________and branches at _________________________

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 the audit. In my / our opinion,
proper books of account have been kept by the head office and the branches of the
assessee so far as appears from my / our examination of books, subject to the comments
given below:
In my / our opinion and to the best of my / our information and according to explanations
given to me / us the said accounts give a true and fair view ----
(i) in the case of the balance sheet of the state of the abovenamed assessee’s affairs as at
(ii) in the case of the profit and loss account / the income and expenditure statement of
the profit or the income or loss of the abovenamed assessee for the accounting year
ending on

The prescribed particulars are furnished in Form No. 3CE annexed hereto. In my / our
opinion and to the best of my/ our information and according to explanations given to
me/ us these are true and correct.

Place

Date

Signed
FORM NO. 3CA

[ See rule 6G(1)(a) ]

Audit report under section 44AB of the Income Tax Act, 1961, In a case
Where the accounts of the business of a person have been
audited under [any other law ]

*I / We have to report that the statutory audit of

[Permanent A/C. No  was conducted by *my / us /

in pursuance of
the provisions of the Act, and *I / we annex hereto a copy of
*my / our audit report dated // along with a copy each of
audited
profit & loss account for ended on and a copyof the audited balance
sheet as at along with the documents declared by the relevant
Act to be part of, or annexed to,the profit and loss account and
balance sheet.

A further report as required under the proviso to section 44AB is furnished in Form No.
3CD annexed hereto.

In *my / our opinion and to the best of *my / our information and according to
explanations given to *me / us, the particulars given in Form No. 3CD, are true and
correct.

Place :
Date :