A Guide to

Karnataka VAT Audit

A Guide To

Karnataka VAT Audit

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament) New Delhi

 The Institute of Chartered Accountants of India All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior permission, in writing, from the publisher.

First Edition

: December, 2009

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FOREWORD
It is always one of the cardinal principles of economic administration that goods and services should be made available to the general public at affordable prices. Through centuries nation-States have experimented with various types of tax systems with the twin objectives of deriving revenue as well as to keep in check the rise in prices of commodities. After several attempts to tackle with the inflationary effect on prices, a system of Value Added Tax was evolved. VAT is a tax, based on sound economic rationale and, if implemented effectively, will result in the reduction in prices of goods and services. It is a transparent system of tax since meticulous documentation is a sine quo non for its proper implementation. From the 1st of April 2005 onwards, a system of State-Level VAT has been introduced in a majority of the States of the Indian Union. The most important ingredients for the success of State-Level VAT is for widespread education among the traders, general public, Government authorities and professionals. The ICAI has published State-Level VAT in India A Study which explains the general principles for State-Level VAT. In order to assist the members to understand the provisions of individual State-Level VAT legislations with particular reference to audit requirements, the Indirect Taxes Committee has taken the initiative to bring a guide in respect of Karnataka VAT Audit. Certainly the Guide to Karnataka VAT Audit will help the members to understand the intricacies of the provisions of Karnataka VAT Act and its audit implications. I compliment CA. Atul Bheda, Chairman, Indirect Taxes Committee and its members for taking this excellent initiative for bringing this guide which will assist the members in discharging their responsibilities under Karnataka VAT Act, 2003. New Delhi 15th November, 2009 CA. Uttam Prakash Agarwal President

PREFACE
VAT is revolutionary in the realm of taxation of commodity and services. It is an internationally recognized multipoint tax system providing for levy of tax on sale of goods as well as on rendering of services on the value addition occurring at every stage of sale or transfer.. The principle of VAT contemplates levy of tax at the point of consumption, and realization of full tax on the final sale value from the consumer. Today, it can be largely said that VAT being in the nature of a self assessment tax, audit procedures are introduced for proper compliance. This manual is an attempt to explain the applicable Value Added Tax Audit Guidelines under the Karnataka Value Added Tax Laws. This manual is written with a view to create awareness among the users and send the message of usefulness of VAT audit to State administration. An attempt has been made in this manual to cover areas that are related to the basic principles, policies and special issues pertaining to conduct of a Value Added Tax Audit. However, the manual does not deal with legal interpretations and rulings. This manual is intended to give a general guidance to the chartered accountants to address the various issues that may arise in the course of audit. Of course the various individuals practical issues have to be solved by exercising professional judgement. While the general scheme of audit is outlined in the Audit Manual, the detailed steps are incorporated in Annexure and Appendix such as Standard Audit Program, Check list, Audit Working Papers, Notifications, etc. Therefore, these documents should also be perused to understand the entire gamut of the audit scheme under the Karnataka Value Added Tax Act, 2003. Realizing the importance of giving guidance to the members in discharging their responsibilities relating to State-Level VAT, I express my sincere thanks to CA. Uttam Prakash Agarwal, President of the Institute for giving the basic idea for bringing out Guides to VAT Audit for respective States. I also place on records my sincere thanks to CA. Amarjit Chopra for giving guidance in this project. I am also thankful to Vice Chairman CA. Akshay Gupta and other members of the Committee for their active support.

I am happy to acknowledge the active support and assistance rendered by CA. K. Raghu, Council Member, CA. Govind Goyal member of Indirect Taxes Committee and CA. Venkatramani, CA. Sanjay Dhariwal, CA. M.S. Keshava, CA. Madhur Harlalka, CA. C.S. Sreenivas, Chairman, Bangalore Branch, CA. Naveen Rajpurohit, CA. K.S. Ramnath and CA. Annapurna Kabra and sincerely thank them. I am appreciate the efforts of CA. Karuna Bhansali, Secretary and CA. Ajay kumar Ray, Executive Officer of Indirect Taxes Committee for coordinating this project. I am sure that this guide will give enough technical guidance to the chartered accountants to have an understanding of the Karnataka State VAT laws and its practical implications.

New Delhi 15th November, 2009

CA. Atul C Bheda Chairman Indirect Taxes Committee

ABBREVIATIONS
Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Abbreviations KVAT KST CST AS SA ICAI MRP TDS COE TIN Excise HSN code SMC LR Terms and abbreviations used in the guide Karnataka Value Added Tax Karnataka Sales Tax Central Sales Tax Accounting Standard Standards on Auditing Institute of Chartered Accountants of India Maximum Retail Price Tax deducted at source under KVAT law Code of Ethics Tax Payers Identification Number Excise Tariff Code Small and Medium Sized Companies Lorry Receipts

PT / KTPTCE Act, Professional Tax / Karnataka Tax on 1976 Professions, Trades, Callings and Employments Act, 1976 KTEG Act, 1979 SET EOU SEZ URD CTD VAT MVAT FIRC Karnataka Tax on Entry of Goods Act, 1979 Special Entry Tax Export Oriented Undertaking Special Economic Zone Unregistered Dealer Commercial Tax Department Value Added Tax Maharashtra Value Added Tax Foreign Inward Remittance Certificate

15 16 17 18 19 20 21 22 23

DISCLAIMER
Every effort has been made to avoid errors or omissions in this publication. Inspite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to the notice of the Institute of Chartered Accountants of India, New Delhi which shall be taken care of in the next edition. It is notified that neither the publisher nor ICAI, or the authors or seller will be responsible for any damage or loss to anyone of any kind or in any manner there from. It is suggested that to avoid any doubt the reader should cross-check all the facts, law and contents of the publication with original Government / ICAI publications or notifications. This book is only meant for general guidance and awareness and should not be used as a basis for any decision-making.

Table of Contents
Chapter No 1 2 3 Particulars Introduction An insight into audit under the KVAT Act, 2003 Relevant Statutory Provisions Part I Audit and VAT Auditor Part II Audit Engagement 4 Part I Audit Approach Part II Accounting Standards Part III Code of Conduct and Other Matters 5 6 7 Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005 Frequently Asked Questions Appendix Page No. 1 7 29 37 41 49 55 59 89 103

Chapter 1

Introduction - An Insight Into Audit Under The KVAT Act, 2003

A. Introduction 1. Audit in General
Audit is a subject by itself with which members are familiar. The concept of tax audit introduced by the Income Tax Act in 1985, has provided the members with sufficient experience to carry out an audit within the frame work of a taxing statute, while taking into consideration the concept of audit, responsibilities, duties, professional ethics, accounting norms, accounting standards, method of accounting, valuation, etc. It is important that, all these aspects need to be looked into or complied with, in respect of an audit under the KVAT Act, 2003. Thus, the guidance note of Institute in respect of Audit under Section 44AB of the Income Tax Act is useful to a large extent to conduct an audit under the KVAT Act, 2003.

2. Audit under Sales Tax / VAT legislation

2.1 Karnataka Sales Tax Act, 1957
Audit of accounts of a dealer was prevalent under the Karnataka Sales Tax Act (KST Act), with effect from 01.04.1994 by insertion of Section 26-A to the KST Act. In terms of the said section, the accounts of a dealer whose total turnover exceeds Rs.50 lakhs were subject to an audit by a Chartered Accountant. The Karnataka Sales Tax Laws Third Amendment Act, (which was notified on 31.08.99 came into force with effect from 01.09.99) amended Section 26A of the KST Act, by including the words or a Sales Tax Practitioner subject to the prescribed limits. Consequent to this amendment a Sales Tax Practitioner was also competent to carry out an audit under Section 26A of the KST Act. The section specified that once the total turnover exceeded the specified limit an audit was required to be carried out by a Chartered Accountant or a Sales Tax Practitioner subject to the prescribed limits. It was not clear whether the words subject to the prescribed limits applied only to a Chartered Accountant or only to a Sales Tax Practitioner.

A Guide to KARNATAKA VAT Audit Sub rules 9C to Rule 26 of the KST Rules was amended by way of a Notification bearing No. FD 284 CSL 99 dated 20.04.2000. In terms of the proviso inserted to sub rule 9C of rule 26: A dealer who is not a body corporate may get his accounts audited by a Sales Tax Practitioner or a Chartered Accountant; Such Sales Tax Practitioner enrolled under Section 36 of the KST Act, should have been in practice for a period of not less than 5 years on the date of such audit; Such Sales Tax Practitioner should furnish a report in Form 52C along with an attested statement in Form 52B (as furnished by a dealer);

Sub rules 9C to rule 26 was inserted prescribing Audit Report in Form 52-A. The said report was required to be furnished by an Auditor in respect of an audit carried out by him under the KST Act. The sub rule also required a dealer to furnish particulars and classification of goods, and transactions in Form 52B. The particulars in Form 52B were to be certified as true and correct by the auditor, in his report in Form 52-A. The said Form 52B was also required to be duly attested by a Chartered Accountant/ Sales Tax Practitioner. The Finance Minister in his budget speech during 1995 proposed to defer the implementation of this provision, but however, there was neither a consequential amendment to the section, nor a Government order was passed pursuant to the budget speech. Thus, the provision of Section 26A and the relevant rules continued to be in force since 01.04.1994. In strict legal sense, all dealers with a total turnover exceeding Rs.50 lakhs ought to have their accounts audited with effect from 1994-95. However, the department has not enforced this provision, which does not stop an assessing authority from demanding an audit report in accordance with the provision of Section 26A of the KST Act.

2.2 Karnataka Value Added Tax Act, 2003

Every dealer whose taxable turnover exceeded a sum of Rs. 25 lakhs was required to get his books of accounts audited for the financial year 2005-06 and 2006-07. However, the relevant format in which a VAT Auditor was required to report was prescribed for the financial year 2006-07. 2

Introduction An Insight Into Audit Under the KVAT Act, 2003 With effect from the financial year 2007-2008, every dealer whose taxable turnover in a year exceeds rupees forty lakhs shall have his accounts audited by a Chartered Accountant or a Cost Accountant or a Sales Tax Practitioner. It may be noted that Corporates are mandatorily required to get their audits done by Chartered Accountants only. The words taxable turnover indicated above have been substituted by the words total turnover by the Karnataka Value Added Tax (Amendment) Bill, 2009 (L.A. Bill No.20 of 2009) with effect from 01.04.2009. This amendment implies that every dealer whose total turnover in the State (including the value of goods stock transferred to other States) exceeds Rs.40 lakhs is required to get his accounts audited. One can safely presume that since it is a substantive amendment, the amended provision will take effect for and from the financial year 2009-10 onwards. However, there is a second school of thought that this is a procedural amendment and hence would be applicable for and from the financial year 2008-09 onwards as the audit reports are required to be filed on or after 01.04.2009. The statutory definitions, provisions relating to turnover, total turnover, taxable turnover, determination of total and taxable turnovers etc., have been covered in Chapter 2 of this book.

B. Objectives of an Audit by the Department

Among others, the main objectives of an audit from the revenue perspective would be to: Protect the revenue in a fair manner; Ensure fair computation of tax payable and claim for set-off / refunds by dealer; Assist registered dealers in compliance of VAT law; and to Prevent evasion / avoidance of taxes

Generally, in order to plug probable leakages of revenue, among others the main objective of the department is to detect evasion, or to investigate a fraud, or to improve compliance, an audit is conducted. The audit can be based on 3

A Guide to KARNATAKA VAT Audit parameters relating to refund claims, volume of business, quantum of turnover, compliance verification so as to deter dealers who indulge in evasion / avoidance or risk audits etc. Audits can also be industry specific or in cases of dealers who have file NIL returns involving refunds. Normally, audits are conducted by the department based on previous history, change in behaviour of the trade, information gathered from the records of the department and other intelligence reports, unexpected or huge refund claims, huge and unusual payments of taxes in one go, based on cross verification or random selection based on computerised parameters, etc.

C. Audit by professionals
In terms of Section 31 of the KVAT Act, 2003 every person registered or liable to get himself registered is required to maintain true and correct accounts and, such other records that may be prescribed relating to his business. Rule 33 of the KVAT Rules, 2005 provides for the nature of accounts to be maintained by every dealer, agent, wholesaler, etc. The rule also provides for different particulars to be maintained by different class of dealers, such as name and address of the purchasers, quantity details, stock particulars, production and consumption statements etc. Section 31(4) of the KVAT Act, 2003 provides that: Every dealer Whose taxable turnover in a year exceeds Rs.40 lakhs (Total turnover with effect from 01.04.2009) Shall have his accounts audited By a Chartered Accountant or a Cost Accountant (with effect from 01.04.2007) or a Tax Practitioner subject to the conditions and the limits prescribed, and Shall furnish to the prescribed authority a copy of the audited statement of accounts and the prescribed documents in the prescribed manner.

The term taxable turnover and total turnover are defined in Sections 2 (34) & 2(35) respectively of the KVAT Act, 2003 read with Rule 3 of the KVAT Rules, 4

Introduction An Insight Into Audit Under the KVAT Act, 2003 2005. The same have to be understood accordingly and not as per any other law or Accounting Standards or other Guidance Notes, etc. The total turnover as per KVAT Law may differ from the total turnover as understood in general or accounting parlance. For instance, value added tax collected is a part of the total turnover under the KVAT Act, 2003. Advances received, in case of works contractor, forms part of total turnover whereas under the accounting parlance such advances would be treated as a current liability. Similarly material supplied to a contractor, which is deducted from the contract value amounts to a sale of goods by the contractee to the contractor and will form part of the taxable turnover [N M Goels case (72 STC 368)(SC)]. However, the value of such amount would have been reduced from the sales turnover under the accounting parlance. While labour charges received in a composite contract may form part of the total turnover but not a part of taxable turnover, it will not be part of total turnover in the case of an exclusive labour contract.

D. Penalty
The KVAT Act, 2003 specifically provides for penalty for non-compliance of the provisions of Section 31 relating to filing of audited statement of accounts. Section 74 of the KVAT Act, 2003, provides that failure to submit a copy of the audited statement of accounts within the prescribed time entails a penalty of Rs.5,000/- (rupees five thousand) in addition to rupees 50/- per day of continuing default.

E. Planning
It is advisable to plan for an audit of accounts under the KVAT Act, 2003 concurrently along with the audit under the Companies Act, 1956 or under the Income Tax Act, 1961 to avoid duplication of work. In the case of a chartered accountant who carries out only VAT audit it would be wiser to complete the VAT audit after completion of the other statutory audit under the appropriate Act/s. This will also reduce the work of the VAT auditor in checking the accuracy of the books of accounts as the due date under the KVAT Act, 2003 succeeds all other laws. Further, it would be practical to go through the rigours of a KVAT audit checks, on a quarterly basis, which will throw up discrepancies, if any, and ensure filing of revised returns within the prescribed time limits.

A Guide to KARNATAKA VAT Audit

F. Conclusion
The audit of accounts under the KVAT Act, 2003 has created new opportunities for the profession. It will also improve the standard of maintenance of accounts by dealers and compliance. It will increase the confidence levels of dealers and lessen tax surprises. It can act as a tool for better tax planning. It is a good compliance mechanism and lastly audit helps in operation and implementation of VAT laws.

Useful references: 1. 2. Sales Tax Practitioners' Association of Maharashtra and another Vs. State of Maharashtra and others (and other cases) [14 VST 69] T D Venkata Rao Vs Union of India [1999] 237 ITR 315 (SC) 6

Chapter 2

Relevant Statutory provisions

The relevant statutory provisions under the KVAT Act, 2003 and KVAT Rules, 2005 are reproduced below for ready reference:

A. Definitions
1. Section 2(5-A) - Body corporate means a corporation, a company as defined under the Companies Act, 1956 (Central Act 1 of 1956) and a company incorporated outside India but does not include.(a) (b) (c) a corporation sole; a co-operative society registered under any law relating to cooperative societies; and any other body corporate, not being a company as defined in the Companies Act, 1956, which the State Government may, by notification in the Official Gazette, specify in this behalf.

2.

Section 2(6) Business includes (a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues there from; and any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern.

(b) 3.

Section 2(7) - Capital goods for the purposes of Section 12 means plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs, and used in the course of business other than for sale. Section 2(9) - Company shall have the meaning assigned to it in the Companies Act, 1956 (Central Act 1 of 1956).

4.

A Guide to KARNATAKA VAT Audit 5. Section 2(12) Dealer means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes (i) an industrial, commercial or trading undertaking of the Government, the Central Government, a State Government of any State other than the State of Karnataka, a statutory body, a local authority, Company, a Hindu undivided family, an Aliyasanthana Family, a partnership firm, a society, a club or an association which carries on such business; (ii) a casual trader, a person who has, whether as principal, agent or in any other capacity, carries on occasional transactions of a business nature involving the buying, selling, supply or distribution of goods in the State, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration; (iii) a commission agent, a broker or del credere agent or an auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling , supplying or distributing goods on behalf of any principal; (iv) a non-resident dealer or an agent of a non-resident dealer, a local branch of a firm or Company or association situated outside the State; (v) a person who sells goods produced by him by manufacture or otherwise; (vi) a person engaged in the business of transfer otherwise than in pursuance of a contract of property in any goods for cash deferred payment or other valuable consideration. (vii) a person engaged in the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (viii) a person engaged in the business of delivery of goods on hire purchase or any system of payment by instalments; 8

Relevant Statutory Provisions (ix) a person engaged in the business of transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

Explanations
(1) A society (including a co-operative society), club or firm or an association which, whether or not in the course of business, buys, sells, supplies goods or distributes goods from or to its members for cash, or for deferred payment or for commission, remuneration or other valuable consideration, shall be deemed to be a dealer for the purposes of this Act. The Central Government or a State Government or a local authority or a statutory body which whether or not, in the course of business, buys, sells, supplies or distributes goods, directly or otherwise, for cash or deferred payment or for commission, remuneration or other valuable consideration shall be deemed to be a dealer for the purposes of this Act. In respect of the transfer of the right to use feature films, the person who transfers such right to the exhibitor and from whom the exhibitor derives the right to make such use shall be deemed to be the dealer under this clause. (a) An agriculturist who sells exclusively agricultural produce grown on land cultivated by him personally or a person who is exclusively engaged in poultry farming and sells the products of such poultry farm shall not be deemed to be a dealer within the meaning of this clause; (b) Where the agriculturist is a company and is selling arecanut, pepper, cardamom, rubber, timber, wood, raw cashew or coffee grown on land cultivated by it personally, directly or otherwise, such company, shall be deemed to be a dealer in respect of turnovers relating to sales of such produce. 6. 7. Section 2(13) - Document includes written or printed records of any sort, title deeds and data stored electronically in whatever form. Section 2(13-A) Electronic Tax Register means a secure fiscal electronic device meant to issue tax invoices or bills of sale and record the details of such sales, and includes a printer and a device to affix signature of the dealer or his agent. 9

(2)

(3)

(4)

A Guide to KARNATAKA VAT Audit 8. Section 2(15) Goods means all kinds of movable property (other than newspaper, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form) involved in the execution of a works contract or those goods to be used in the fitting out, improvement or repair of movable property, and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale. Section 2(19) Input means any goods including capital goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business. Section 2(20) Input tax has the meaning assigned to it in Section 10. Section 2(21) - Maximum retail price or MRP shall mean the price marked on the package in which the goods are contained. Section 2(22) Output tax has the meaning assigned to it in Section 10. Section 2(26) - Published shall mean published in any newspaper, journal or periodical or notified by a market committee or any such authority. Section 2(28) - Return means any return including a revised return prescribed or otherwise required to be furnished by or under this Act. Section 2(29) Sale with all its grammatical variation and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration and includes,(a) a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration; (b) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a delivery of goods on hire purchase or any system of payment by instalments; 10

9.

10. 11. 12. 13.

14. 15.

Relevant Statutory Provisions (d) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

Explanations
(1) A transfer of property involved in the sale or distribution of goods by a society (including a co-operative society), club, firm, or any association to its members, for cash, or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act. Every transaction of sale by way of or as a part of any service or in any other manner whatsoever, of goods, being food or any other article of human consumption or any drink (whether or not intoxicating) where such sale or service is for cash, deferred payment or other valuable consideration, shall be deemed to be a sale of those goods by the person making the sale and purchase of those goods by the person to whom such sale is made. Notwithstanding anything to the contrary contained in this Act or any other law for the time being in force, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place, (a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser, or (b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid,(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal at another rate, or (ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate, or (iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal, or (iv)to have acted for a fictitious or non-existent principal. 11

(2)

(3)

A Guide to KARNATAKA VAT Audit (4) Every transfer of property in goods by the Central Government, any State Government, a statutory body or a local authority for cash or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act. Section 2(32) Tax invoice means a document specified under Section 29 listing goods sold with price, quantity and other information as prescribed. Section 2(34)-Taxable turnover means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or dispatched outside the State otherwise than by way of sale [refer Rule 3 of the KVAT Rules, 2005]. Section 2(35)-Total turnover means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or dispatched outside the State otherwise than by way of sale. Section 2(36) - Turnover means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done

16.

17.

18.

19.

12

Relevant Statutory Provisions by the dealer in respect of the goods sold at the time of or before the delivery thereof. Explanation: The value of the goods transferred or despatched outside the State otherwise than by way of sale, shall be the amount for which the goods are ordinarily sold by the dealer or the prevailing market price of such goods where the dealer does not ordinarily sell the goods. 20. Section 2(38) - Year means the year commencing on the first day of April.

B. Levy and Incidence of Tax

1. Section 3 - Levy of tax
(1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. (2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act.

2. Section 4 - Liability to tax and rates thereof

(1) Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover, (a) in respect of goods mentioned in,(i) Second Schedule, at the rate of one per cent, (ii) Third Schedule, at the rate of four per cent, and (iii) Fourth Schedule, at the rate of twenty per cent. (b) in respect of other goods, at the rate of twelve and one half per cent. (c) in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract specified in column (2) of the Sixth Schedule, subject to Sections 14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), at the rates specified in the corresponding entries in column (3) of the said Schedule. 13

A Guide to KARNATAKA VAT Audit (2) Where goods sold or purchased are contained in containers or are packed in any packing material liable to tax under this Act, the rate of tax applicable to taxable turnover of such containers or packing materials shall, whether the price of the containers or packing materials is charged for separately or not, be the same as the rate of tax applicable to such goods so contained or packed, and where such goods sold or purchased are exempt from tax under this Act, the containers or packing materials shall also be exempt. (3) The State Government may, by notification, reduce the tax payable under subsection (1) in respect of any goods subject to such restrictions and conditions as may be specified in the notification. (4) Notwithstanding anything contained in sub-section (1), subject to such conditions as may be prescribed, a registered dealer, if he so elects, may pay tax on the sale of goods specified in Sl. No. 60 of the Third Schedule, on the maximum retail price indicated on the label of the container or pack thereof or on such maximum retail price reduced by an amount equal to the tax payable.

3. Section 6 - Place of sale of goods

(1) The sale or purchase of goods, other than in the course of inter State trade or commerce or in the course of import or export, shall be deemed, for the purposes of this Act, to have taken place in the State irrespective of the place where the contract of sale or purchase is made, if the goods are within the State (a) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and (b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation. (2) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of goods at each of such places.

14

Relevant Statutory Provisions (3) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of property of goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement for works contract is made, whether the assent of the other party is prior or subsequent to such transfer. (4) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of the right to use any goods for any purpose (whether or not for a specified period) shall be deemed to have taken place in the State, if such goods are for use within the State irrespective of the place where the contract of transfer of the right to use the goods is made.

4. Section 7 - Time of sale of goods

(1) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, and subject to sub-section (2), the sale of goods shall be deemed to have taken place at the time of transfer of title or possession or incorporation of the goods in the course of execution of any works contract whether or not there is receipt of payment: Provided that where a dealer issues a tax invoice in respect of such sale within fourteen days from the date of the sale, the sale shall be deemed to have taken place at the time the invoice is issued. (2) Where, before the time applicable in sub-section (1), the dealer selling the goods issues a tax invoice in respect of such sale or receives payment in respect of such sale, the sale shall, to the extent that it is covered by the invoice or payment, be deemed to have taken at the time the invoice is issued or the payment is received. (3) The Commissioner may on an application of any dealer exempt such dealer subject to such conditions as he may specify, from the time specified in sub-section (1).

5. Section 10 - Output tax, input tax and net tax

(1) Output tax in relation to any registered dealer means the tax payable under this Act in respect of any taxable sale of goods made by that dealer 15

A Guide to KARNATAKA VAT Audit in the course of his business, and includes tax payable by a commission agent in respect of taxable sales of goods made on behalf of such dealer subject to issue of a prescribed declaration by such agent. (2) Subject to input tax restrictions specified in Sections 11, 12, 14, 17 and 18, input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases. (3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of this Act. (4) For the purpose of calculating the amount of net tax to be paid or refunded, no deduction for input tax shall be made unless a tax invoice, debit note or credit note, in relation to a sale, has been issued in accordance with Section 29 or Section 30 and is with the registered dealer taking the deduction at the time any return in respect of the sale is furnished, except such tax paid under sub-section (2) of Section 3. (5) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, where under sub-section (3) the input tax deductible by a dealer exceeds the output tax payable by him, the excess amount shall be adjusted or refunded together with interest, as may be prescribed.

C. Audit and Accounts

1. Section 31 - Accounts
(1) Every registered dealer and every dealer liable to pay tax under this Act shall keep and maintain a true and correct account, in Kannada or English or Hindi or in such other language as the Government may, by notification, specify, of all his purchases, receipts, sales, other disposals, production, manufacture and stock showing the values of goods subject to each rate of tax under this Act including input tax paid and output tax payable. 16

Relevant Statutory Provisions (2) If the Commissioner or prescribed authority is of the opinion that the accounts kept and maintained by any dealer or any class of dealers do not sufficiently enable him or it to verify the returns required under this Act or to make any assessment under it, he or it may, by order, require any dealer or class of dealers, to keep such accounts and records including tax invoices of manufacture, sales, purchases, disposals or transfers of stock other than by way of sales in such form and in such manner as he or it may direct. (2-A) The Commissioner may require every registered dealer belonging to a class of dealers as may be notified by him to install and use any electronic tax register of such type and description and secured in such manner as may be prescribed, for the purpose of accessing information regarding any matter or transaction which may affect the tax liability of such dealer. (2-B) Notwithstanding anything contained in sub-sections (1) to (3) of Section 29, every registered dealer falling under sub-section (2-A), shall issue tax invoices or bills of sale, through the electronic tax register, irrespective of the value of the goods sold and such dealer shall be allowed to recover the cost of the electronic tax register, in the manner and subject to such conditions as may be prescribed. (3) If the Commissioner considers that any class of dealers is not in a position to keep and maintain accounts in accordance with the provisions of this Section, he may, for reasons to be recorded in writing, permit such class of dealers to maintain accounts in the prescribed manner. (4) Every dealer whose total turnover in a year exceeds forty lakh rupees shall have his accounts audited by a Chartered Accountant or a Cost Accountant or a Tax Practitioner subject to such conditions and such limits as may be prescribed and shall submit to the prescribed authority a copy of the audited statement of accounts and prescribed documents in the prescribed manner. (5) * * * (omitted with effect from 01.08.2008) (6) Every registered dealer and every dealer including owner of a land, liable to get registered under this Act, entering into a written agreement during any tax period for executing, partly or wholly, a works contract of construction of a building or other civil work either by himself or through another, shall submit a copy of such agreement within the end of the 17

A Guide to KARNATAKA VAT Audit subsequent tax period to the prescribed authority to whom he is required to submit a return [Refer Rules 33 & 34].

2. Section 33 - Electronic records

Every dealer required to keep and maintain records and accounts pursuant to Section 31 and who does so by electronic means shall retain them in an electronically readable format for the retention period specified in Section 32 [To be read along with Rules 33(5) and 33(7)].

D. Penalties
1. Section 74 - Penalties Relating to the Keeping of Records and Submission of Audited Statement of Accounts
(1) Any dealer who fails to keep and maintain proper records or submit a copy of the agreement entered into for execution of civil works contract, in accordance with Section 31 or by order of the prescribed authority shall be liable to a penalty not exceeding two thousand rupees if such failure is the first during any year or five thousand rupees if such failure is the second or subsequent during that year and, in addition, a further penalty not exceeding two hundred rupees per day for so long as the failure continues after being given an opportunity to show cause against such imposition of penalty. (2) Any dealer who fails to retain records and accounts in accordance with Sections 32 and 33, after being given the opportunity of showing cause in writing against the imposition of a penalty, shall be liable to a penalty of ten thousand rupees. (3) The power to levy the above penalty shall be vested in the officer authorized under Section 52. (4) Any dealer who fails to submit within the time prescribed a copy of the audited statement of accounts, shall be liable to pay a penalty of five thousand rupees and, a further penalty of fifty rupees per day for so long as the failure to submit a copy of the audited statement of accounts continues, after being given an opportunity of showing cause in writing against such imposition of penalty by the prescribed authority.

18

Relevant Statutory Provisions

E. KVAT Rules, 2005

1. Rule 3 of the KVAT Rules, 2005 - Determination of Total and Taxable Turnover
(1) The total turnover of a dealer, for the purposes of the Act, shall be the aggregate of(a) the total amount paid or payable by the dealer as the consideration for the purchase of any of the goods in respect of which tax is leviable under sub-section (2) of Section 3; (b) the total amount paid or payable to the dealer as the consideration for the sale, supply or distribution of any goods where such sale, supply or distribution has taken place inside the State, whether by the dealer himself or through his agent; (c) the total amount paid or payable to the dealer as the consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract including any amount paid as advance to the dealer as a part of such consideration; (d) the total amount paid or payable to the dealer as the consideration for transfer of the right to use any goods for any purpose (whether or not for specified period); (e) the total amount payable to the dealer as the consideration in respect of goods delivered on hire purchase or any system of payment by instalments; (f) the aggregate of the sale prices received and receivable by the dealer in respect of sale of any goods in the course of inter state trade or commerce and export out of the territory of India and sale in the course of import into the territory of India; and (g) the value of all goods transferred or dispatched outside the State otherwise than by way of sale. Explanation: Any amount paid as advance to a dealer as a part of consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be included in his total turnover in the month in which execution of such works contract commences. 19

A Guide to KARNATAKA VAT Audit (2) The taxable turnover shall be determined by allowing the following deductions from the total turnover: (a) The aggregate of the sale prices received and receivable by the dealer in respect of sales of any goods in the course of INTERSTATE trade or commerce and export out of the territory of India and sales in the course of import into the territory of India. (b) The value of all goods transferred or despatched outside the State otherwise than by way of sale. (c) All amounts allowed as discount: Provided that such discount is allowed in accordance with the regular practice of the dealer or is in accordance with the terms of any contract or agreement entered into in a particular case; and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount; and Provided further that the accounts show that the purchaser has paid only the sum originally charged less discount. (d) All amounts allowed to purchasers in respect of goods returned by them to the dealer: Provided that the goods are returned within a period of six months from the date of delivery of the goods and the accounts show the date on which the goods were returned, the date on which the refund was made and the amount of such refund together with the details of credit notes issued as specified under sub-section (1) of the Section 30. (e) All amounts received from the seller in respect of goods returned to them by the dealer, when the goods are taxable under sub-section (2) of section 3: Provided that the goods are returned within period of six months from the date of delivery of the goods and the accounts show the date on which the goods were returned and the date on which the refund was made and the amount of such refund. (f) All amounts for which goods exempt under Section 5 are sold. (g) All amounts realised by sale by a dealer of his business as a whole. (h) All amounts collected by way of tax under the Act; 20

Relevant Statutory Provisions (i) The turnover in respect of which the dealers agent has paid tax, and the dealer has furnished a certificate in Form VAT 140. (i-1) All amounts paid or payable to sub-contractors as the consideration for execution of works contract whether wholly or partly: Provided that, no such deduction shall be allowed unless the dealer claiming deduction produces document in proof that the subcontractor is a registered dealer liable to pay tax under the Act and that the turnover of such amounts is included in the return filed by such sub-contractor. (j) All amounts separately collected in tax invoices as commission under the provisions of the Agricultural Produce Marketing (Regulations) Act, 1966, by a commission agent: Provided that the tax is not separately charged for and collected in the tax invoices on such commission. (k) All amounts received or receivable by way of interest on the unpaid amount payable in respect of goods delivered on hire purchase or on any system of payment by instalments, where such interest is specified and charged for by the dealer separately without including such amounts in the price of the goods delivered and does not exceed twenty per cent per annum on the amount remaining unpaid. (l) All amounts actually expended towards labour charges and other like charges not involving any transfer of property in goods in connection with the execution of works contract including charges incurred for erection, installation, fixing, fitting out or commissioning of the goods used in the execution of a works contract. (m) Such amounts calculated at the rate specified in column (3) of the Table below towards labour charges and other like charges as incurred in the execution of a works contract when such charges are not ascertainable from the books of accounts maintained by a dealer.

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A Guide to KARNATAKA VAT Audit

TABLE
Sl. No (1) Type of contract (2) Labour and like charges as a percentage of the value of the contract (3) Fifteen per cent

1. Installation of plant and machinery

2. Installation of air conditioners and air Ten per cent coolers 3. Installation escalators of elevators (lifts) and Fifteen per cent

4. Fixing of marble slabs, polished granite Twenty five per cent stones and tiles (other than mosaic tiles) 5. Civil works like construction of buildings, Thirty per cent bridges, roads, etc. 6. Construction of railway coaches on under Thirty per cent carriages supplied by Railways 7. Ship and boat building including Twenty per cent construction of barges, ferries, tugs, trawlers and draggers 8. Fixing of sanitary fittings for plumbing, Fifteen per cent drainage and the like 9. Painting and polishing Twenty per cent 10. Construction of bodies of motor vehicles Twenty per cent and construction of trucks 11. Laying of pipes 12. Tyre re-treading 13. Dyeing and printing of textiles 14. Any other works contract Twenty per cent Forty per cent Forty per cent Twenty five per cent

Explanation-I: In the case of a dealer executing works contract, in determining the taxable turnover during any tax period, the deduction under clause (l) shall be allowed so that such deduction is proportionate to the value of goods, the 22

Relevant Statutory Provisions property in which has been transferred in the execution of works contract in that period, and if the total turnover is not sufficient to cover apart from other deductions, such taxable turnover and such deduction, they shall be determined and allowed proportionately to the extent of the turnover of the dealer in that period, and the balance shall be carried forward to the following tax period or any subsequent tax period to be determined and allowed in the same manner. ExplanationII: For the purpose of clause (l), labour and other like charges include charges for obtaining, on hire or otherwise, machinery and tools used in the execution of a works contract, charges for planning, designing and architects' fees, cost of consumables used in the execution of the works contract, cost of establishment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services. Explanation-III: For the purpose of clause (l), gross profit earned by a dealer shall be apportionable to the value of the goods and labour and other like charges involved in the execution of a works contract in the same ratio as in the total turnover. (3) (a) A dealer opting to pay tax on the sale of goods under sub-section (4) of Section 4, shall report his option in writing to the jurisdictional Local VAT officer or VAT sub-officer within fifteen days from the commencement of these rules or on the first day of any month after such commencement, indicating the date from which he so opts. (b) Notwithstanding anything contained in clause (b) of sub-rule (1) and subrule (2), the total turnover of such dealer in respect of sale of such goods where the sale has taken place inside the State, shall be, (i) the aggregate of the maximum retail prices of the goods sold, where such maximum retail prices are exclusive of tax payable under the Act and all amounts collected by way of tax under the Act, or (ii) the aggregate of the maximum retail prices of the goods sold, where such retail prices are inclusive of tax payable under the Act, and the taxable turnover in respect of such sales shall be determined by allowing deductions specified in clauses (d), (h) and (i) of sub-rule (2) from the total turnover. (c) The tax invoice issued by such dealer shall contain the details of maximum retail price of the goods including whether such retail price is 23

A Guide to KARNATAKA VAT Audit inclusive or exclusive of tax payable under the Act, in addition to the details prescribed in rule 29.

2. Rule 33 - Keeping of Accounts and Records

(1) Every registered dealer and every person liable to be registered under the Act shall keep and maintain a true and correct account of his daily transactions showing the goods produced, manufactured, bought and sold by him and the value thereof separately together with invoices and bills. (2) Every such dealer or person shall keep separate purchase, sale and disposal accounts in respect of each commodity, whether taxable or not, dealt with by him and the account in respect of purchase made within the State shall be in Form VAT 170. 3(a) Every dealer shall maintain a VAT account containing details of input and output tax, together with credit and debit notes issued during any tax period. 3(b) Every registered dealer belonging to a class of dealers as may be notified by the Commissioner, but other than a dealer opting to pay tax by way of composition under Section 15, shall enter the details of, (i) purchases made within the State from other registered dealers in respect of which he is eligible to claim deduction of input tax; and (ii) sales made to other registered dealers in the State, in the individual account provided to him in the website notified by the Commissioner, in the manner specified in the notification issued, and obtain from the website an acknowledgement of such an entry [For the relevant notification in this regard refer Appendix 1]. (4) Every such dealer or person shall keep current books of accounts at the place or places of business entered on his certificate of registration, and every purchase and sale shall be brought to account as soon as the purchase or sale is made. (5) The registers, accounts and documents maintained shall be sequentially numbered, and where the registers and other documents are maintained by means of a computer or any other similar mechanical device, the dealer shall maintain copies in paper of such registers and other documents printed on a monthly basis. 24

Relevant Statutory Provisions (6) Any entry in such registers, accounts and documents shall not be erased, effaced or overwritten, and all incorrect entries shall be scored out under attestation and correct entry recorded and where the registers, accounts and documents are maintained by means of a computer or any other similar mechanical device, the dealer shall also maintain a record of correction or change of any entry. (7) For the purpose of sub-rule (4), current books of accounts shall include computer hardware and software used in connection with business activities of the dealer or person. (8) The accounts maintained by dealers together with all invoices, bills, declarations, way bills and delivery notes relating to stocks, deliveries, purchases, output and sales shall be preserved by them for the time specified under Section 32 or for any further period as may be notified by the Commissioner and shall be kept at the place of business, mentioned in the registration certificate. (9) Every commission agent, broker, declared del credere agent, auctioneer or any other mercantile agent shall maintain accounts showing.(a) particulars of authorization received by him from each principal to purchase or sell goods on behalf of each principal separately; (b) particulars of goods purchased or goods received for sale on behalf of each principal each day; (c) particulars of purchases or sales effected on behalf of each principal each day; (d) details of accounts furnished to each principal each day; and (e) the tax paid on purchases or on sales effected on behalf of each principal and the challan number and date of remittance of the tax into the Government Treasury. (10) Every purchasing agent shall keep particulars of the names and addresses of the dealers or persons from whom he purchased the goods, and every selling agent shall keep the particulars of the names and addresses of the dealers or persons to whom he sold the goods. (11) Every wholesale dealer, importer, exporter and manufacturer shall maintain monthly stock accounts in respect of each commodity dealt with 25

A Guide to KARNATAKA VAT Audit by him, and such stock account shall contain particulars of purchases or receipts, sales, deliveries and balance of stock. (12) Every manufacturer of goods shall maintain monthly production of accounts, showing quantitative details of the various raw materials used in the manufacture and the quantitative details of the goods so manufactured. (13) Every dealer who is required to maintain stock accounts shall maintain subsidiary accounts for each godown if there is more than one godown for keeping his stocks. (14) Every dealer or person executing works contract shall keep separate accounts showing.(a). the particulars of the names and address of the persons for whom and on whose behalf he carried on the execution of works contact in respect of each works contract; (b). the particulars of goods procured by way of purchase or otherwise for the execution of works contact; (c). the particulars of goods to be utilized in execution of each works contract; and (d). the details of payment received in respect of each works contract. (15) Every dealer or person engaged in the transfer of a right to use any goods shall keep(a). particulars of the names and addresses of the persons to whom he delivered the goods for use; (b). details of amounts received in respect of each transaction; and (c). monthly stock accounts in respect of each commodity dealt with by him and such stock account shall contain particulars of purchases or receipts, deliveries and balance of stock. (16) Every dealer claiming exemption on his turnover under sub-section (2) of Section 8 shall retain for every tax period a declaration in Form VAT 140 obtained from the registered dealer who sold the taxable goods relating to such turnover on his behalf and the selling agent shall issue the declaration to his principal within twenty five days from the end of the month in which such goods were sold. 26

Relevant Statutory Provisions (17) Every dealer claiming deduction of input tax on goods purchased on his behalf by any other registered dealer shall retain for every tax period a declaration in Form VAT 145 obtained from the registered dealer who purchased the taxable goods on his behalf and also the tax invoices in original relating to such purchases and the purchasing agent shall issue the declaration and furnish the tax invoices to his principal within ten days from the end of the month in which such goods were purchased. (18) Any officer authorised by the Commissioner to make an assessment under Section 38 or to exercise powers under sub-section (1) of Section 52, shall exercise powers under sub-section (2) of Section 31.

3. Rule 34 - Audit and submission of accounts

(1) Every registered dealer who is, not a company defined under the Companies Act, 1956 (Central Act 1 of 1956) or a Company incorporated outside India and required to have his accounts audited under subsection (4) of Section 31 shall have his accounts audited by a Tax Practitioner enrolled under Rule 168 for a period of not less than three years or under Section 36 of the Karnataka Sales Tax Act, 1957 (Karnataka Act 25 of 1957) for a period of not less than three years on the date of such audit or by a Chartered Accountant or a Cost Accountant. (2) Every other registered dealer who is required to have his accounts audited under sub-section (4) of Section 31 shall have his accounts audited by a Chartered Accountant. (3) The audited statement of accounts shall be submitted in Form VAT 240 to the jurisdictional Local VAT officer or VAT sub-officer within nine months after the end of the relevant year. Provided that the statement in Form VAT 240 for the year ending 31st March, 2007 shall be in the form as substituted in the Karnataka Value Added Tax (Amendment) Rules, 2007. Provided that the audited statement of account for the year ending 31st March, 2007 shall be submitted on or before 29th February, 2008. (4) A registered dealer required to furnish a statement under sub-section (5) of Section 31 shall submit for every year commencing from the end of the year on 31st March, 2007, such statement in Form VAT 115 to the jurisdictional Local VAT office or VAT sub-office within sixty days after the 27

A Guide to KARNATAKA VAT Audit end of the relevant year and if he discovers it to be incorrect, he shall submit a revised statement within nine months from the end of the relevant year. (5) Any dealer who fails to furnish Form VAT 115 shall be liable to pay a penalty of fifty rupees for each day of default [Form VAT 115 has been omitted from 1-8-08]. (6) The clearance certificate specified in sub-section (12) of Section 42 shall be in Form VAT 146.

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Chapter 3

Part I - Audit and VAT Auditor

(1). Section 31 of KVAT Act, 2003, speaks of maintenance of books of accounts, documents and records. Sub-section (4) of Section 31 relates to audit. In terms of the said section, every dealer whose taxable turnover (total turnover with effect from 01.04.2009) in a year exceeds forty lakhs rupees has to get his accounts audited by either a Chartered Accountant or a Cost Accountant or a Tax practitioner. This provision is subject to conditions and limitations that are prescribed in the Rules. The conditions and limitations set out in the KVAT Rules, 2005 in this regard are as follows: (a). Every registered dealer [having a taxable turnover (now to be replaced by total turnover)of more than Rs. 40 Lakhs] who is not a Company (either as defined under Companies Act, 1956 or incorporated outside India), shall get his accounts audited: (i) (ii) by a tax practitioner, enrolled under Rule 168 for a period not less than three years; or by a Chartered Accountant; or

(2).

(iii) by a Cost Accountant (from 01.04.2007). (b). Every other registered dealer [having a taxable turnover (now to be replaced by total turnover) of more than Rs. 40 lakhs], i.e. a Company (either as defined under Companies Act, 1956 or incorporated outside India) is required to get his accounts audited by a Chartered Accountant. (c). The audited statement of accounts shall be submitted in Form VAT 240 to jurisdictional Local VAT or VAT sub-officer. [Refer Appendix 2 for Form VAT 240] (d). The Form VAT 240 has to be submitted within nine months after the end of the relevant year. (3). In terms of Section 2(1) (b) of The Chartered Accountants Act, 1949 (No. 38 of 1949) [As amended by The Chartered Accountants (Amendment)

A Guide to KARNATAKA VAT Audit Act, 2006 (No.9 of 2006 ) chartered accountant means a person who is a member of the Institute; (4). In terms of Section 2(2) of The Chartered Accountants Act, 1949 (No. 38 of 1949) [A s amended by The Chartered Accountants (Amendment) Act, 2006 (No. 9 of 2006)] a Chartered Accountant in practice means A member of the Institute shall be deemed to be in practice, when individually or in partnership with chartered accountants in practice, he, in consideration of remuneration received or to be received, (i) engages himself in the practice of accountancy; or (ii) offers to perform or performs services involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements or holds himself out to the public as an accountant; or (iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or (iv) renders such other services as, in the opinion of the Council, are or may be rendered by a chartered accountant in practice; and the words to be in practice with their grammatical variations and cognate expressions shall be construed accordingly. Explanation: An associate or a fellow of the Institute who is a salaried employee of a chartered accountant in practice or a firm of such chartered accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of articled assistants.

5. Fellows and Associates

In terms of Section 5 of The Chartered Accountants Act, 1949 (No. 38 of 1949) [As amended by The Chartered Accountants (Amendment) Act, 2006 (No. 9 of 2006)]: (1) (2) The members of the Institute shall be divided into two classes designated respectively as associates and fellows. Any person shall, on his name being entered in the Register, be deemed to have become an associate member of the Institute and be entitled to 30

Part I Audit and Vat Auditor use the letters A.C.A. after his name to indicate that he is an associate member of the Institute of Chartered Accountants. (3) A member, being an associate who has been in continuous practice in India for at least five years, whether before or after the commencement of this Act, or whether partly before and partly after the commencement of this Act, and a member who has been an associate for a continuous period of not less than five years and who possesses such qualifications as the Council may prescribe with a view to ensuring that he has experience equivalent to the experience normally acquired as a result of continuous practice for a period of five years as a chartered accountant shall, on payment of such fees, as may be determined, by notification, by the Council, which shall not exceed rupees five thousand and on application made and granted in the prescribed manner, be entered in the Register as a fellow of the Institute and shall be entitled to use the letters F.C.A. after his name to indicate that he is a fellow of the Institute of Chartered Accountants: Provided that the Council may with the prior approval of the Central Government, determine the fee exceeding rupees five thousand, which shall not in any case exceed rupees ten thousand. In terms of Section 6 of The Chartered Accountants Act, 1949 (No. 38 of 1949) [As amended by The Chartered Accountants (Amendment) Act, 2006 (No. 9 of 2006)]: No member of the Institute shall be entitled to practice whether in India or elsewhere unless he has obtained from the Council a certificate of practice; Provided that nothing contained in this sub-section shall apply to any person who, immediately before the commencement of this Act, has been in practice as a registered accountant or a holder of a restricted certificate until one month has elapsed from the date of the first meeting of the Council. 7. Section 24: Penalty for falsely claiming to be a member, etc. Section 24: Any person who (i) (ii) being a member of the Institute, but not holding Certificate of Practice 31

6. Certificate of practice

A Guide to KARNATAKA VAT Audit represents that he is in practice or practices as a chartered accountant, shall be punishable on first conviction with fine which may extend to one thousand rupees, and on any subsequent conviction with imprisonment which may extend to six months or with fine which may extend to five thousand rupees or both. 8. Section 31 of the KVAT Act, 2003 provides that in certain circumstances the accounts are to be audited by a chartered accountant. In terms of the above definition and as per the provisions of The Chartered Accountants Act, 1949, no member can practice without holding a certificate of practice. Therefore, only a chartered accountant holding certificate of practice can audit accounts. Similarly, section 2(2) of The Chartered Accountants Act, 1949 provides that a member of the Institute is also deemed to be in practice when he provides services in partnership with chartered accountant(s). In view of this provision, the audit can also be conducted by a firm of chartered accountants. In such a case, it would be necessary to state the name of the partner who has signed an audit report on behalf of the firm. A member of the Institute can practice either in his individual name or in the trade name e.g. 'XYZ & Co.' or `XYZ & Associates'. The member signing the report as a partner of the firm or in his individual capacity or in trade name should also give his membership number below his name. The relevant section 31 of the KVAT Act, 2003 does not stipulate that the statutory auditor appointed under the Companies Act, 1956 or other similar statutes should only perform the audit. As such, the audit can be conducted either by the statutory auditor or by any other chartered accountant who is in full time practice or by a firm of chartered accountants. 9. The Council at its 242nd Meeting has passed a Resolution, effective from 1st April 2005, that any member in part time practice (holding certificate of practice and also engaging himself in other business or occupation) is not entitled to perform attest function. The audit under the KVAT Act, 2003 being an attest function, the resolution of the Council is applicable for such audit also. Therefore, any member in part time practice cannot perform an audit under the KVAT Act, 2003.

32

Part I Audit and Vat Auditor 10. A member in part time practice can be a partner of firm of chartered accountants, but if the audit under the KVAT Act, 2003 is to be conducted by the firm, then the audit has to be conducted by the member who is in full time practice only. In other words, a partner holding a part time certificate of practice cannot sign the audit report / certificate under the KVAT Act, 2003. The Council's resolution on part time practice passed at its 242nd meeting held in April 2004 at New Delhi as published in the Chartered Accountants Journal for the month of June, 2004 (Page 1392) is annexed as Appendix-3. The decision clarifies that certain circumstances like engagement in part time lecturership, editorship of magazine etc. are not considered as part time practice, subject to the condition mentioned in the resolution. It is possible for the dealer to appoint two or more chartered accountants as joint auditors under the KVAT Act, 2003 in which case the audit report will have to be signed by all the joint auditors. In case of disagreement, they can give their report separately. In this regard, attention is invited to SA 299 Responsibility of the Joint Auditors. The responsibility of Joint Auditors under the KVAT Act, 2003 will be the same as in the case of other audits e.g. audit under the Companies Act or the Income- tax Act. It is also possible for a dealer to appoint separate auditor(s) under the KVAT Act, 2003 for conducting the audit in respect of any branch / division / additional place of business etc. and there could be separate auditor(s) for a principal place of business. In such a case, the branch auditor(s) will have to submit report(s) / certificates to the management or, if directed, to the auditor(s) appointed for conducting the audit for the principal place of business and such reports will have to be considered and dealt with appropriately by such auditor(s) while consolidating the report for the business as a whole. The KVAT Act, 2003 does not prohibit a relative or an employee of the dealer being appointed as an auditor under Section 31. It may, however, be noted that as per the decision of the Council (reported in the Code of Conduct under clause (4) of Part I of Second Schedule), a chartered accountant who is in the employment of a concern or in any other concern under the same management cannot be appointed as auditor of that concern. Further, as per the decision of the Council, a member who 33

11.

12.

13.

A Guide to KARNATAKA VAT Audit is not in full time practice cannot carry out attest function on and after the 1st of April 2005. Therefore, an employee of the dealer or an employee of a concern under the same management cannot audit the accounts of the dealer under Section 31 of the KVAT Act, 2003. It may also be noted that under the Second Schedule to the Chartered Accountants Act, if a member gives an audit report in the case of a concern in which he and / or his relatives have substantial interest, it will be necessary for him to disclose his interest in the audit report. This is equally applicable to audit under Section 31 of the KVAT Act, 2003. Relevant extracts from the Code of Ethics published by ICAI relating to disclosure of substantial interest by a chartered accountant are given in Appendix-4. 14. A chartered accountant / firm of chartered accountants, appointed as tax consultant/s of the dealer can conduct audit under Section 31 of the KVAT Act, 2003. In relation to audit under Companies Act, the Council has clarified that the statutory auditor of the company cannot be its internal auditor. The same principle may apply in respect of VAT audit under the KVAT Act, 2003. A chartered accountant / a firm of chartered accountants, engaged by a dealer for preparing the monthly / quarterly returns of an entity, cannot be VAT Auditor of the said entity in situations where the dealer authorises the chartered accountant or a firm of chartered accountants to sign the VAT returns / prepare the VAT returns on behalf of the entity. A chartered accountant should not accept the audit of a person to whom he is indebted for more than rupees ten thousand. Reference can be made to Notification No. 1-CA (7) 63/2002 dated 2nd August 2002, issued by the ICAI (Appendix-5) whereby a member of the Institute shall be deemed to be guilty of professional misconduct if he accepts appointment as auditor of a concern while he is indebted to the concern or has given any guarantee or provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for amount exceeding rupees ten thousand. For this purpose, the limit of Rs. 10,000/- shall be the aggregate amount in respect of the proprietor and/or the partner/s of the firm of chartered accountants.

15.

16.

34

Part I Audit and Vat Auditor 17. The Council has issued a Notification No. 1-CA(7)/60/2002 dated 8th March, 2002 effective 1st April 2002 (Appendix-6) whereby a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts the appointment as statutory auditor of Public Sector Undertaking/ Government Company/Listed Company and other Public Company having turnover of Rs. 50 crores or more in a year and accepts any other work or assignment or service in regard to the same undertaking/Company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/Company. The above restrictions shall apply in respect of fees for other work or service or assignment payable to the statutory auditors and their associate concerns put together. As per the said notification, the term "other work(s)" or "service(s)" or "assignment(s)" shall include Management Consultancy and all other professional services permitted by the Council pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 but shall not include: (i) audit under any other statute; (ii) certification work required to be done by the statutory auditor. And (iii) any representation before an authority. 19. Since the obligation for audit has been specified in Section 31 the KVAT Act, 2003 it will be considered as an audit under any other statute for the purpose of this notification and thus the above restriction shall not apply in respect of audit fees.

18.

35

Chapter 3

Part II - Audit Engagement

A. Appointment
A dealer liable to get his accounts audited under the provisions of Section 31(4) of the KVAT Act, 2003 is required to appoint a Chartered Accountant or a Firm of Chartered Accountants as a VAT Auditor. The provisions of Section 31(4) of the KVAT Act, 2003 or the Rules there under do not prescribe the methodology for such an appointment. Normally, a VAT auditor so appointed, must accept an appointment in the following manner: (1). The dealer must issue a letter of appointment to a Chartered Accountant / a Firm of Chartered Accountants appointing him / them as his VAT auditor. The said letter of appointment must be signed by a person competent to appoint such VAT auditor. In case of a Company or certain other legal entities, the appointment must be made following the procedures or policies of the entity viz a board resolution. There are no specific provisions either under the KVAT Act, 2003 or under the Companys Act, 1956. No specific instructions / guidance regarding the procedure of appointment by a corporate entity is available. However, it is recommended that based on the guidance note issued by the ICAI in respect of Section 44AB of the Income Tax Act, 1961, a Board Resolution must be obtained from the said entities. In case of noncorporate entities, a letter from the authorised person may be obtained. In case different auditors are appointed for different branches / business units of the dealer within the same State and under the KVAT Act, 2003 it would be advisable to incorporate the fact that the appointment is for a particular branch or business unit, specifying the names and addresses of the Principal Auditor with an instruction that the Branch VAT audit report must be sent to such Principal Auditor. The KVAT auditor of the main branch is required to consolidate the accounts and incorporate the findings of the branch auditors in the main KVAT audit report.

(2).

A Guide to KARNATAKA VAT Audit (3). In case of a corporate entity which has opted for multiple registrations for multiple businesses / units as specified under Section 38(6) of the KVAT Act, 2003 read with Rule 47 of the KVAT Rule, 2005, the auditor is advised to verify the prescribed conditions imposed by the Commissioner of the Commercial Taxes as regards the permission for multiple registrations. In this scenario a question which may arise is whether a single audit report would suffice or separate audit reports are to be furnished. In our view, it is advisable to furnish separate audit reports for each registration obtained by the dealer. However, if a single audit report is furnished, then the bifurcation pertaining to each of the registrations should be furnished together with a consolidation. In such a case, it also advisable to file a copy of the single audit report also with jurisdictional VAT officer. The letter of appointment must be in terms of SA 210 Terms of Audit Engagement indicating the terms of the engagement, the scope and the extent of the coverage. In case joint auditor are appointed by the dealer under the KVAT Act, 2003 then the name and address of such joint auditor must be specified in the letter of appointment. The letter of appointment may stipulate the fee / remuneration. Normally, the said letter of appointment must be duly acknowledged by the VAT auditor and accordingly a letter of acceptance of audit should be issued to the dealer [Refer to Appendix 7 for suggested format of letter of appointment and acceptance]. Even in respect of certain entities viz., Department of State or Central Government the provisions of the KVAT Act, 2003 would equally apply.

(4).

B. Acceptance
(a). Prior to accepting the VAT audit assignment, a VAT auditor is expected to ensure that he is eligible to conduct the audit. It may be noted that under the KVAT Act, 2003 there are no ceilings in respect of the number of the audit assignments that an auditor can accept. (b). It is recommended for a member accepting a VAT audit assignment to communicate with a member who conducted the VAT audit in the prior year(s). While communicating it would be advisable to find out whether there are any professional or any other reasons as to why the member should not 38

Part II Audit Engagement accept the appointment. It may be noted that, it is not required for a VAT auditor to communicate with the statutory auditor who has conducted the audit of the dealers under any other law for time being in force. (c). A VAT auditor is not required to communicate about his appointment or acceptance of an audit to the departmental authorities.

C. Audit Fees
There are no separate guidelines issued / prescribed by the ICAI in respect of Audit fees for an audit under the KVAT Act, 2003. The minimum recommended scales of fees for professional services issued by the ICAI from time to time may be adhered to. Normally, a VAT auditor is expected to charge his audit fee based on the quantum of work, scope of the engagement, personnel deployed etc. It must be appreciated that the turnover of a dealer, quantum of tax paid, refunds envisaged etc., cannot be a basis for fee to be charged. Fees cannot be fixed, based on the percentage of trading profits or any such method.

D. Removal of a VAT auditor

(a). Whether a VAT auditor can be removed by a dealer depending on the facts and circumstance of each case? Under the KVAT Act, 2003 there is no specific procedure or provision for such removal. It is possible for a dealer to remove the VAT auditors on any valid ground viz delay in submission of reports; unreasonable delay in conducting an audit etc. However, a VAT auditor cannot be removed on the ground that he has given an adverse report or on the possibility of him qualifying the report. In the case of unjust removal, it is possible for the committee of ICAI to intervene. Reference can also be made to ICAIs pronouncements, if any, in this regard. (b). A VAT auditor duly appointed by a dealer can resign from the audit engagement after giving prior notice to the dealer who has appointed him by citing reasons as to why he would not be in a position to conduct the Audit. In such a situation the board of directors/authorised person of the dealer can appoint another chartered accountant/firm as his VAT auditor.

39

A Guide to KARNATAKA VAT Audit

E. Submission of the VAT Audit report

A VAT auditor is required to submit the report to the dealer appointing him on or before the due date as prescribed under the KVAT law. The KVAT Act, 2003 does not cast any responsibility on the VAT auditors for submission of the report with the VAT department. Similarly, a VAT auditor is also not required to furnish a copy of the report to any other agency or to the department. In case a VAT auditor is appointed after the due date for submission of the report or is appointed at a time when adequate time is not provided to furnish his audit report within the due date, then he should mention the said fact in his acceptance letter.

40

Chapter 4

Part I - Audit Approach

(1). There are no prescribed or specified approaches for conduct of an audit under the KVAT Act, 2003. However, certain similarities may be drawn between a VAT Audit, Tax audit under Section 44AB of the Income Tax Act, 1961 and audit under the Companies Act, 1956. While a VAT Auditor is not required to express his opinion on true and fair view of the financials, he is required to certify the correctness and completeness of certain data. In this background certain time tested methods of conducting an Audit has evolved certain suggested guidelines, which among others are as follows:

(a) Obtaining prior knowledge of the business and comparing them with similar businesses; (b) Preparing a master file of the clients/or permanent master file; (c). Discussion with the audit team on how to proceed with the audit; (d) Study and evaluation of systems and internal control of the business entity; (e) Assessment of the audit risks and deployment of personnel; (f) Preparation of an audit plan / audit program; (g) Risk appetite of the entity; (h) Conducting the audit in accordance with an audit plan and program; (i) Review meeting with the audit team; (j) Drawing conclusions on the basis of audit evidence obtained in the course of conducting the audit and a discussion with the client on the observations and findings; (k) Obtaining the various management certificates; (l) Reporting the observations in the prescribed format; (m) Audit working papers file (Filing of documents either in permanent file or working papers file).

A Guide to KARNATAKA VAT Audit (2). While adhering to each of the above said stages of audit, an auditor should bear in mind the scope of his engagement, objectives of the audit as well as the requirements of the statute. The audit tools to be used for conducting the VAT audit depend upon the environment in which the audit is being conducted. In an IT (information technology) record keeping environment, computerized audit approach using various information technology audit techniques and tools would be appropriate. The guidelines stated above are briefly explained hereunder:

(a). Knowledge of the business As a professional, an auditor is expected to have a general knowledge of the economy as a whole and the trade or industry in particular. The knowledge of the business must be used by the auditor in assessing the inherent control risks in determining the nature, timing and extent of audit procedures / verification. He must be aware of the trade practices. It is possible that certain types of trades have very localized or seasonal business practices. (b). Master file Every clients documents should be bifurcated into permanent file and the working papers file. Generally, the following documents should be included in the permanent file: (1). Name address and contact number of the clients; (2). Brief profile of the client, details of his businesses and locations of his branches along with the details of the concerned persons in charge; (3). A list of products being dealt with, the various notifications and clarifications applicable, copies of important judgement, advance ruling copies and clarification with reference to the client in specific and products in general; (4). Copies of the registration certificates issued under the KVAT Act and/ or under the CST Act and other allied laws; (5). Previous years signed KVAT Audit Report; (6). Copies of the constitution of the organisation, like Memorandum and Article of Association, Partnership Deed, Addendum to the Deeds etc;

42

Part II Accounting Standards (7). Copies of the Application made for Composition Scheme, Special Accounting Scheme, Partial Rebating Application, etc; (8). A list of visits by the various department officials, notices received and replies thereof, pending litigations before various authorities and other important issues unresolved; (9). Copies of other relevant statutory forms such as Form VAT 3, Form VAT 5, Form VAT 4 etc.

c. Discussion with the Audit Team

Before the commencement of the audit, the VAT auditor should have a pre-audit meeting with his audit team. In the meeting, the auditor should brief the team on matters such as general background of the dealer, nature of business, history of the dealer, industry specific points, key financial parameters and accounting policies, organisation of the business, organisation of the accounts, key-products dealt by the dealer, assessment history, litigation, etc. He should also clearly spell out the scope of work, extent and manner of checking of the various transactions. The auditor would do well, if he has the basic audit plan, audit program and the various audit checklists at this stage itself which could be suitably modified later on during the course of the audit, if required.

d. Systems and internal control

The systems, processes and controls put in place by the business entity will largely define the scope of the auditor in conducting an audit. While conducting a VAT audit, a study of the internal control systems would be an important step for assessing the risks of the audit as well as for planning the audit. A note on the software used by the client and the specific merits and demerits of the software will help the audit teams.

e. Assessment of audit risk and deployment of personnel

An audit risk can be inherently present or surface in many forms in a business entity. In many cases it would be camouflaged and in such circumstances an audit risk can be combated or mitigated by an auditor in many ways. Some of the proven methods would be to apply audit techniques, audit tools, professional expertise, and comparative analysis with similar businesses or evolving techniques, which suit the business. It

43

A Guide to KARNATAKA VAT Audit would also be worthwhile for an auditor to seek expert opinions in certain circumstances to mitigate audit risks. The extent of check by the auditor would depend on the nature of audit risk and the expertise of the personnel deployed by the business.

f. Audit Plan and Audit Program

Audit program is a written document setting forth the procedures to implement the audit plan. Planning encompasses developing a plan for the conduct of the audit and developing an audit program showing the nature, timing, and extent of audit procedures in accordance with the scope of the audit. Planning is a continuous process and changes in case of unexpected results during audit, would require a relook of the audit program. Along with the procedures the program must also contain the audit objective for each area of the business and should have sufficient details to serve as a set of instructions to the audit assistants involved in the audit and as a means to control proper execution of audit work. For this a detailed checklist should be devised which clearly states the various details to be checked, manner of checking and the extent of checking. This ensures that important issues are not overlooked during delegation of work. [Refer Appendix 8 for an indicative VAT audit checklist]

g. Risk appetite of an entity

Risk appetite of an entity cannot be defined in a clear-cut manner. Normally risk appetite would mean the extent of chance that an entity would be willing to take. For e.g. claiming an exemption or classifying a product at a lower rate of tax based on certain interpretations or judicial pronouncements. In a situation where the risk appetite of a business entity is extremely high it would be worthwhile for an auditor to place reliance on external expertise and suitably qualify the report. An auditor can decide upon the extent of check depending upon the risk appetite of the entity.

h. Conduct of an audit
The success of an audit primarily depends upon the quality of the audit, the verification of the records and transactions in accordance with the audit plan and program and which would help collect audit evidence to 44

Part II Accounting Standards form an opinion or draw conclusion on the transactions upon which the auditor is called upon to comment. The conduct of the audit must not be mechanical as per the plan and program but it must be done with an open mind. The staff that conduct the compliance testing or the substantive verification should have sufficient knowledge about the provisions of the KVAT Act, 2003 and the rules framed there under. They should also have knowledge of the judicial pronouncements, government orders, circulars, notifications etc. The conduct of an audit as in the case of any other audit assignment is substantially dependent upon the judgment of the auditor. Largely an audit must be conducted keeping in mind the concept of materiality, knowledge of local laws, general auditing and accounting practices, the accounting and auditing standards, guidance notes etc., issued by the ICAI. List of audit standards issued by ICAI can be referred in Appendix 9. Responsibilities of Joint Auditors In case of joint auditors, the roles and responsibilities of each of the joint auditors should be clearly defined. Some of the points, based on SA 299, which have to be kept in mind for this purposes are: Division of work The division of work among the joint auditors should be based on identifiable units. Where owing to the nature of the business of the dealer, division is not possible as above, the division can be done based on items of assets and liabilities or income or expenditure or with reference to period of time. The scope and division of work should be documented and communicated to the dealer. Co-ordination During the audit, if the VAT auditor comes across any matter which are relevant to the areas covered by the other auditors and deserve their attention, the same should be communicated in writing to them. This should be done before the final audit report has been submitted Relation among joint auditors The joint auditor is responsible for the work allocated to him except in the following cases where the responsibility of the joint auditors is joint and several: In respect of work not specifically allotted to any one auditor and jointly carried out by all the auditors.

45

A Guide to KARNATAKA VAT Audit In respect of the decisions taken by all the auditors regarding the nature, timing and extent of the audit procedures to be adopted by any of the joint auditors. However, this responsibility is restricted only to the extent of the appropriateness of the decision regarding the timing, nature and extent of the audit procedures. The responsibility concerning the actual execution of the audit procedures is the separate and specific responsibility of the respective joint auditor. It is the responsibility of each of the joint auditor to determine the nature, timing and extent of audit procedures for his area of work, manner of making enquiries, etc. For e.g.: the extent of test check for a given area of VAT audit, has to be determined by the concerned joint auditor after the evaluation of the accounting policies and the internal control system concerning his area of work. In case of a dealer having several branches, the joint auditor concerned shall be responsible for the review of the branch auditors report concerning his area of work and not pertaining to the other joint auditor. In case, one or more branch auditors report is not concerning any of the joint auditors area of work, then for such branch audit reports, the joint auditors may mutually decide regarding the division of work. It is the responsibility of the concerned joint auditor to obtain and evaluate the information, explanations and documents from the dealer pertaining to his area of work. Each of the joint auditors is entitled to assume that the other joint auditors have carried out their part of the audit work in accordance with the generally accepted audit procedures including matters pertaining to applicable statutory disclosures in the VAT audit report and other legal and professional requirements. It is not necessary for the joint auditor to review the work performed by the other joint auditor. Each of the joint auditors will issue a final report for the consolidated VAT audit report. However, where the joint auditor is in disagreement with regard to any of the matters covered in the VAT audit report, each of them should express own opinion through separate report. The joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the report.

46

Part II Accounting Standards

(i). Periodical meeting with the Audit Team

It is advised to have regular and periodical review meeting with the Audit Team. A preview meet, will help remove the bottlenecks and the hurdles rather than making the whole audit procedure redundant.

(j). Reporting
An auditor has to form an opinion and draw conclusions on the basis of the audit evidence and decide upon the issues, which are required to be reported and commented upon which has the bearing on the KVAT law and procedure to be adhered by the assessee. In forming such an opinion the auditor should be diligent to ensure that no material misstatement creeps into the report and also no material matters have been left out from reporting. It would be a good practice to report on matters on which an auditor while conducting an audit under the KVAT law has placed reliance upon. Before the audit is finalised, a meeting with the client is required discussing with him the audit observations and qualifications, if any. Many of the observations which might look to be major issues to be qualified can be clarified with the client before reporting.

(k). Management Representation Certificates

It is advised to obtain all the relevant management representation certificates from the client before the VAT Audit Report is signed. [Refer Appendix 11]

(l). Reporting the observations in the format prescribed

The auditor has to submit the findings of the VAT audit in Form VAT 240 through the issue of Certificate along with the audit report in Parts 1, 2 & 3. The certificate and the report has to be dated and signed and should be accompanied by the relevant annexures. Since there is no specific format prescribed under Form VAT 240 for any comments, observations or qualifications, the auditor could carry out the same at suitable places under the respective clauses and also by way of additional notes attached to the Form VAT 240.

(m). Audit working papers file

Once the audit is completed ensure that all working papers are segregated and inserted in the respective files of the client. It is also very 47

A Guide to KARNATAKA VAT Audit important to ensure the Audit working file (both master file and current file) is updated and the filing is done systematically according to the different areas covered in the audit. This will ensure compliance with the professional practice guidelines including peer review objectives.

48

Chapter 4

Part II - Accounting Standards

1. Accounting Standards issued by ICAI
With a view to maintain uniformity in the preparation and presentation of the accounts of various entities, the ICAI has issued various Accounting Standards. These standards are applied while issuing General Purpose Financial Statements to the public by commercial and business enterprises as specified by the ICAI and which are subject to attestation by the members of the Institute. The term General Purpose Financial Statements includes Balance Sheet, Profit and Loss Account, Cash Flow Statements along with the Explanatory Notes thereon. Various stakeholders such as investors, Government and the public at large use these statements. In addition, the ICAI has also issued various clarifications and guidance notes on accounting and auditing standards.

2. Applicability of Accounting Standards

The Companies Act requires that the financial statements should give a true and fair view of the financial position of the entities which are subject to audit. This view is implicit even in the absence of such a statutory requirement. What constitutes true and fair view has not been defined either under the Companies Act or any other statute. The accounting standards including clarifications and guidance notes which seek to describe the accounting principles and the methods of applying these principles in preparing the financial statements so that they give a true and fair view. It is worth noting that Section 211(3A) of the Companies Act provides that every profit and loss account and balance sheet should comply with accounting standards. Section 211(3B) provides that where the profit and loss account and the balance sheet do not comply with the accounting standard, such a fact needs to be disclosed along with reasons for non-compliance and the effect of the same on the financial statments. Sub section (3C) of Section 211 further provides that the expression accounting standards means the standards of accounting recommended by the ICAI as may be prescribed by the Central Government in consultation with the National Advisory

A Guide to KARNATAKA VAT Audit Committee on Accounting Standards established under sub section (1) of Section 210A. Further, under Section 227(3)(d), the auditor has to state in his audit report whether the profit and loss account and the balance sheet comply with the accounting standards referred under Section 211(3C). In this regard, the Central Government has notified1 the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as rules) for all accounting periods commencing on or after December 7, 2006. The accounting standards as notified by the Central Government are a virtual reproduction of accounting standards issued by the ICAI except for a few changes. Thus for all accounting periods commencing on or after the above date, it is the Central Government notified accounting standards that are mandatory. As per the rules, every company and its auditor shall comply with the accounting standards as per the annexure to the said rules. However, there are some relaxation and exemptions prescribed for Small and Medium Sized Companies (SMC) from compliance requirements under some accounting standards. Further, there are other compliance and disclosure requirements applicable for all companies including SMC under the rules. The term SMC has been defined as: Definition of SMC Small and Medium Sized Company (SMC) means, a company (i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; (ii) which is not a bank, financial institution or an insurance company; (iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year; (iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and (v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

50

Part II Accounting Standards

Notification G.S.R. 739(E) dated 07.12.2006

Explanation: A company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period. The accounting standards notified by Central Government are mentioned in Appendix 10. It is to be noted that, in the case of non-compliance by entities such as partnership firms, proprietorships, etc., the ICAI has directed its members to qualify their audit reports in case the accounting standards issued by it have not been followed. Thus, it is very important for the VAT Auditor to be aware of the regulatory or statutory framework under which the dealers accounts are prepared. Further, the VAT Auditor should also keep in mind that the financial statements given by the dealer for the VAT audit would comply with the accounting standards. Hence, it is essential that the VAT Auditor possesses knowledge about the applicability of the various Accounting Standards.

3. Disclosure of Accounting Policies

The accounting policies adopted by dealer are very important for the VAT Auditor to conduct the VAT audit under the KVAT law. In this regard, the disclosure requirements under AS 1 should be kept in mind while conducting the VAT Audit. Some of the aspects that need to taken into account are as follows: The accounting policies adopted by the dealer; The effect of change of any accounting policy during the year which may have a substantial effect on the financials of the year under audit or in any subsequent year; The accounting policies of the dealer should enable the VAT Auditor to correctly determine the sales and purchase and the input credits.

The major considerations for selection and application of the accounting policies are: Prudence 51

A Guide to KARNATAKA VAT Audit Substance over Form Materiality

If the fundamental accounting assumptions relating to going concern, consistency and accrual are followed in the financial statements, specific disclosure in respect of such assumptions are not required. If the fundamental accounting assumptions are not followed, such a fact should be disclosed.

4. Implication of non-compliance with the Accounting Standards

In case of non-compliance with the Accounting Standards, the Chartered Accountant(s) who had carried out the statutory audit would have qualified his audit report or made specific disclosures. In such cases, the VAT Auditor should refer to the statutory audit report of the dealer in order to ascertain any specific comment / qualification in the report. The qualifications in the statutory audit may or may not impact the details that are to be certified by the VAT Auditor. It has to be noted that the VAT Auditor is required to certify the completeness and correctness of the returns filed under the KVAT Act and at the same time, compute the VAT liability to be disclosed in Form VAT 240. Any change in the accounting method or policy could impact the VAT liability.

5. Accounting Standards Vs KVAT

There could be differences in the manner of accounting treatment of certain transactions as per Accounting Standard in the financials statements vis--vis the treatment under KVAT. Some of the differences are: A dealer may have adopted accrual basis of accounting by following AS 7 for construction contracts. However, under Section 7 of the KVAT, sales have to be recognised for construction contracts on the basis of accrual or realization of money whichever is earlier. Turnover on behalf of the principal is not reflected in the financial statements of the agent and only commission is shown as the revenue of the agent. Under the KVAT, such turnover would be treated as part of the agents turnover. In case of drugs and medicines, the turnover of the dealer will be based on the Maximum Retail Price, and not so as per the regular financial statements.

52

Part II Accounting Standards Tax payable under VAT is part of the total turnover under KVAT Act however the same will not be part of the sales in the regular financials statements. Under Accounting Standard 19 in the case of finance lease, in the books of the lessor, the cost of the asset is recorded as a receivable whereas in the books of the lessee, it will be recorded as an asset purchased. However, under KVAT, the cost of the asset will be recorded as a purchase and the fair value of the asset will not be recorded in the books of the lessee as a purchase. In the case of lessor, only the finance charges will be treated as revenue as per AS, whereas under the KVAT, the entire amount will be treated as revenue. Similarly, as per the Accounting Standard, in the case of lessee, the amount of lease rentals will be bifurcated into interest charges and liability, whereas under the KVAT, the entire amount will be treated as an expense. Materials supplied by the contractee for works contracts on his own account are treated as sales under VAT, whereas the same may not be the case as per Accounting Standards.

The above is only illustrative and there could be much more cases where there are differences in the turnovers between the financials statements and the KVAT Act, 2003.

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Chapter 4

Part III - Code of Conduct And Other Matters

1. Chartered Accountants are governed by The Chartered Accountants Act, 1949 and regulations framed there under. The Institute of Chartered Accountants of India has formulated the Code of Ethics (COE) for Chartered Accountants. In formulating the Code of Ethics for the profession, the Institute has always considered the motto Pride of service in preference to personal gain as a litmus test. User expectations and public perceptions are crucial criteria while formulating the Code of Ethics so that there should not be any gap between the Standards expected and those prescribed. The success of the profession of accountancy is dependent upon a self-imposed Code of Ethics. The COE is essential to command the respect and confidence of the general public. The COE recognises that the objectives of the accountancy profession are to work for the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirements set out. Some of the issues, which are commonly raised in regard to different aspects of VAT audit vis--vis the liabilities/obligations of the VAT auditor, are considered hereunder. The liability of the VAT auditor in respect of VAT audit will be the same as in any other audit assignment. It may be noted that when any question relating to the audit conducted by VAT auditor arises; he is answerable under the Chartered Accountants Act to the Council. In all matters concerning VAT audit, Institutes disciplinary jurisdiction will prevail. In case a dealer is found guilty of having concealed his turnover or tax liability, it would not ipso facto mean that the VAT auditor is also responsible. If the Assessing Officer comes to the conclusion that the VAT auditor was grossly negligent in the performance of his duties, he can refer the matter to the Institute so that appropriate action can be taken against the VAT auditor under the Chartered Accountants Act.

2.

3.

A Guide to KARNATAKA VAT Audit 4. The Assessing Officer or any other authority who is authorised to issue summons to the dealer and call for evidence or documents, can call the VAT auditor who has audited the accounts to give any evidence or produce documents(other than his working papers) on which he has relied upon before certifying Form VAT 240 of the dealer. If the actual work relating to the examination of books and records is done by a qualified assistant in a firm of chartered accountants and the partner of the firm signing the audit report has relied upon his work, action, if any, for professional negligence can be initiated against the member who has signed the report and in such an event, it would be open for the member concerned to prove that he has taken due care and diligence in the performance of his duties and is not aware of any reason to believe that he should not have so relied. If the qualified assistant (whether or not holding the certificate of practice) is found to be grossly negligent in the performance of his duties, the Institute can take disciplinary action against the qualified assistant. A VAT auditor can accept the assignment of tax representation. Under the COE, VAT auditor cannot charge professional fees by way of percentage of turnover or percentage of profits. In this context, reference is invited to Clause (10) of Part I of the First Schedule to the Chartered Accountants Act and the commentary on the subject at page Nos. 116117 of the Code of ethics (2003 Reprint of Ninth Edition). Certain exceptions are made in Regulation 192, but these exceptions do not apply in respect of charging fees for VAT audit. Under reporting requirements of Form VAT 240, the VAT auditor is expected to advise the dealer to file a revised return for a particular period and pay any difference in tax liability or claim additional refund. Therefore, the VAT auditor virtually steps into the shoes of the assessing authority. While conducting VAT audits, figures declared by the dealer are duly verified by the VAT auditor, the tax authorities are expected to accept the figures certified by the VAT auditor. If there is a specific reason for differing with the figures determined by the VAT Auditor, the tax authorities may re-compute the tax liability.

5.

6.

7. 8.

9.

56

Part III Code of Conduct and Other Matters 10. The opinion expressed by the VAT auditor is not binding on the dealer. If the VAT auditor has qualified his report and expressed an opinion on a particular item, the dealer may take a different view and may not take steps on the advice given by the VAT auditor. In case a member is a director of a company, the financial statements of which are to be audited and/or opinion has to be expressed, he should not undertake an audit of that company. This applies to the VAT audit also. Section 226 of the Companies Act specifically prohibits a member from auditing the accounts of a company in which he is a director or an employee of the company or in the employment of an officer of the company. Although the provisions of the aforesaid section are not specifically applicable in the context of audits performed under other statutes, e.g., VAT audit, the underlying principle of independence is equally applicable. However, where a member undertakes VAT audit of such a business or enterprise, he should disclose his interest in Form VAT 240 while expressing an opinion. Holding of substantial interest by a partner or a relative of the member in the business or enterprise of which an audit has to be carried out and opinion has to be given on the financial statements, may affect the independence of the member, in the performance of his professional duties. Therefore, a member may, not to compromise his independence, desist from undertaking the VAT audit of such business or enterprise.

11.

12.

13.

Relative means the spouse, brother or sister or any lineal ascendant or descendent of the member. Please refer to the definition of Relative given in Appendix (9) to the CA Regulations, 1988.

57

Chapter 5

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005
Clause by Clause Analysis of Form VAT 240 under the Karnataka Value Added Tax Act, 2003 (KVAT) read with the Karnataka Value Added Tax Rules, 2005 (Rules)

1. Form VAT 240 Audit Report under KVAT Act, 2003

The provisions of Section 31(4) of the KVAT Act, 2003 require a dealer to get his books of accounts audited and submit a statement of accounts duly certified by such auditor in Form VAT 240, within a period of nine months (Rule 34(3) from end of the relevant year). The criteria for audit of dealers accounts, as applicable from 1.4.2009 are laid down in the section and are as under: Sl. No 1 Category of dealer Registered dealers not being a company defined under the companies Act, 1956 or a company incorporated outside India, having Total Turnover not exceeding Rupees forty lakhs in a year. Auditor Chartered Accountant or Cost Accountant or a Tax Practitioner enrolled under Rule 168 (1] of the KVAT Rules, 2005

Company defined under the Companies Chartered Accountant Act, 1956 or a company incorporated [See Rule 168) of the outside India KVAT Rules, 2005]

2. Form VAT 240 is divided into four sections

2.1 Section 1 : Certificate
The initial portion of this Section requires a VAT Auditor to certify the accuracy / correctness of books of accounts and related records maintained by the dealer, turnover of sales and purchases, deductions claimed by the dealer, input tax

A Guide to KARNATAKA VAT Audit rebate claimed, calculation of output tax and net tax payable, classification of goods, rate of tax applied, returns filed etc. Further, the VAT auditor is also expected to compile data as required in the table included in or attached to the relevant Form, compare the same with that of the returns filed by the dealer for the year and also quantify the difference, if any. The VAT auditor is expected to advice the dealer of any requirement for filing revised returns, if any, and pay differential taxes or claim refund or to make corrections in the input tax credit balances. Detailed discussion on various clauses in this section is done in the following paragraphs.

2.2

Section 2 Part 1 : General Information

This section relates to compilation and providing various particulars about the dealers and its business that are relevant for the VAT audit.

2.3

Section 3 Part 2 : Particulars of turnovers, deductions and payment of tax

This section requires the VAT auditor to compile and state various amounts relating to the Total Turnover, Taxable Turnover, deductions, purchases, receipts, output tax, input tax, net tax payable, etc. It is important to note that the figures compiled for this purpose should be the figures as per the books of accounts and records audited by the VAT auditor. Any differences between the amounts / cumulative amounts so extracted from the returns filed by the dealer for the year has to be stated in the table provided in Section 1 (i.e, Certificate) and appropriate remarks / observations have to be given. This section also requires the VAT auditor to provide the details of return filed with the department and inspection of the business premises / books of accounts of the dealer by the departmental authorities.

2.4

Section 4 Part 3 : Particulars of declarations and certificates

In this section a VAT auditor is expected to comment on the statutory forms and declarations obtained under the CST and KVAT law, utilised and held in stock by the dealer along with the misuse, if any, of such forms.

3.

Section 1 : Certificate

The initial part of this Section requires the auditor to certify the accuracy of statements submitted by the dealer for audit and issue a certificate which states that:

60

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

Certified that I / we being a Chartered Accountant / Cost Accountant / Tax Practitioner have audited the accounts of (Name and address of the dealer) having registration No. (TIN) . for the year ending .. and that subject to my / our observations and comments about non-compliance, short comings and deficiencies in the returns filed by the dealer, as given in the attached report The latter part of the section requires an auditor to express an opinion and advise the dealer which is in the nature of a report. Hence, Form VAT 240 is a combination of both a Certificate and a Report. In this context attention is drawn to para 2.2 of the Guidance Note on Audit Report and Certificates for Special Purpose, issued by the Institute of Chartered Accountants of India to understand the principle differences between certificate and report. A Certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or an opinion. On the other hand a report is a formal statement usually made, after an enquiry, examination or reviews of specified matters under report and includes the reporting auditors opinion thereon. Thus, in the case of a VAT audit under the KVAT Act, 2003 the auditor will not only certify the accuracy of the statements and returns filed by the dealer but will also report on the shortcomings and advise the dealer of corrective actions to be taken. An auditor is required to report on any deficiency in the returns filed, incorrect or insufficient information provided etc. An auditor is expected to give his observations, if any, on the correctness and completeness of the returns. This part of the certificate specifically requires an auditor to state/comment / report about non-compliance with the statutes vis- vis the returns.

Auditors Certificate in Form VAT 240

3.1 Clause 1 : The books of account and other related records and registers maintained by the dealer are sufficient for the verification of the correctness and completeness of the returns filed for the year;

The auditor has to verify whether the various registers, books of accounts and other records available with the dealer and produced for audit are sufficient to 61

A Guide to KARNATAKA VAT Audit ensure the correctness and completeness of the returns filed by the dealers. What constitutes sufficient records could be highly debatable since the term sufficient has not been defined. Therefore, an auditor is expected to be prudent in his examination of such records and registers and satisfy himself that the said documents and records give a clear picture of the correctness and completeness of the returns filed. While the Rules do not prescribe the books of accounts to be kept or maintained; nonetheless, they clearly state the type or nature of records to be maintained for each commodity dealt with by the dealer. Such records maintained should be for manufacture, production, trading, purchases, sales, consumption and closing stock for each class or type of dealer. Hence the auditor has to exercise his due diligence and judgment in arriving at a conclusion or framing an opinion under this clause. In arriving at a conclusion under this clause, the various records among others that would have to be examined by the auditor in terms of Rules 27 to 33 of the KVAT Rules, 2005 are: Sales or Tax Invoice including Lorry Receipts / Delivery challans; Purchase Invoice including Lorry Receipts / Goods received note; Debit Notes; Credit Notes; Consignment Notes / Branch Transfers Memos (stock transfer invoices); Goods sent for demo purposes/ free replacements / display / job-work / repairs / samples / lost and destroyed goods / stolen goods / goods gifted / free issue / warranty / self consumed / exhibition etc; In the case of a manufacturer, stock registers for raw materials, component parts and inputs, consumables, receipt of goods, finished goods, opening stock, goods manufactured, goods used, sold or consumed or otherwise disposed off and closing stock of goods (which have value and quantity); For trading units, the stock register would reflect opening stock, purchases, sales, closing stock; (which have value and quantity); Register for Statutory Forms, declarations and delivery challans such as Form C / F / H / I and Forms 505/515/, etc. Details of Tax Deducted at Source/ TDS deductee details if dealer is the deductee; VAT / PT / CST Registration Certificates; 62

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

VAT Returns; Details of pending litigations, pending assessments, search, seizure, confiscation, audit, investigations, check post issues, protective assessments, reassessments, revision orders, garnishee orders, attachment orders, etc. Tax payment details including input credit details; Bank payment details for purchases; Financials; Ledger accounts including subsidiary books; For commission agents, the auditor should verify agreements between him and his principals, authorisation letters for purchasing and selling goods on behalf of the principal; Particulars for each works contract executed such as: - Names and Addresses of the contractees for whom or on whose behalf the contracts are executed; - Goods purchased and utilised for each works contract; - Payments received in respect of each works contract;

Particulars for dealer engaged in lease transactions: - Names and Addresses of person to whom goods are delivered for use; - Details of amounts received for each transaction - Details of opening and closing stocks including purchase and sale details.

The books of accounts maintained / examined are to be listed in clauses 13 & 14 of Part I of Form VAT 240 respectively. The certificate is required to be issued based on the audit of the listed books of accounts / records provided by the dealer. Therefore it is advisable for an auditor to comprehensively list out all the books of accounts and records audited. It is advisable to obtain a declaration / representation from the dealer which states that there are no other books / records that are maintained / available other than what is produced for the purpose of audit. 3.2 Clause 2 - the total turnover of sales declared in the returns include all the sales effected during the year; Clause 3 - the total turnover of purchases declared in the returns include all the purchases made during the year; 63

A Guide to KARNATAKA VAT Audit The task of the auditor under these two clauses is rather very onerous since he has to certify that all sales and purchases are disclosed in the returns! In case a dealer does not disclose all the purchases and sales effected by him in the books of accounts as produced, the auditor could be held liable. A suitable comment / observation in respect of this clause could be Based on the entries in the books of account and other related records furnished to us for the purpose of our audit, all the sales have been declared in the returns. Similar considerations and disclosures should apply for purchases under Clause 3. An auditor must exercise proper care and diligence while commenting on the said clauses. The auditor could gather audit evidence to ensure compliance under this clause by using any of the following tools / techniques or methods among other methods that he may adopt: The auditor would have to ascertain whether there are proper internal controls for recording all the sales, preparing of the tax invoices / bills of sale and for proper accounting of the transactions. Similar internal control checks are required to be conducted for all the purchase transactions of the dealer. Certain analytical review procedures could be carried out by the auditor to ascertain the trends of sales and purchases of the earlier years and compare it with the current years sales and purchases. Reconcile sales and purchases figures as per VAT returns with the books of accounts, financials etc; Reconcile the manufacture, sales and purchases and closing stock / details with the excise or income-tax returns. [Refer Annexure A] Clause 4 - the adjustment to turnover of sales and purchases is based on the entries made in the books of account maintained for the year; Under Clause 4, the auditor has to certify whether the adjustments to the sales and purchase are based on the accounting entries. The auditor has to verify the nature of adjustments made to the sales and purchases and ensure only the net sales and purchase figures are disclosed. Such adjustments could be in the nature of recognition of sales / purchases and possible differences, if any, between financials, books and returns filed. It is also possible that in certain cases the turnovers liable to tax under 64

3.3

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

Section 7 of the KVAT Act, 2003 may have to be recognized based on advances received by the dealer. Such adjustments ought to be duly reconciled and reported. Hence, in such cases the auditor should adopt suitable checks to ensure that the adjustments to the sales have been carried out in the current year and not the following year (and vice versa in case of earlier years). 3.4 Clause 5 - the deductions from the total turnover including deduction on account of sales returns claimed in the returns are in conformity with the provisions of the law; This clause essentially relates to certifying the computation of the taxable turnover of dealer liable to value added tax. Under this clause, the auditor has to verify whether the deductions that are claimed by the dealer are in conformity with Rules 3(1) and 3(2) of the KVAT Rules, 2005. Attention should be given to the fact as to whether deductions towards freight, insurance, etc. are claimed or not since these collections are not allowed as a deduction while computing the taxable turnover under the KVAT Act, 2003 unlike the Central Sales Tax Act, 1956 (CST). Further, the deduction towards discounts should be reflected in the tax invoice pertaining to that sale for which tax invoice has been issued and not in respect of any other sale or sales. The deduction towards sales returns should be allowed only if the goods have been returned within six months from the date of delivery of goods and if they are supported by debit / credit notes. Deductions towards inter-State sales, export sales, high sea sales, outside State sales and stock transfers to a place outside State are allowed while computing the taxable turnovers under the KVAT Act, 2003. Another issue that needs to be checked here is whether service tax deduction is allowed or not in case of composite / works contracts for the purpose of arriving at the taxable turnover. Deductions for dealer paying VAT based on MRP for sale of pharmaceutical products should be verified as per Rule 3(3) of the KVAT Rules, 2005. It may be noted that while verifying the said deductions it is imperative for an auditor to correspondingly check the validity / authenticity of each of the deductions with the relevant supporting documents. In case of deductions relating to sub contractors one may have to verify whether such sub contractor is a registered dealer under the KVAT Act, 2003 and whether he is paying taxes regularly. 65

A Guide to KARNATAKA VAT Audit The issue that arises for consideration is that sales returns in the subsequent year in respect of sales effected in the current year would date back to the actual date of sale as per Supreme Courts decision in Deputy Commissioner of Sales Tax (Law) Vs Motor Industries Co. [1983] 53 STC 48 (SC) case. However, it appears that the provisions of Section 30 of the KVAT Act, 2003 appears to nullify the ratio of the said judgement and mitigate the hardship of a dealer by permitting the dealer to claim set-off in respect of sales returns in the month in which the goods are returned, provided it is returned within the prescribed period. Further, it may be noted that, in case purchase returns are effected either within six months or otherwise, the dealer is required to reverse / restrict the input tax credit. 3.5 Clause 6 - the classification of goods sold, rate of tax applicable and computation of output tax and net tax payable as shown in the return is correct; Under this clause the auditor has to certify the classification of goods sold, rate of tax and whether the computation of input tax / output tax / net tax is as per the provisions of the KVAT Act, 2003. Classification of goods is a very wide subject which encompasses interpretation of statutes and commodity classification. Normally, commodity classification is a vexed issue and is highly litigated. In such a scenario, an auditor has to exercise utmost care while reporting on classification issues. Under such circumstances the VAT auditor has to clearly comment, make his observations or remarks in the certificate, the basis for his observation or remark, the reliance placed by him on judgements / circulars / notifications / Excise HSN code etc., or the material evidences he has gathered before reporting on the classification of goods. Thereafter, the net tax payable also has to be determined correctly. 3.6 Clause 7 - the computation of classification of goods purchased, the amount of input tax paid and deductions of input tax credit claimed in the return is correct and in conformity with the provisions of law; This clause requires the auditor to certify whether the classification of goods purchased is as per KVAT Act, 2003. Under the KVAT Act, 2003, there is no specific provision for the purchasing dealer to ensure that the selling dealer has classified the goods in accordance with law. For 66

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

verifying whether the selling dealer charges correct tax, the points mentioned under Clause 6 would equally apply. However, even if the selling dealer has under or over charged the taxes, the buying dealer would be eligible to claim input taxes if taxes are charged in the said tax invoice. However, the VAT Auditor has to ensure that the input tax credit taken by the dealer is only in respect of eligible inputs and in accordance with the provisions of the KVAT Act, 2003. The eligibility to input tax deduction should be in accordance with Section 10 of the KVAT Act, 2003 and the ineligibility should be determined according to Sections 11, 12, 13, 14 & 17 read with Fifth Schedule or the relevant notifications to the KVAT Act, 2003 which deal with various types of input tax restrictions. The KVAT Act, 2003 and the relevant notifications issued there under provides that certain classes of registered dealers are required to upload purchases and sales data in the notified departmental website. The auditor has to ensure compliance in this regard by requesting the said registered dealer to provide for suitable acknowledgements / data uploaded. 3.7 Clause 8 - the utilization of statutory forms under the KVAT Act , 2003 and the CST Act, 1956 is for valid purposes; Under this clause, the auditor has to certify whether the various Forms prescribed under the KVAT & CST Acts are utilised for valid purposes. For example: The auditor has to verify - whether the goods purchased against Form C have been listed in the CST Registration Certificate in Form B of the dealer and in conformity with the provisions of section 8 of the CST Act, 1956. That Form F is issued only for a valid stock transfer of goods etc. Similarly, issue of Form F, E-I, E-II, H, I etc., must be thoroughly verified. Further, under the KVAT Act, 2003 the auditor has to verify whether the Forms VAT 505, 140, 145, 156, 158, 161 etc., are utilised for valid purposes. These forms pertain to delivery challans in respect of movement of goods, proof of tax payments in respect of consignment sales and tax deduction at source respectively. Effective from December 15, 2008, certain dealers have to obtain Form VAT 505 / Form C online. Further, from the same date the facility of issuing self printed delivery challans in Form VAT 515 appears to have been discontinued in respect 67

A Guide to KARNATAKA VAT Audit of such dealers. It may be noted that the electronic methods for obtaining the forms has been notified only in respect of certain registered dealers. 3.8 Clause 9 - Other information given in the returns is correct and complete Under this clause, the auditor has to certify whether all other information in the returns filed by the dealer is correct. The relevant clause does not stipulate as to what is the information that needs to be certified under the statute. Experts believe that this clause essentially is a pointer seeking certification in respect of matters such as entry tax under the KTEG Act, 1979, special entry tax under the SET Act, 2004 and annexures 1, 2 & 3 to Form VAT 100. Information such as the person authorised to sign the return etc., should also be verified [Refer Annexure B]. 3.9 Summary of additional tax liability or additional refund due to the dealer on audit for the year Form VAT 240 provides a table in which the VAT auditor is expected to compile certain information relating to the dealers business. However, to analyse the yearly data the VAT auditor has to compile information month-wise (i) from the returns filed by the dealers and (ii) from the books of accounts & other records as per the provisions of the KVAT Act, 2003 and after comparing the two, State the differences, if any. This table essentially reveals the differences, if any between the returns and the report in a summary format. The information to be provided for this table is basically extracts of the detailed workings provided in various clauses under Part II of Form VAT 240 [Refer Annexure C]. 3.10 Conclusion of the Auditor The VAT auditor is expected to state in this certificate / report and advise the dealer to file revised return, if required and pay the differential taxes, if any, or claim additional refund and / or make corrections in the balance of tax credits available as per returns filed. Section 35(4) of the KVAT Act, 2003, restricts a registered dealer, under certain circumstances, from filing a revised return beyond six months from the end of the relevant tax period. However, the department is accepting the revised returns beyond the period of six months, only in such of those circumstances wherein the registered dealer is liable to pay tax. In case, of a refund claim / mistake apparent on the records etc which does not lead to any additional tax 68

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

liability etc., the department is not accepting the said revised return taking support of Section 35(4) of the KVAT Act, 2003. On a plain reading of the Form VAT 240, the VAT auditor is required to advise the registered dealer to file such revised returns in circumstances leading to payment / refund of taxes arising out of audit. Therefore, the intent of the legislature is to permit a registered dealer to file revised returns even after a lapse of six months. Thus, the revised returns can be filed by the dealer along with the KVAT Audit Report or may be submitted after filing the KVAT Audit Report. 3.11 Attestation of the audit report The VAT auditor has to affix his signature under his name (individual member) or trade / partnership firm name and state his designation and membership number along with the location / place, etc. 3.12 Attachment to the audit report On a plain reading of the Form VAT 240 the dealer is required to enclose copies of Profit and Loss account and Balance Sheet. It is not very clear whether a dealer has to file audited or unaudited copies of the said financial statements. Further, in case the dealer has a consolidated Balance Sheet for multi State locations, it is advisable that suitable declaration in this regard is made in the audit report itself.

4. Section 2 : PART 1 of Form VAT 240 General Information

4.1 Clause 1 : Name of the dealer This clause requires the VAT Auditor to verify the Registration Certificate of the dealer issued under the KVAT Act, 2003 and mention the name of the dealer as mentioned in the Registration Certificate. It has to be noted that the Name of the dealer and the trade name are distinct and separate. 4.2 Clause 2 : Registration Certificate No. (TIN) This clause requires the Tax Payers Identification Number (TIN) to be disclosed. The VAT auditor is required to cross check the said TIN with documents such as Registration Certificate, Tax Invoices, Monthly Returns filed etc., 69

A Guide to KARNATAKA VAT Audit 4.3 Clauses 3(i) & 3(ii) : Status of the dealer and If partnership firm, name of all the partners This clause requires the status of the dealer to be disclosed. The dealer could be an Individual, Proprietorship Concern, Partnership Firm, Company, Trust, HUF, Society, Government Department, etc. Sub clause (ii) stipulates that the name of all the Partners in case of a Partnership Firm be disclosed. If there is any change in the constitution of the dealer during the year under audit, the same has to be mentioned giving details of such change. It is advisable for an Auditor to check / verify whether changes in Directorships, Trustees etc., have been suitably intimated to the department within the prescribed time limits. 4.4 Clause 4 : Trade name and full address of the principal place of business This clause stipulates that the trade name of the dealer is disclosed. In case of a dealer having multiple businesses, if the trade name differs, the trade name and full address of the principal place of business should be stated. 4.5 Clause 5(i) : Full address of all additional places of business in the State This clause mandates that all the additional places of business within the State has to be disclosed. It must be noted that all these addresses should also be mentioned in the registration certificate of the dealer. The VAT auditor must verify whether the dealer has obtained the relevant branch registration certificate after payment of the appropriate registration fees. In this scenario the VAT auditor must verify whether appropriate Form VAT 3 has been filed within the prescribed time. In terms of Section 2(23) of the KVAT Act, 2003, a place of business is defined to mean any place where the purchase or sale of goods takes place and includes any warehouse, godown or other place where the dealer stores or processes goods; any place where a dealer produces or manufactures or processes goods; any place where a dealer keeps his accounts including documents and in a case where the dealer carries on business through an agent (by whatever name called), the place of business of such agent. It must be noted that branches of dealers having a different TIN must not be included under this clause. [Refer Annexure D] 70

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

4.6

Clause 5(ii) : Full address of all additional places of business outside the State This clause requires that all the places of business outside the State including such additional places of business outside India should be disclosed. The definition of place of business is the same as mentioned in Clause 5 above. The auditor should check / verify the details under this clause with the relevant VAT registration certificates of other States. It would be advisable that while verifying the registration details of the additional places of business the auditor must verify the data / details relating to additional places of business that have been opened or closed during the year. It is advisable to obtain an appropriate management certificate in this regard. [Refer Annexure E]

4.7

Clause 6 : Address of any branch or unit in the State having a different registration number (TIN) This clause requires disclosure of details of all the places of business for which a separate TIN has been issued by the VAT authorities. This could be within the same city or within the State. Under Rule 47 of the KVAT Rules, 2005 if the dealer is a company having more than one place of business, it can apply to the Commissioner of Commercial Taxes requesting for a separate TIN for each of place of business. The VAT auditor has to verify the registration application, certificates, address and TIN numbers for such place of business. [Refer Annexure F]

4.8

Clause 7 : Nature of business (specify whether manufacturer, reseller, works contractor, etc.) This clause requires disclosure relating to the nature of business such as manufacturer, reseller, wholesaler, retailer, exporter, importer, stockiest, agent, works contractor, lease, service provider or any category of business etc.

4.9

Clause 8 : Description of 10 major goods sold This clause requires disclosure of ten major goods dealt with by the dealer. In cases where it is difficult to disclose the 10 major commodities dealt with, the VAT auditor can disclose the major classes of goods dealt with by the dealer. 71

A Guide to KARNATAKA VAT Audit 4.10 Clause 9 : Whether opted for composition or not Clause 9 mandates that, the auditor has to mention whether the dealer has opted for payment of tax under the composition scheme. In case the dealer is carrying on multiple businesses, the businesses for which he is registered with the VAT authorities under the composition scheme must be mentioned here. In this regard, the VAT auditor should verify the permission granted by the VAT authorities in respect of exercise of such option for the composition application. In case the dealer has opted out of payment of tax under the composition scheme during the year then the VAT auditor is required to verify the relevant application filed by the dealer exercising his option to opt out of the scheme. The consequential provisions relating to payment of taxes and filing of final returns etc., must also be verified. If Sthe dealer has switched from regular scheme to composition scheme during the year, the VAT auditor should ensure that a new/amended registration certificate is obtained / available with the dealer clearly mentioning the nature of business for which the registration is taken and also the effective date of such change. 4.11 Clause 10 : Whether permitted under special accounting scheme or not Clause 10 requires the VAT auditor is required to disclose whether he has opted for payment of tax under the special accounting scheme. In terms of Section 16 of the KVAT Act, 2003, if the dealer is unable to identify each individual sale or its value or rate of tax, then he can apply to the Commissioner for payment of tax on such sales based on special accounting methods as per Rule 134 of the KVAT rules, 2005. This option is available only to retailers who sell taxable goods directly to the customers. Hence, under this clause the dealer has to disclose whether the permission for special accounting scheme has been granted to him or not. The VAT auditor should also report instances, if any, where permission is applied for, by the dealer and rejected by the prescribed authority. 4.12 Clause 11 : Whether availing incentive as a new industrial unit (specify whether exemption/deferment) This clause requires the VAT auditor to disclose whether the dealer has availed any tax exemption or deferment under the Karnataka Sales Tax 72

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

Act, 1957 (KST) or any of the industrial / SEZ policies currently in force under the KVAT Act, 2003 or any other commercial tax law. The auditor has to check whether the dealer has complied with all the terms and conditions relating to exemption / deferral of taxes under the relevant Government Orders / Notifications. [Refer Annexure G] 4.13 Clause 12 : Whether registered under the KTEG Act, 1979 and enrolled / registered under the KTPTC & E Act, 1976 Under Clause 12, the registration details of entry tax and profession tax are to be disclosed. In case the dealer is already registered under VAT, separate registration is not required under the KTEG Act, 1979. In respect of profession tax, the VAT auditor has to verify whether the dealer has been registered / enrolled as an employer and as a dealer. It is imperative to note that the VAT auditor must verify whether the dealer has registered all the additional places of business within the State. 4.14 Clause 13 : Books of account maintained This clause requires the disclosure of books of accounts maintained by the dealer. The KVAT Act, 2003 does not specify / prescribe the books of accounts to be maintained and hence the books of accounts maintained under other laws such as Income tax, etc. should be acceptable. Such books of accounts would be sales book, purchase book, credit note book, Debit note book, out put tax and input tax register, Fixed Asset Register, cash book, bank book, general ledger, journal, vouchers etc. However Section 31(1) of the KVAT Act, 2003 read with Rule 33 of the KVAT Rules, 2005 requires that every registered dealer shall maintain a true and correct account in Hindi, Kannada or English of all the purchases, receipts, input taxes, sales, disposals, output taxes, closing stocks, production, manufacture and closing stock quantity. Further, this clause does not require the dealer to mention the accounting method adopted by the dealer, such as on cash or accrual basis unlike the Income-tax Act, 1961. [Refer Annexure H] 4.15 Clause 14 : List of books of account examined Under Clause 14, the list of books of accounts examined by the VAT auditor has to be stated. It may be noted that the auditor has to mention 73

A Guide to KARNATAKA VAT Audit here all those books of accounts and records examined by him whether or not the same is disclosed officially by the dealer based on Clause 13 above. [Refer Annexure H] 4.16 Clause 15 : Method of valuation of opening and closing stocks Under Clause 15, the dealer has to disclose the method of valuation of opening and closing stocks. The KVAT Act, 2003 does not prescribe any method of stock valuation. As per Accounting Standard-2 recommended by the ICAI, the stock valuation is done either at cost or market price whichever is lower. It must be noted that the said disclosure must be in line with the method disclosed by the dealer in his financial statements. If there is change in the method of stock valuation (opening or closing stock) during the year, it is advisable to disclose such a change.

5. Section 3 : PART 2 of Form VAT 240 Particulars of turnovers, deductions and payment of tax
5.1 Clause 1 : Total and taxable turnovers The term Total Turnover and Taxable Turnover have been defined U/S 2(35) and 2(34) of the KVAT Act, 2003 respectively. Rule 3 of KVAT Rules, 2005 prescribes the method of determination of total and taxable turnovers. A detailed discussion of these provisions can be found in Chapter 2 of this book. It is essential for the VAT auditor to compile this information, month-wise or tax period wise in an annexure and disclose the aggregate amounts in this column. The Total Turnover in terms of Section 2(35) of the KVAT Act, 2003 will be different from that of the Total turnover or sales as per the normally adopted accounting policies of the dealers financial statements, prepared under Companies Act, 1956 or for purposes of Income Tax Act, 1961. For instance the sale / disposal of any fixed assets as per KVAT law will form part of the total and taxable turnover of the dealer, whereas, the treatment for this transaction in the financial statements will be different. It might not form part of trading account and will be only a Balance Sheet item. Hence, for the purposes of clarity, it is advised that the VAT auditor gives a reconciliation statement explaining the difference between the turnovers. The VAT auditor has to exercise his knowledge and expertise in arriving 74

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

at the Total and Taxable turnovers under the KVAT Act, 2003 because the turnover as understood under the KVAT Law may be different from the amounts credited to sales account by the dealer. For example, the dealer might have credited value added tax or excise duty collected to a separate account in the books of account whereas for the purposes of KVAT law it has to be added to the turnover. Similarly sale of scrap, sale of fixed assets, amounts recovered from employees towards goods provided to them free or at subsidized rates, etc form a part of the turnover under the KVAT Act, 2003. In case of dealers engaged in works contracts, advances received will not form a part of the turnover in the books, but for the purposes of VAT laws these advances are part of the total turnover. It has to be borne in mind that even inter-State stock transfers not involving transfer of property in goods is deemed to be a part of total turnover under the KVAT Act, 2003 The taxable turnover referred to in this clause relates to the taxable turnover as understood u/s 2(34) of the KVAT Act, 2003. The taxable turnover under CST Act will be disclosed under Clause 10 of Part II of this form. However, the turnover under CST Act, export turnover etc will form part of total turnover, although it does not form a part of the dealers taxable turnover. The suggested formats for disclosure have been given under Annexure I. 5.2 Clause 2 : Deductions claimed under the KVAT Act, 2003 (specify in respect of each deduction its nature and whether, it is in order and supported by prescribed documents) Clause 2 of Form VAT 240 requires that the various deductions claimed including details of each type of deduction availed to be mentioned and whether the same are in conformity with the provisions of the KVAT Act, 2003. The difference between the total turnover and taxable turnover should be equal to the deductions claimed by the dealer under this clause. Under Rules 3(1) & 3(2) of the KVAT Rules, 2005 various deductions have been prescribed from the total turnover of the dealer in order to arrive at the taxable turnover. Some of them are exempt sales, inter state sales, export sales, stock transfers outside the State, discounts allowed, sales returns, purchase returns for purchases made from unregistered dealers, tax collected, payment to registered sub75

A Guide to KARNATAKA VAT Audit contractors, labour and other like charges in respect of works contracts, etc. Each of the above deductions should be supported by adequate documents, bills, payment details, correspondence with customers / suppliers, debit / credit notes etc. For e.g.: In respect of direct export sales - invoices, shipping bills and customs clearance documents, FIRCs should be maintained as proof of export. The deduction under Rule 3(2) of the KVAT Act, 2005 is applicable for all types of dealers except such of those dealers who have opted to pay tax based on MRP, such as dealers dealing in pharmaceutical products. Rule 3(3) of the KVAT Rules, 2005 prescribes the deductions for pharmaceutical products. The details of deductions to be furnished under this clause should be in respect of the deductions claimed under the KVAT Act, 2003 and not in respect of CST Act, 1956. [Refer Annexure J]. 5.3 Clause 3 : Details of taxable sales within the State Clause 3 requires a dealer to disclose the details of all taxable sales effected within the State of Karnataka. The description of goods, its taxable value, rate of tax and the tax payable for each class of goods sold by the dealer should be mentioned. In case the dealer has opted for payment of tax under the composition scheme for all or any of the businesses, details of goods covered under the composition scheme should be furnished separately. In respect of contractors who have opted for payment of taxes under the composition scheme, the phrase total consideration means total turnover in respect of which the dealer has received monies towards works contract. The deductions from the total consideration viz payments effected to registered sub contractors can be reflected in Clause 2 relating to deductions. The turnover on which tax is liable to be paid by such composite dealer has to be reflected in Clause 3. [Refer Annexure K] 5.4 Clause 4 : Details of purchases and receipts Under Clause 4, the dealer has to disclose all the purchases and receipts such as imports, inter State purchases, local purchases from registered dealers, local unregistered dealer purchases, inward stock transfers from outside the State, etc. Thus, it is advisable that the VAT auditor compiles or collates these data month wise / tax period wise in an annexure and

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Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

discloses the total aggregate amount in this clause. As far as possible, a detailed break-up should be furnished: - Local purchases from registered dealers; - Local purchases from unregistered dealers; - Within State stock transfers; - Interstate stock transfers; - Purchases at a concessional rate against Form C; - Purchases without Form C; - In transit inter-state purchase (E 1 purchases) - Purchases against Form H; - Purchases against Form I; - Purchases against Form J; - Goods received for job work; - Goods received for repair; - Direct imports; - Purchases in the course of import; - Purchases by an agent on behalf of the dealer; - Purchases by the dealer on behalf of principal; - Purchases from composition dealers; - Purchases from EOUs; - Purchases from SEZs; - Purchases Returns The Purchase and receipt details provided under this clause will have a direct bearing on the computation of input taxes that needs to be disclosed in the subsequent clauses. Suggested formats for the purchase register and for compilation of information for this clause are provided under Annexure L.

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A Guide to KARNATAKA VAT Audit 5.5 Clause 5 : Details of input tax paid on Purchases Under Clause 5, the dealer has to disclose the description of goods, its taxable value, and input tax paid on its purchases. This essentially means that the details of purchases from registered dealers within the State along with the input tax paid / payable for all purchases have to be disclosed. Thus, even purchases on which input tax is not allowed as setoff under the KVAT Act, 2003 are required to be disclosed. [Refer Annexure M]. 5.6 Clause 6 : Details of input tax paid on purchases eligible for deduction (give details of capital goods separately and specify whether calculated on the basis of partial rebating formula) Under Clause 6, only those purchases which are eligible for input tax deduction or set-off, should be disclosed with full details such as description of goods, taxable value, tax rate and tax amount. These details should be shown separately for capital goods and non-capital goods. Care should be taken not to include goods listed under Fifth Schedule of the KVAT Act, 2003 which are covered under input tax restricted category. Further, under the KVAT Act, 2003 pro-rata input tax is available as set-off in case common inputs are used for manufacturing / trading / exempt as well as taxable goods. Hence, such of those inputs and capital goods on which prorata credit or partial credit has been availed under the KVAT Act, 2003 should be disclosed separately. [Refer Annexure N]. 5.7 Clause 7 : Details of input tax paid on purchases ineligible for deduction (give details of capital goods and special rebate separately and specify whether calculated on the basis of partial rebating formula) Under Clause 7, after collating information relating to purchases eligible for set-off, the VAT auditor is required to compile information with respect to purchases that are ineligible for set-off of input tax. These are essentially goods attracting the provisions of Section 11 of the KVAT Act, 2003, input tax restricted goods like the goods listed under Fifth Schedule of the KVAT law, purchases attributable to sale or manufacture of exempted goods, certain capital goods not eligible for input tax rebate, purchase of goods that are involved directly or indirectly in stock transfers outside the State, purchases of certain petroleum products when used in motor vehicles, etc. 78

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

With respect to purchases of goods that are directly or indirectly involved / used in the goods stock transferred outside the State and also in respect of purchase of certain petroleum products used as fuel in the production of taxable goods or any goods for exports or for use in captive generation of power, a special rebating provision stipulated in Section 14 of the KVAT Act, 2003 has to be applied. The VAT auditor has to ensure that compilation is carried out in such a manner, which will reflect the purchases and ineligible input tax paid there on separately. This clause also requires a VAT auditor to state separately purchases in respect of which Section 14 special rebating formula and Section 17 of the KVAT Act, 2003 - partial rebating formula has to be applied. [Refer Annexure O] 5.8 Clause 8 : Details of input tax deduction claimed on purchases relating to inter- State sales and export sales(give details of capital goods and special rebate separately and specify whether calculated on the basis of partial rebating formula) Under Clause 8, input tax on purchases relating to export and inter-State sales have to be disclosed separately. Under Section 20 of the KVAT Act, 2003 input tax set-off is available as deductions for inputs used in export and inter-State sales. However, it may not always be practical to establish a one-to-one co-relation between each purchase and the corresponding interState sale or export sale. For e.g.: in case of large manufacturing entities, such one-to-one co-relation is practically impossible. The principle of tracking of purchase (input tax credit) to sales (output tax) is not required under the KVAT Act, 2003, except with regard to URD purchases made and taxes paid under Section 3(2) of the KVAT Act, 2003 since the provision of Section 11 entitles a dealer to claim set-off only when such goods are put to use (unregistered dealer purchases under Section 3(2)). 5.9 Clause 9 : Details of un-adjusted excess input tax credit carried over from the previous year and to the next year Under Clause 9, the VAT auditor has to verify the input tax of the previous year and that which is carried forward to the next year. The VAT auditor has to verify the input tax that is carried forward - on a month-on-month basis and verify whether the excess input tax is adjusted within the year 79

A Guide to KARNATAKA VAT Audit or if the same is carried forward to the next year. The excess amount carried forward, if any, to the next year should tally with the year-end accounts and the returns. 5.10 Clause 10 : Total and taxable turnovers under the CST Act, 1956 Under Clause 10, the total and taxable turnovers under the CST Act, 1956 has to be disclosed. The term total turnover has not been defined under the CST Act, 1956. However, the words sale price, means the amount payable to a dealer as consideration for the sale of any goods, less any cash discount according to normal trade practice, but inclusive of any sum charged for anything done by the dealer at the time of or before the delivery of goods other than cost of freight or delivery or installation, if they are separately charged for. Further, the term turnover means the aggregate sale price received or receivable in respect of inter state sales and determined according to prescribed rules. There is no separate tax computation mechanism under the CST Act, 1956 in order to arrive at the taxable turnover. One would have to refer to the definition of the terms sale price and turnover as mentioned above. Further, based on Supreme Courts decision in the case of Mahim Patram Pvt. Ltd. Vs Union of India & Others [2007] 6 VST 248 (SC), the computation of taxable turnover, in certain cases, may have to be carried out as applicable under the State sales tax laws. Details in respect of the following sales have to be furnished under this clause: - Inter-State sales at a concessional rate against Form C; - Inter State sales without Form C; - Subsequent sales commonly referred to as E1 Sales; - Inter state sales against Form I; - Inter state sales against Form J; - Deemed export sales against Form H; - Direct Exports; - Sales to EOUs; - Sales to SEZs; - Stock transfers outside the State; - Sale of scrap; 80

Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

- Sale of fixed assets; - Sales returns; - Free Samples issued; - Goods issued for warranties; - Goods sent for Demo purposes; - Goods sent for job work; - Goods sent for repair and return; - Goods sold through consignment agents; - Goods lost / destroyed / change in use / captive consumption / theft / fire - The deductions specified in clause 11 below have to be deducted from the total turnover above to arrive at taxable turnover. Further the details of taxable turnover along with bifurcation of the taxable turnover is already provided under clause 12 below [Refer Annexure P for suggested formats] 5.11 Clause 11 : Deductions claimed (specify in respect of each deduction its nature, whether it is in order and supported by prescribed documents) Clause 11 requires the VAT auditor to mention the various deductions claimed including details of each type of deduction availed and whether the same are in conformity with the provisions of the CST Act, 1956. The points discussed under Clause 2 of Part 2 of Section 3 above would be equally applicable for this clause. Various deductions have been prescribed from the total turnover of the dealer in order to determine at the taxable turnover. Some of them are exempt sales-export sales, deemed export, stock transfers outside the State, discounts allowed, sales returns, CST payable, payment made to registered sub-contractors, labour and other like charges for execution of works contracts, etc. Documents, bills, payment details, correspondence with customers/suppliers, etc, shall support each of the above deductions. [Refer Annexure Q]. 5.12 Clause 12 : Details of taxable sales Clauses 12 requires the VAT auditor to disclose the details of all taxable inter-State sales. The description, taxable value, rate of tax and the tax 81

A Guide to KARNATAKA VAT Audit payable in respect of each class of goods sold by the dealer should be mentioned. The total turnover minus the deductions claimed as above should be equal to the taxable turnover. [Refer Annexure R]. 5.13 Clause 13 : If the dealer has opted for composition indicate the type of composition scheme opted and details of the composition amount paid, its rate and the basis Clause 13 requires a VAT auditor to disclose whether the dealer has opted for payment of taxes under the composition scheme for any of the businesses or in respect of goods sold by him. Under Section 15 of the KVAT Act, 2003 the dealer has an option to pay a flat rate of tax in lieu of the net tax payable under KVAT Act, 2003. Different tax rates have been prescribed for different class of dealers. This is an optional scheme and a relatively hassle free scheme of payment of tax subject to fulfillment of certain conditions. The dealer has to disclose the type of composition scheme, amount of composition tax, rate of tax and the basis of payment of such tax. In this regard, the auditor should examine the relevant application filed and the registration certificate granted by the VAT Officer. The auditor should also verify whether the dealer has fulfilled all the conditions of the composition scheme on an on-going basis apart from the initial conditions, if any. 5.14 Clause 14 : Details of returns filed Under Clause 14, the VAT auditor has to disclose the due dates of the returns, actual date of filing of the monthly and quarterly returns, details of payments of tax, interest, and penalty. There may be cases where the dealers would have filed the revised returns within the time permitted u/s 35 (4) of the KVAT Act, 2003, in which case the VAT auditor should have to separately mention the details of revised returns filed by the dealer. [Refer Annexure S for suggested formats]

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Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

5.15

Clause 15 : Details of inspection of business premises / books of account of the dealer by departmental authorities on inspection / visit Clause 15 requires the VAT auditor to disclose any proceeding whether the premises of the dealer or the books of accounts / records have been inspected by the tax authorities. The disclosure is required only where the tax authorities have visited the dealers premises to carry out investigation, search, seizure or departmental audit or for any other purpose. This clause seems to be silent on any other proceedings such as notices issued without visits for re-assessments, best judgment assessment, protective assessment, rectification of orders, revision orders, check post issues, etc. Details such as name and designation of the Officer, date of the visit, additional tax, if any assessed, interest or penalty levied and compounding fee collected, if any, has to be disclosed. In the view of the authors any of the above referred proceedings which commence or conclude during the audit period should be reported here. If any proceeding commences after the audit period, but before signing the report, pertaining to the audit period, must also be reported. [Refer Annexure T].

5.16

Note: As per this note, the trading account and manufacturing account in respect of each class of goods (whether taxable or not) has to be furnished along with the Audit Report. Practically it may not be possible to prepare the trading account in respect of each class of goods especially for large dealers. In such instances as per Authors view the sales and purchases as disclosed in trading and manufacturing account can be reflected. Basically, the manufacturing and trading account would include opening stock, purchases, direct expenses, sales, and closing stock figures. Based on the above Trading and Manufacturing Account, accounting ratios on sales and non-sales transactions have to be computed and furnished separately. Such ratios could be gross profit ratio, expense ratios, stock turnover ratio, cost of goods sold ratios, material consumption ratios, stock transfer ratio, Agent turnover ratio, free samples ratio, etc. Also, whether the ratios should be furnished for each

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A Guide to KARNATAKA VAT Audit tax period or on annualised basis is not specifically mentioned. As commonly understood it has to be furnished for the year as a whole. The second limb of the said note requires - wherever the transactions in the Balance Sheet and Profit and Loss account contain details of State transactions which have taken place outside the State, then details pertaining to transactions within the State shall have to be suitably computed and declared separately. The said manufacturing account / trading account must be prepared relating to such of those transactions which occur from / within the State of Karnataka.

6. Section 4 - PART 3 : Particulars of Declarations and Certificates

6.1 Clause 1 : Details of sales as commission agent Under Clause 1, the VAT auditor is required to disclose the details of sales made by the dealer as a commission agent or broker on behalf of its principal. In terms of Section 8 of the KVAT Act, 2003, the dealer can claim exemption from payment of tax for sales through an agent subject to the condition that the agent is liable to pay tax. The details of such sales and tax paid by the agent thereon are required to be furnished in Form VAT 140. Form VAT 140 has to be issued by the agent to his principal. The dealer has to disclose the sales value, value as per Form VAT 140, number of Forms filed and balance, if any. [Refer Annexure U]. On a plain reading of the above said clause, one can also interpret that the information sought in the said clause is from the Principals point of view and not from an Agents point of view. In this scenario, it advisable for the VAT Auditor to suitably comment based on whether the dealer is an Agent or a Principal. 6.2 Clause 2 : Details of purchases as commission agent Under Clause 2, the dealer is required to disclose the details of purchases made as a commission agent or broker. In terms of Section 11(b) of the KVAT Act, 2003, the agent who purchases goods on behalf of a resident principal cannot claim input tax credit. In this regard, the dealer has to submit Form VAT 145 to his principal as proof of purchases

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Clause by Clause Analysis of Form VAT 240 vide Rule 34 of the KVAT Rules, 2005

by the agent on behalf of the said principal. The dealer has to disclose the purchase value, value as per Form VAT 145, number of forms filed and balance, if any. [Refer Annexure V]. On a plain reading of the above said clause, one can also interpret that the information sought in the said clause is from the Principals point of view and not from an Agents point of view. In this scenario, it advisable for the VAT Auditor to suitably comment based whether the dealer is an Agent or a Principal. 6.3 Clause 3 : Details of tax deducted at source from the amounts payable to the dealer Under Clause 3, the VAT Auditor has to disclose the tax deducted at source by him on various transactions. Under KVAT Act, 2003, tax has to be deducted at source in terms of Sections 9A, 18 & 18A of the KVAT Act, 2003. Section 9A of the KVAT Act, 2003 requires certain Government entities to deduct tax at source. Section 18 of the KVAT Act, 2003 requires commercial establishments to deduct tax at source on canteen payments. Section 18 A of the KVAT Act, 2003 mandates that, tax has to be deducted on purchase of specified goods. Details of tax deducted at source to be given in a certificate to the deductee in Forms VAT 156 / 158/161. The amount involved, tax amount as per the certificate, number of forms, balance, if any, etc. are required to be disclosed. [Refer AnnexureW] 6.4 Clause 4 : (i) Stock of declarations / certificates / delivery notes under the KVAT Act, 2003; and (ii) Details of any misuse of forms. Clause 5 : (1) Stock of declarations / certificates under the CST Act, 1956; and (2) Details of any misuse of C forms Under Clauses 4 & 5, quantitative details of all the statutory forms, declarations and certificates have to be given. Details such as opening balance, forms obtained during the year, utilized and closing balance has to be furnished in respect of Forms VAT 140/145/156/158/161/505, Form C, E1 & E2, F, H. Details of misuse, if any, is also required to be given. It is important to note that the dealer would be responsible for any loss of revenue arising to the State Government due to any misuse or loss of 85

A Guide to KARNATAKA VAT Audit forms. Hence, the VAT auditor should verify the stock of forms, whether the forms were used for the purposes of its issue and the closing balance of the forms, etc. The details can be verified from the statutory registers, certificates of registration etc., maintained by the dealer under the provisions of the relevant statute. If any additional tax, interest or penalty is payable as a result of misuse or loss of forms, the same should be quantified and disclosed along with the nature of misuse. [Refer Annexures X & Y].

7. Some general issues on the format of the audit report

There is no separate section / clause to deal with entry tax computation, declaration in Form 40, etc. under the provisions of the KTEG Act, 1979; The audit report does not have introductory paragraphs, responsibility of the management for the maintenance of the records, etc. on the lines of the statutory audit report under the Companies Act, 1956; There are no separate formats for qualifications, comments, observations, disclosures etc. Under Part 2 and Part 3, the formats appear very general in which the details have to be furnished. There is no separate format for furnishing details for complex transactions such as works contract, composition dealers, lease, hire purchase, etc. Each dealer may furnish the details in their own format, which could be suitably devised. Ideally details for each type of business should be furnished separately. [End of report]

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Frequently Asked Questions on Audit under the Karnataka Value Added Tax Act, 2003 (KVAT Act, 2003)
A. General
1. What is KVAT Audit?
As per AAS-1 (Basic Principles Governing an Audit) issued by ICAI, Audit is defined and understood as An independent examination of financial information of any entity whether profit oriented or not and irrespective of its size or legal form, when such examination is conducted with a view to expressing an opinion thereon. Therefore, Audit under the KVAT Act, 2003 is also an independent examination of correctness of self assessed tax liability of the dealers after claiming the input tax setoff as per the books of accounts and in compliance with various provisions of the Karnataka Value Added Tax law.

2.

What are the objectives of KVAT Audit?

The main objectives of carrying out an Audit under the provisions of the KVAT Act, 2003 among others are: - To verify the system of self-assessment being postulated under law and scrutiny of returns / statements filed by the dealer will be ensured; - To determine the correct computation of taxable and total turnovers; - To ensure that the books of accounts and other records are maintained in accordance with rule 33 of KVAT Rules, 2005; - To facilitate the assessing authority to obtain proper and correct information about the dealer; - To ensure whether the dealer has claimed the input tax set-off and other deductions correctly; - To bring to light any deviations of the dealer while complying with the provisions in the Act; - To determine the correct rate of tax charged by the dealer.

A Guide to KARNATAKA VAT Audit

3.

Under which Section and Rule of the KVAT Act, 2003 is the dealer liable to get his books of accounts audited?
Section 31 of KVAT Act, 2003 requires the maintenance of accounts and records. Sub section (4) of the said section mandates that every dealer whose total / taxable turnover exceeds forty lakhs rupees to get his accounts audited under the KVAT Act, 2003. Rule 34 of KVAT Rules, 2005 defines the relevant Form and time limit within which the Audit report is required to be obtained and filed by a dealer.

4.

Who are the dealers liable to get audited under the KVAT law?
Every dealer whose taxable turnover in a year exceeds rupees forty lakhs shall have his accounts audited by a Chartered Accountant or a Cost Accountant or a Sales Tax Practitioner. It may be noted that corporate entities are mandatorily required to get their audits done by Chartered Accountants. The words taxable turnover indicated above has been substituted by the words total turnover by the Karnataka Value Added Tax (Amendment) Bill, 2009 (L.A. Bill No.20 of 2009) with effect from 01.04.2009. This amendment implies that every dealer whose total sales in the State (including the value of goods stock transferred to another State) exceed Rs. 40 lakhs is required to get his accounts audited.

5.

Whether the term Total Turnover includes Excise duty, VAT, CST and Service tax payable for determining the applicability?
The total turnover will include all these taxes paid or payable as defined under the KVAT Act, 2003.

6.

Whether the term total turnover includes freight and insurance recovered from buyer to calculate the threshold limit?
Freight and insurance incurred on sales effected under the KVAT Act, 2003 or under the CST Act, 1956 and recovered from the customers would form part of the total turnover.

7.

Whether the term Total turnover includes stock transfers effected within the State of Karnataka for determining the threshold limits?
The term total turnover shall not include stock transfers effected within 88

Frequently Asked Questions the State of Karnataka for the purpose of determining the threshold limit in the absence of specific provisions under the KVAT Act, 2003. It may also be noted that in case goods are sent on consignment basis to an agent (who is located within the State), then the sale effected by the agent will form part and parcel of total turnover of the Principal.

8.

Whether a service provider registered with the VAT authorities are liable for Audit? For eg: A Telecom Company having NIL VAT liability but issuing F Forms under the CST Act, 2003 would be liable for the Audit based on the total turnover criteria?
A pure service provider whose receipt does not involve any transfer of property in goods may not be liable for Audit. Audit under KVAT Act, 2003 is applicable to every registered dealer whose taxable / total turnover exceeds threshold limits as prescribed for the respective assessment years. In the example cited above the Telecom Company effects interstate stock transfers, which would form part of total turnover and therefore the provisions relating to Audit under the KVAT Act, 2003 would be applicable depending on the assessment year referred to in query 4 of Section A above.

9.

Whether a dealer selling exempted goods under the KVAT Act, 2003 & under the CST Act, 1956 and having a total turnover more than Rs. 40 lakhs will be liable for Audit?
Yes. Audit will be applicable to dealers dealing in exempt goods under KVAT / CST Acts depending on the assessment year referred to in query 4 of Section A above.

10.

Which Form should be filed with the VAT authorities and what are the documents to be enclosed?
The audited statement of accounts shall be submitted together with Form VAT 240 to jurisdictional Local VAT Officer or VAT sub officer. In addition to Form VAT 240, the financial statements and relevant annexures forming part of the Form VAT 240 should also be filed. Although no specific documents are prescribed, annexures pertaining to sales and purchases, computation of total and taxable turnovers, input tax availed, etc. could be attached along with the report.

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11.

What are the contents of Form VAT 240?

It consists of an Audit Certificate / Audit Report. Audit Report is classified into three parts as General Information (Part I), Particulars of Turnovers, deduction and payment of tax (Part II) and Particulars of Declarations and Certificates (Part III) [Refer Appendix 2].

12.

Who are the persons authorised under the KVAT law to conduct / certify the Audit?
A Chartered Accountant, Cost Accountant or Tax Practitioner can conduct the audit and issue the Certificate under the KVAT law. Rule 34 of the KVAT Rules, 2005 states that in case a registered dealer is a company or a company incorporated outside India then only a Chartered Accountant can conduct the audit and issue the relevant Certificate / Report. In case the registered dealer is a person other than what is stated above then the audit can be conducted and certified by a Chartered Accountant, Cost Accountant or Tax Practitioner.

13.

What is the time limit to file the KVAT Audit Form?

As per Rule 34(3) of the KVAT law, the audited statement of Accounts shall be submitted in Form VAT 240 to the jurisdictional local VAT Officer or VAT Sub Officer within nine months after the end of the relevant financial year, which is 31st March. There are no provisions for extension of the time limit.

14.

If the financial year of the dealer is a calendar year say from January to December, can the KVAT audit Certificate / Report be filed for the said period?
No. The KVAT Audit Certificate / Report has to be filed for the financial year (April to March) only.

15.

What are the consequences for non-submission of the audit report / Certificate under the KVAT Act, 2003 within the prescribed time limit?
Penalty under Section 74 of the KVAT Act, 2003 will stand attracted for non-submission of the Audit Report / Certificate within the prescribed time limit. The penalty is at Rs. 5,000/- plus Rs. 50/- per day for each day of 90

Frequently Asked Questions default subject to issue of show cause notice by the jurisdictional VAT Officer.

16.

Can the penalty be waived off in genuine cases?

The levy of penalty is subject to issue of show cause notice by the VAT Officer to the dealer. Hence, the VAT Officer could waive the penalty in genuine cases of delay.

17.

Is there any provision of filing the Revised KVAT Audit Report?

There are no specific provisions under the KVAT law which enables a dealer to file the revised KVAT Audit Report / Certificate. Although, some experts opine that, the VAT Audit Report / Certificate once issued / filed cannot be revised. However, in our opinion, as there are no specific restrictions under the KVAT Act, 2003, if circumstances so arise a revised Audit Report / Certificate can be issued / filed.

18.

Whether revised figures can be incorporated in KVAT Audit Report without filing of the Revised Returns?
In terms of Section 35(4) of the KVAT Act, 2003 dealers are required to file the revised returns, if any, within a period six months from the end of the tax period to which such return relates. In case there is change in the details / turnovers in respect of the returns filed with the department then as per the view of the authors the revised details can be incorporated in KVAT Audit Report / Certificate. It is for the dealer to decide whether to file or not to file a revised return. The auditors duty is to give a correct advise based on the audit conducted by him.

19.

Whether revised returns are to be enclosed along with the KVAT Audit Report or can be filed subsequently?
There are no specific rules or provisions for enclosing the revised return along with the KVAT Audit Report. The revised returns can be filed along with Audit Report / Certificate or can be filed subsequently.

20.

Can the Internal Auditor of the dealer conduct the VAT audit?
There is no specific restriction barring an Internal Auditor / VAT Advisor of a dealer to conduct the VAT Audit under the KVAT law..

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21.

How many copies of the Audit Report / Certificate should be filed with the VAT authorities?
Only one original signed hard copy should be filed with the VAT authorities. Till date there is no provision under the KVAT law for e- filing.

22.

Can the investigations / searches / inspections be avoided if the Audit Report / Certificate is submitted for the relevant period?
There are no specific provisions to this effect and hence the VAT authorities have the powers to conduct investigations / searches / inspections even though the dealer has filed the Audit Report / Certificate.

23.

Where a part of the records of the dealer have been seized by the VAT authorities before the due date for submission of the Audit Report / Certificate and the dealer has not been able to get his accounts audited under KVAT Act, 2003, will the penalties still be applicable?
Since the penalty for non-submission of the Audit Report/Certificate are governed by the KVAT Act, 2003, in genuine cases, the VAT officer could waive/reduce the penalty. It is advisable that the dealer files an intimation to this effect with his VAT Officer immediately after the records have been seized.

24.

What happens in cases where the dealer has not filed returns but has filed the VAT Audit Report / Certificate for the relevant period?
In case the dealer has not filed returns but filed Audit Report / Certificate, the Commissioner of Commercial Taxes, Karnataka, Bangalore can notify such dealers for production of books of accounts and other details. The VAT officer can also resort to the best judgment assessments in such cases. Penal provisions relating to nonfiling of returns within the prescribed time and for non-payment of taxes, if any, will also stand attracted. In this scenario, relevant comments have to be incorporated relating to non-filing of Form VAT 100 in the Audit Report.

25.

Does the submission of the Audit Report / Certificate mean that the Commissioner will not further notify such dealers for production of books of accounts for further hearings / assessments / re-assessments / revision?
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Frequently Asked Questions There are no specific provisions under the KVAT Act, 2003 to this effect and hence the VAT authorities have the powers to call for assessments / re-assessments / revision even though the dealer has filed the Audit Report / Certificate.

26.

How does a casual dealer who has carried on business for a brief period in the State and has left the State immediately thereafter, file the Audit Report / Certificate? Are there any exceptions for casual dealers to file the audit report within the same year?
There are no specific provisions or exceptions in respect of casual dealers to file the audit report within the financial year itself. The time limit prescribed under the KVAT Act, 2003 will equally apply to such casual dealers.

27.

If a dealer has more than one TIN in the State, whether separate audit reports have to be filed for each TIN obtained or a consolidated Audit Report / Certificate can be filed?
The Audit Report / Certificate has to be filed separately TIN-wise.

B. Audit Certificate
1. In Clause 1, how does the auditor comment about the books of accounts and other records of the dealer are sufficient to determine the correctness and completeness of the returns filed?
There can be certain instances like a dealer may not have disclosed the inter-State purchase, stock inwards or any other details in the returns which determine the incompleteness, or dealer has made arithmetical error during the filing of returns like instead of purchase 500000/- dealer has stated 50000/- but the input tax might be correct or vice-versa, or any such instances which determine the correctness of the returns. Therefore, the Auditor should comment if there are any such discrepancies between the books of accounts produced and the monthly returns filed. The sufficiency will determine the supporting documents and records produced for verification. Accordingly the Auditor has to comment on such clause if discrepancies are noticed. 93

A Guide to KARNATAKA VAT Audit

2.

In Clauses 2 & 3, how does the auditor ensure that all the sales and purchases have been disclosed by the dealer? This is more important based on the fact that every audit is generally carried out on a test check basis.
The Auditor has to arrive at the above conclusion based on his assessment of the internal controls and audit risk. His judgment is also based on the explanations, representations and information adduced by the dealer. The Auditor is entitled to rely on the information given by the dealer so long as he has exercised his professional due diligence and judgment in seeking information and explanations.

3.

In Clause 4, how does the Auditor determine that the adjustment to turnover of sales and purchases are based on the entries made in the books of accounts maintained for the year?
The Auditor has to comment if there any adjustments entries passed in the books of accounts pertaining to sales or purchase like goods destroyed, samples, reversal of taxes, goods sent for approval, suspense account, etc

4.

In Clause 7, how does the auditor certify the classification of goods purchased? Please note that under the KVAT Act, 2003 itself, there is no duty cast upon the purchasing dealer to ensure correct classification and computation. In that scenario, how does the Auditor of the purchasing dealer certify the classification? What is the legal liability of the Auditor in case the purchase classification as certified by him is found to be incorrect later?
The Auditor has to comment stating that he has relied on the purchase invoices and purchase register produced for verifications to arrive the amount of input tax credit and that he cannot certify the computation of classification of goods purchased.

5.

In clause 9, how does the Auditor certify that all other information as per the returns is correct and complete especially when the audit is carried out on a test check basis?
The auditor can add the comments, that the audit is carried out under the Generally Accepted Accounting Principles and clearly state the extent of 94

Frequently Asked Questions reliance placed on books and records and the manner in which he has carried out his test checks.

6.

Does the dealer have to ensure that additional tax, if any, as per the audit report has been paid before or at the time of the filing of the audit report?
The audit report merely states that the dealer has been advised to file revised returns and pay additional tax, interest or penalty. The dealer could pay additional tax even after the submission of the audit report subject to interest and penalty.

7.

Whether interest and penalty should be computed till the date of filing the Audit Report and at what rate?
As per the KVAT law, the interest at the rate of 1.25% of the differential tax liability should be computed till the date of payment of the tax payable. Therefore, it is advisable to compute and reflect the tax, interest and penalty till the date of signing / filing of KVAT Audit Report.

8.

What do you mean by revise the opening and closing balance of input tax credit?
In case for any of the tax period, if the input tax credit claimed is in excess or short, then the opening and closing balance of input tax credit has to be revised accordingly and the revised amount has to be reflected in the Audit Report / Certificate.

9.

Whether a Chartered Accountant in Service can certify the KVAT Audit Report?
No. Only a Chartered Accountant in practice can certify the KVAT Audit Report.

10.

Whether Audited Profit and Loss Account and Balance Sheet have to be enclosed?
The certificate states that Profit and Loss Account and Balance Sheet has to be enclosed. It is not specified that it should be audited. But it is advisable to enclose the audited profit and loss account and Balance sheet. In case the dealer has a consolidated Profit and Loss Account and balance sheet for the whole of India, then in such case the dealer should enclose suitable clarification and reconciliation. 95

A Guide to KARNATAKA VAT Audit

C. Audit Report
Part A 1. In clause 6, what do you mean by address of any branch or unit in the State having a different registration number?
Under Rule 42 of KVAT Rules, 2005 if a registered dealer is a body corporate and has more than one place of business, then with the permission of Commissioner of Commercial Taxes, Karnataka, Bangalore such dealer can apply for a separate TIN under the KVAT Act, 2003 subject to certain conditions. In case the dealer has any such TIN, then the address of such branch should be added / disclosed to clause 6 of the Report.

2.

In clause 8, if the dealer is a departmental store selling more than 100 items which are all major, should he disclose all the 100 items under this clause?
In case the dealer is a retailer dealing in multiple items, then in such case the auditor can specify the major items by giving general classifications like Provisions, Furniture, Vegetables, Crockery, Shoes, Gift items, Garments, etc.

3.

In clause 15, whether any method is prescribed under the KVAT for stock valuation?
Under the KVAT law, there is no specific method prescribed for stock valuation unlike the Income-tax Act, 1961. The Auditor can disclose the method followed for Income Tax Act 1961 or under the Companies Act, 1956 to be consistent with the other / allied laws.

Part B 4. In Clause 1, whether the turnovers have to be disclosed monthly or annually?

The relevant details under this clause has to be disclosed month-wise for the transactions by way of annexure as the tax period under the KVAT law is a month.

5.

Under Clause 8, how does one disclose each purchase corresponding to the relevant export or CST sale?
In case the dealer is able to furnish each purchase correlating to the sale,

96

Frequently Asked Questions the auditor can disclose it accordingly. In genuine cases, where one to one co-relation between purchase and sales is not possible, a suitable disclosure may be made to the effect that it is not practical to correlate each purchase against each type of sale. This should be backed up by an adequate management representation.

6.

Under clause 8, how to arrive the unadjusted excess input tax credit carried over from the previous year and to the next year.
The details can be arrived in the following manner: Unavailed input tax brought forward from previous year Add: Input tax availed in financial year Less: Utilised against output tax payable Balance carried forward XXX XXX XXX XXX

7.

For the sales ratios, whether ratios pertaining to outside State sales will also have to be furnished?
Yes. Sales ratios pertaining to outside State transactions would need to be disclosed.

Part C 8. Whether the clauses 1, 2 and 3 of Part III are applicable to both deductor and deductee?
The language employed in the Report is confusing as to whether the details should be furnished by deductor or deductee. As per Authors view, both can furnish the details, where the dealer is either deductor or deductee.

9. If the selling dealer has not been able to obtain Forms such as C/F/H/I from its customers as on the date of submitting the audit report, whether he can seek extension of time? In that case will the auditor be liable to disclose the additional/differential tax payable by the dealer in his audit certificate/report?
The dealer can approach the VAT officer for extension of time; however, the additional tax payable shall have to be disclosed by the auditor in his report.

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D. Audit Procedure
1. What is Audit Programme?
Audit program is the written document which contains the audit objective for each area and should have sufficient details to serve as a set of instructions to the assistants involved in the audit and as a means of control in the proper execution of work. The audit program should focus on those matters, which are of importance in forming an opinion on the truth and fairness of financial statement. An audit program should not be static but rather dynamic as the audit program prepared for one business entity may not be same for another entity or audit program for one year may not be same for another year.

2.

What are the basic documents required for KVAT Audit?

The basic documents required for KVAT Audit are Sales Register, (Local, inter-State, Export), Purchase Register (Local, inter-State, Import), Sales Invoices Purchase Invoices, Credit / Debit Note register, Monthly ReturnsOriginal / Revised, Stock Valuation Statement, Financial statementAudited, Correspondence with the departments Registration certificate (VAT, PT, Entry Tax), Statutory Forms Register, Classification Schedule (Rate of tax), Stock inward/Stock Outward Register, Input VAT / Output VAT Register and Place of business within Karnataka and outside Karnataka etc.,.

3.

Where there is a sale of business as a whole, whether buyer or vendor is required to comply with Audit?
The vendor is required to comply with Audit and filing of Form VAT 240 etc.

4.

To what extent an Auditor can rely on electronic records maintained by the dealer?
The dealer can maintain the records electronically and to what extent reliance can be placed on such electronic records is a matter of judgement of the Auditor. But from the Auditors point of view, some of the relevant hard copy can be obtained like financial statements, consolidated monthly Sales and Purchase copies and other relevant records for documentation and evidence. 98

Frequently Asked Questions

5.

Whether verification of uploading of data is required by the KVAT Auditor?

It is advisable for the KVAT Auditor to check whether the conditions as specified in Notifications are fulfilled and accordingly the uploading is made in compliance with the KVAT law.

6.

Whether tax is payable or the refund can be claimed based on KVAT Audit Report without filing any refund documents?
If there is a tax payable or a refund claim, it has to be disclosed in the Audit Report / Certificate. The tax payment can be made along with the revised returns accordingly. The refund documents have to be filed if there is any refund of taxes or can be adjusted against subsequent tax liability.

7.

Is there a procedure to conduct Audit under the KVAT law?

There is no prescribed manner in which the Audit under the KVAT Act, 2003 has to be conducted. The following suggested steps can be followed by the KVAT Auditor like - Preliminary study of the nature of the business of the dealer, examining the taxability of traded goods or other goods, examining the VAT rate applicable to such goods, study of any specific notifications applicable, verification of monthly returns and revised returns, reconciliation of books of accounts with the returns filed, study and reporting of the difference, if any, examine the Input tax allowed as per law and claimed by the dealer, confirm the reversal of input tax added to the cost of purchase, applicability of the partial rebate or special rebating formula, verification of the contents of the total and taxable turnover, verification of eligible input tax credit and non-eligible input tax credit, examine the declarations of the issue of statutory forms and utilisation of the statutory forms, examining the CST sales and export sales in compliance to CST law, requirement of registration under Professional Tax Act and KTEG Act, verifications of the books of accounts as maintained by the dealer, analysis of the accounting ratios for taxable and non taxable goods, extracting and verifying the details as required in KVAT Form 240, computing the differential tax liability or the refund as may be required and Certifying the Form VAT 240 by adding required comments if any in the clauses of the certificate. 99

A Guide to KARNATAKA VAT Audit

8.

Suggest the manner in which Audit for works contractor can be undertaken under the KVAT law?
In addition to method suggested in reply to query 7 of Section D above, the KVAT Auditor while auditing for works contractor can follow some suggested steps like: 1) 2) 3) 4) 5) 6) 7) 8) 9) Pre study the agreement of the works contract; Study the description of works contract; Examine the scheme opted for payment of tax Regular / Composition; Verification of sixth schedule for arriving the rate of tax under regular scheme; Verification of the registration of the sub contractor and payment to subcontractor; Deduction towards labour and other charges- whether Actual or Adhoc; Examine the gross profit margin; Examining the computation of turnover based on receipts or purchase methods; Study the relevant notifications / clarification / cases as applicable.

9.

Whether the KVAT Auditor should be well versed with the CST law?
The KVAT Auditor should be well versed with the CST law applicable during the process of KVAT Audit. The requirements for the KVAT Auditor with respect to filing KVAT Audit report in Form VAT 240 is that the KVAT Auditor should extract the details of the total value of purchases with respect to imports, interstate purchases, and stock inwards from outside the state. The KVAT Auditor should analyse the details of input tax deduction claimed on purchases relating to inter-State sales and export sales. The KVAT Auditor is required to disclose the total and taxable turnover which has to be calculated as per Section 8-A of the CST Act. The KVAT Auditor is required to examine the stock of the declarations/certificates like Forms C, Form E1, Form E2, Form H 100

Frequently Asked Questions obtained and utilised during the financial year. He is also required to disclose the misuse of Form C if any by giving the details of purchase against which Form C is obtained and mis-utilized.

10.

Whether the KVAT Auditor can verify the books of Accounts on Test Check basis?
It has to be noted that KVAT audit prescribed under Section 31 of the KVAT Act is distinct from the normal audits. Generally, in the case of normal audits, the auditors select the transactions on Random Access Principle and based on the results of such random verification, the auditors express their opinion on the correctness and truthfulness of the statements. In case of KVAT audit, the KVAT Auditor in order to express their opinion on the correctness and truthfulness of particulars, there is a requirement of conducting 100% check of the books of account, especially transactions relating to purchase and sale of goods and other related transactions. If the auditor finds an internal control weak, he should not conduct the audit by applying test check. Otherwise he can verify on test check basis.

11.

How the KVAT Audit Report has to be drafted?

The report must be within the framework of the law as laid down by KVAT Act, 2003. The report must be self-contained. The report must clearly bring out the matters having material bearing like all infringements or contraventions of KVAT Act, non compliance of KVAT laws and inadequate disclosers in accounts or notes by management which all capable of misrepresentation. The auditor should draft his audit report with the due care and diligence.

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APPENDIX1 (REFER TO PARA 3(B) OF CHAPTER 2)

GOVERNMENT OF KARNATAKA (DEPARTMENT OF COMMERCIAL TAXES)
No.KSA. CR. 155 /2007-08 Office of the Commissioner of Commercial Taxes in Karnataka, Gandhinagar, Bangalore, Dated: 6.10.2007

NOTIFICATION
In exercise of the powers under clause (b) of sub-rule (3) of Rule 33 of the Karnataka Value Added Tax Rules, 2005, it is hereby notified that, commencing from the tax period of the month of September, 2007, every dealer registered under the Karnataka Value Added Tax Act, 2003, which is a company registered under the Companies Act, 1956 or a company incorporated outside India, with aggregate of output tax liability for the year ending 31st March, 2007 as declared by it in the monthly returns filed during that year exceeds one crore rupees, shall enter in the website http://vat.kar.nic.in, the details of, (i) (ii) its purchases made within the State from other registered dealers in respect of which it is eligible to claim deduction of input tax, and its sales made to other registered dealers in the State, on or before the 20th day of the succeeding month, in the following manner: 1. It shall operate its account in the website using the user name and password communicated to it by the Commissioner of Commercial Taxes and in case such name and password is not communicated to it by 20th October, 2007, it shall obtain the same from the Commissioner of Commercial Taxes.

A Guide to KARNATAKA VAT Audit 2. It shall follow the procedure and instructions as specified in the website to enter the details specified in clauses (i) and (ii) above.

(B.A. HARISH GOWDA) Commissioner of Commercial Taxes in Karnataka, Bangalore Copy to: The Compiler, Karnataka Gazette, Bangalore for publication in the next gazette.

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APPENDIX1 (REFER TO PARA 3(B) OF CHAPTER 2)

GOVERNMENT OF KARNATAKA (DEPARTMENT OF COMMERCIAL TAXES)
No. KSA.CR.155/2007-08 Office of the Commissioner of Commercial Taxes In Karnataka, Gandhinagar, Bangalore, Dated: 23-06-2008

NOTIFICATION
In exercise of the powers under clause (b) of sub-rule (3) of Rule 33 of the Karnataka Value Added Tax Rules, 2005, it is hereby notified that, commencing from the tax period of the month of June, 2008: (1) every dealer registered under the Karnataka Value Added Tax Act, 2003 and who with his total turnover relating to sale of goods in the course of export outside the territory of India for the year ending 31st March, 2008 or in any subsequent year as declared in the monthly returns filed for that year is ten lakh rupees or more and also is claiming refund or deduction of input tax of one lakh rupees or more under sub section (1) of Section 20 of the said Act on such sales; and every registered dealer who is claiming deduction of input tax under Section 11 of the Act for the year ending 31st March, 2008 or in any subsequent year as declared in the monthly returns filed for that year is twenty lakhs rupees or more and whose ratio of output tax to input tax is less than 1.25, shall enter in the website: http://vat.kar.nic.in/, the details of (i) his purchase of goods made within the State from other registered dealers in respect of which he is eligible to claim refund or deduction of input tax ,

(2)

A Guide to KARNATAKA VAT Audit (ii) his sales of goods in the course of export outside territory of India, (iii) his sales of goods made to other registered dealers in the State, on or before the 20th day of the succeeding month, in the following manner: 1. The dealer shall operate his account in the website using the user name and password communicated to him by the Commissioner and in case such user name and password is not communicated by 20th July, 2008, he shall obtain the same from the Commissioner. 2. He shall follow the procedure and instructions in the website to enter the details specified in clauses (i), (ii) and (iii) above. Explanation: Ratio of output tax to input tax means the aggregate of output tax payable under the provisions of the Karnataka Value Added Tax Act, 2003 as declared by the dealer in the monthly returns filed for the year ending 31st March, 2008 divided by the aggregate of the input tax deduction claimed during the year.

(B.A. HARISH GOWDA) Commissioner of Commercial taxes In Karnataka, Bangalore

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APPENDIX 1 (REFER TO PARA 3(B) OF CHAPTER 2)

GOVERNMENT OF KARNATAKA (Department of Commercial Taxes)
No. KSA.CR.155/2007-08 Office of the Commissioner of Commercial Taxes in Karnataka, Gandhinagar, Bangalore-560 009, Dated: 08-06-2009

NOTIFICATION
In exercise of the powers under clause (b) of sub-rule (3) of Rule 33 of the Karnataka Value Added Tax Rules, 2005, it is hereby notified that, commencing from the tax period of the month of June, 2009. (1) every dealer registered under the Karnataka Value Added Tax Act, 2003 who is effecting sale of any goods in the course of export outside the territory of India; and every dealer registered under the Karnataka Value Added Tax Act, 2003 who is claiming deduction of input tax of five lakh rupees or more under Section 10 of the said Act for the year ending 31st March, 2208 or in any subsequent year as declared in the monthly returns filed for that year, shall enter in the website: http://vat.kar.nic.in/, the details of(i) his purchase of goods made within the State from other registered dealers in respect of which he is eligible to claim refund or deduction of input tax, (ii) his sales of goods in the course of export outside the territory of India, and (iii) his sales of goods made to other registered dealers in the State, on or before the 20th day of the succeeding month in the following manner: (a) The dealer shall operate his account in the website using the user name and password communicated to him by the

(2)

A Guide to KARNATAKA VAT Audit Commissioner and in case such user name and password is not communicated by 30th June, 2009, he shall obtain the same from the Commissioner or from the Jurisdictional Local VAT officer or VAT sub-officer. (b) He shall follow the procedure and instructions as specified in the website to enter the details specified in clauses (i), (ii) and (iii) above. Explanation: This notification shall not be applicable to those dealers who are covered by earlier notifications already issued under clause (b) of sub-rule (3) of Rule 33 of the Karnataka Value Added Tax Rules, 2005.

(B.A. HARISH GOWDA) Commissioner of Commercial Taxes In Karnataka, Bangalore

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APPENDIX2
(REFER TO PARA 2.C OF CHAPTER 3(PART I)
APPENDIX - 2 FORM VAT 240 [See rule 34(3)] AUDITED STATEMENT OF ACCOUNTS UNDER SECTION 31(4) OF THE KVAT ACT, 2003 CERTIFICATE Certified that we being a Chartered Accountant have audited the accounts of (Name and address of the dealer) having registration No. (TIN) . for the year ending .. and that subject to our observations and comments about non-compliance, short comings and deficiencies in the returns filed by the dealer, as given in the attached report, (1) the books of account and other related records and registers maintained by the dealer are sufficient for the verification of the correctness and completeness of the returns filed for the year; the total turnover of sales declared in the returns include all the sales effected during the year; the total turnover of purchases declared in the returns include all the purchases made during the year; the adjustment to turnover of sales and purchases is based on the entries made in the books of account maintained for the year; the deductions from the total turnover including deduction on account of sales returns claimed in the returns are in conformity with the provisions of the law; the classification of goods sold, rate of tax applicable and computation of output tax and net tax payable as shown in the return is correct; the computation of classification of goods purchased, the amount of input tax paid and deductions of input tax credit claimed in the return is correct and in conformity with the provisions of law;

(2) (3) (4) (5)

(6) (7)

A Guide to KARNATAKA VAT Audit (8) (9) the utilization of statutory forms under the KVAT Act , 2003 and the CST Act, 1956 is for valid purposes; and Other information given in the returns is correct and complete.

Summary of the additional tax liability or additional refund due to the dealer on audit for the year are as follows.Sl. No. Amount as Correct amount Difference per return (in determined on audit (in Rs.) (in Rs.) Rs.)

Particulars

1 Output tax payable under the KVAT Act, 2003 2 Input tax deduction claimed under Section 10 3 Ineligible input tax deduction under Section 11 4 Refund of excess input tax credit claimed in the return 5 Any other item (specify) 6 Tax payable under the CST Act, 1956 The dealer has been advised to file revised returns for the period / month . and, (i) (ii) (iii) pay differential tax liability of Rs... with interest of Rs and penalty of Rs., claim refund of Rs.; and revise the opening / closing balance of input tax credit of Rs

(Note : Strike out whichever is not applicable.) Place: Bangalore Date: Signature Name Enrollment/Membership No... 110

APPENDIX Enclosures: (1) (2) Copies of Profit and Loss account and Balance Sheet Audit Report in Parts 1, 2 and 3 PART 1 GENERAL INFORMATION 1 Name of the dealer 2 Registration Certificate No. (TIN) 3 (i) Status of the dealer (specify whether proprietor, etc.) (ii)If partnership firm, name of all the partners 4 Trade name and full address of the principal place of business 5 (i) Full address of all additional places of business in the State (ii) Full address of all additional places of business outside the State 6 Address of any branch or unit in the State having a different registration number (TIN) 7 Nature of business (specify whether manufacturer, reseller, works contractor, etc.) 8 Description of 10 major goods sold 9 Whether opted for composition or not 10 Whether permitted under special accounting scheme or not 11 Whether availing incentive as a new industrial unit (specify whether exemption/deferment) 12 Whether registered under the KTEG Act, 1979 and enrolled / registered under the KTPTC & E Act, 1976 13 Books of account maintained 14 List of books of account examined 15 Method of valuation of opening and closing stocks 111

A Guide to KARNATAKA VAT Audit PART 2 Particulars of turnovers, deductions and payment of tax 1 Total and taxable turnovers 2 Deductions claimed under the KVAT Act, 2003 (specify in respect of each deduction its nature and whether, it is in order and supported by prescribed documents) 3 Details of taxable sales within Description Taxable Rate of Tax the State of goods Turnover tax payable

4 Details of purchases and receipts

5 Details of input tax paid on Purchases:

Total value of purchases and receipts: Imports Annexure E&F Inter-state purchase Inter-state stock transfer Purchases from registered dealers within the State Purchases from unregistered dealers within the State Description Taxable Rate of Tax paid of goods Value tax

6 Details of input tax paid on Description Taxable Rate of Tax paid Value tax purchases eligible for of goods deduction(give details of capital goods separately and specify whether calculated on the basis of partial rebating formula) 112

APPENDIX 7 Details of input tax paid on Description Taxable Rate of Tax paid purchases ineligible for of goods Value tax deduction(give details of capital goods and special rebate separately and specify whether calculated on the basis of partial rebating formula) 8 Details of input tax deduction claimed on purchases relating to inter-State sales and export sales(give details of capital goods and special rebate separately and specify whether calculated on the basis of partial rebating formula) 9 Details of un-adjusted excess input tax credit carried over from the previous year and to the next year 10 Total and taxable turnovers under the CST Act, 1956 11 Deductions claimed (specify in respect of each deduction its nature, whether it is in order and supported by prescribed documents) 12 Details of taxable sales: Description Taxable Rate of Tax paid of goods Value tax

13 If the dealer has opted for composition indicate the type of composition scheme opted and details of the composition amount paid, its rate and the basis

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A Guide to KARNATAKA VAT Audit 14 Details of returns filed Month/Quarter Due Date Date of Penalty Interest Date of Penalty paid payment paid Paid filing of tax

15 Details of inspection of business premises / books of account of the dealer by departmental authorities on inspection / visit Date of visit/ Designation of Penalty CF Additional tax assessed Inspection the Officer levied collected

Note: Trading account in respect of each class of goods and manufacturing account in respect of each class of goods (whether taxable or not) along with accounting ratios on sales and other non-sale transactions has to be furnished separately. Wherever the Profit and Loss Account and balance Sheet contain the details of transactions made outside the State, then the details relating to transactions within the State shall be suitably computed and declared seperately.

114

APPENDIX PART 3 PARTICULARS OF DECLARATIONS AND CERTIFICATES 1 Details of sales No. of Amount covered by as commission Total Amount forms Balance Form VAT 140 agent filed 2 Details of purchases as commission agent No. of Amount covered by forms Balance Form VAT 145 filed

Total Amount

3 Details of tax No. of Amount covered by deducted at Total Amount forms Balance Form VAT 156/158/161 source from the filed amounts payable to the dealer 4 (i) Stock of declarations / certificates / delivery notes under the KVAT Act, 2003. Form Form Form Form VAT VAT Form VAT 145 Form VAT 156 VAT VAT 505/ 140 158 161 515 Opening Stock Forms obtained during the year from CTD Forms utilized during the year Loss, if any Closing Balance (ii) Details of any misuse of forms 5 (1) Stock of declarations / certificates under the CST Act, 1956. Form Form Form C Form EI Form H EII F Opening Stock Forms obtained during the year from CTD 115

A Guide to KARNATAKA VAT Audit Forms utilized during the year Loss, if any Closing Balance (2) Details of any misuse of C forms Number Amount of purchase involved Nature of Misuse

The above audit report enclosed to my / our certificate is true and correct.

Place : Bangalore Date :

Signature : Name :

Suggested Formats for Reconciliation statements UNDER Clause 2 & 3 of the Certificate Annexure A (Refer para 3.2 of chapter 5) I) Reconciliation statement between KVAT Audited Books and Income Tax Audited Books of Accounts Particulars I) Sales Sales as per Income Tax Audit report Sales (Total Turnover) as per KVAT Audit law Difference in Sales Reasons Unregistered purchase Discount Frieght charges Sales Return XXXX XXXX XXXX Amount

116

APPENDIX
Sales Invoice not accounted/ Cancelled Sale of capital goods Tax collected Other reasons XXXX For Example: Sales reconciliation with audited books of Accounts Sales as per KVAT Audited Books Less: Sale of capital goods Sales as per Income Tax audited Books Particulars II) Purchase Purchase as per Income Tax Audit report Total Purchase as per KVAT Audit law Difference in Purchases Reasons Unregistered purchase Discount Frieght charges Purchase Return Purchase Invoice not accounted/ Cancelled Excise Duty Other reasons XXXX Purchase reconciliation with audited books of Accounts Purchase as per KVAT Audited Books Less: Excise Duty Purchase as per Income Tax audited Books XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX Amount

117

Annexure B (Refer para 3.8 of chapter 5) Other Information in the return pertaining to Entry Tax (Clause 9 of Audit Certificate) Total Purchases
Taxab le Taxable Value Value of of Notifie Notified goods d goods (Import (Inters s) tate) Total Taxable Purchase Purchase Purchase Value of s within s against returns Notified local area Form 40 goods

Deductions

Taxable Turnover

Entry tax payable

Entry tax paid

Month

Taxable Value of Notified goods (local)

Total Taxable Taxable ReOthers deductio Turnove value at Exports ns r 1%,

Taxable value at 2%,

Entry Entry Entry Entry Taxable Taxable tax tax tax tax Cheque value at value payable Date payable payable payable no 5%, (others), (Others) at 1%, at 2%, at 5%, ,

Amount

Differen ce

A April May June

D=(A:C)

J=(E:I) K=D-J

(S-V)

A Guide to KARNATAKA VAT Audit

July August September October November December January February March Total -

118

APPENDIX
Annexure C (Refer para 3.9 of chapter 5) Summary of the additional tax liability or additional refund due to the dealer on audit for the year. Monthly Return(Form VAT 100) Ineligible Input tax Input tax Refund of Output tax deduction deduction excess payable claimed claimed input tax (KVAT) under credit Any other under (Serial No section 10 item section 10 claimed in 6.12 of (Serial No the (Serial No monthly 9.16 of 10.6 of return(Seri return) monthly al monthly Return) Return) C D D A B D

Audited (Form VAT 240) Input tax deduction Ineligible Input tax Tax payable claimed Output tax deduction claimed under the CST payable (KVAT) under Act 1956 (Serial under section 10 (Refer Annexure section 10 No 7.12 of the (Reference H) (Refer monthly Return) Annexure L) Annexure J) A B C

Month

Tax payable Refund of under the excess input Any other CST Act tax credit 1956 item claimed in (Annexure the return O)

April May June July August September October November December January February March Total -

119

List of Annexures to Part I Annexure- D (Refer para 4.5 of chapter 5) Name and address of the concern and its offices within the State (Part I, clause 5(i)) Name of Address(place of Contact Circle/LVO/VTO division/Branch (Trade business) Number/Email ID. name) Sl.No.

A Guide to KARNATAKA VAT Audit

Annexure E (Refer para 4.6 of Chapter 5) Name and address of the concern and its offices outside the State (Part I, clause 5(ii) Sl.No. Name of division (Trade name) Address(place of business) Contact Number/Email ID. Circle/LVO/VSO

120

APPENDIX

Annexure F (Refer para 4.7 of chapter 5) Name and address of the concern and its offices within the State having different TIN (Part I, clause 6) Sl.No. Contact Name of division Address(place of Number/Email Circle/LVO/VSO (Trade name) business) ID.

Annexure G (Refer para 4.12 of chapter 5) Incentives and concessions sanctioned (Part I, Clause 11) Sl. No. Year of sanction DIC certificate reference

Incentive - Exempt / Deferred Date of issue Issuing Authority Financial Utilised Unexpired of certificate sanctioned year value value

121

Annexure H (Refer para 4.14 and 4.15 of chapter 5) List of Books Maintained and Verified (Part I, Clause 13&14) Particulars Trader/Manufacturer Sales Register Purchase Register Stock Register Input tax credit Register Output tax payable Register Others (specify) Works contractor Contract Receipts Register\ Labour Charges Register Purchase register Sub contractor register Running Bills Register Others (specify) As per Rule Maintained Verified

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122

APPENDIX Hire purchase Hire Charges Register Interest Register Receipts Register Purchase Register Others (specify) Agency Register Sales Register Form VAT 140 Purchase Register Form VAT 145 Commission Register Consignment Account Stock Register Reconciliation statement Others (specify)

123

List of Annexures to Part II Annexure I (Refer para 5.1 of chapter 5) Total Turnover under KVAT law (Clause 1 of Part II)

Month K=E+J April May June July August September October November December January February March Total A B C D

Total Turnover

Gross local Sales-1%

Gross local Sales-4%

Gross local Gross local sales of sales-12.5% Fixed Asset goods

Total Local Gross Sales E=(A:D)

URD Pur-4% F

URD Pur12.5% G

Total URD URD Tax URD Tax Purchase and 4% 12.5% tax H I

J=(F:I)

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APPENDIX
List of Annexures to Part II Annexure I (Refer para 5.1 of chapter 5) Total Turnover under KVAT law (Clause 1 of Part II)

Month K=E+J A B

Total Gross Gross local Gross Total Local URD Pur- URD Pur- URD Tax URD Tax URD Gross local local Total sales of Fixed local Gross Sales 4% 12.5% 4% 12.5% Purchase Sales-4% salesTurnover Asset goods Sales-1% and tax 12.5% C D E=(A:D) F G H I J=(F:I)

April May June July August September October November December January February March Total -

125

Taxable Turnover under KVAT law Annexure I (Refer para 5.1 of chapter 5) Month A April May June July August September October November December January February March Total Total Turnover Less: Total Exemptions & Deductions B

Taxable Turnover C=A-B

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APPENDIX
Deductions (Clause 2 of Part II) Annexure J (Refer para 5.2 of chapter 5) Total Exemptions & Deductions

Month

Total Output Tax Sales Return URD Sale of Labour and like Payment to Other Exemptions CollectedExempted Agent at 1%, 4% or Discount Purchase business as Interest charges(Actual/ subcontract deductio & 1% or 4% or sales sales or ns 12.5% return a whole Adhoc) Deductions 12.5% L=(A:K) A B C D E F G H I J K

April May June July August September October November December January February March Total -

127

Taxable sales under KVAT law (Clause 3 of Part II) Annexure K (Refer 5.3 of Chapter 5) Net local sales Net local sales at Net local sales at URD at 1% (description of 4%(description of 12.5%(descrip Purchases goods) goods) tion of goods) A April May June July August September October November December January February March Total B C D Output tax at 1% E Output tax at 4% F Output tax at 12.5% G

Month

URD tax

Total Output tax payable H

I=(E:H)

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APPENDIX
Details of Purchases and Receipts (Clause 4, Part II) Annexure L (Refer 5.4 of chapter 5) Local Interstate Registered stock transfer purchases at 1%

Month Imports Interstate Purchases

Gross Purchases Local Local Registered Registered Purchases at Purchases at 4% 12.5%

URD Pur 4%

URD Pur 12.5%

Total

April May June July August September October November December January February March Total -

129

Details of Total Input tax on purchases (Clause 5, Part II) Annexure M (Refer para 5.5 of chapter 5) Total Input tax credit Local Local Local Input tax Registered Input tax Registered Input tax Registered credit at purchases at credit at 1% Purchases at credit at 4% purchases at 12.5% 1% 4% 12.5% -

Month

URD Pur 4%

URD tax at 4%

URD Pur 12.5%

URD tax 12.5%

April May June July

A Guide to KARNATAKA VAT Audit

August September October November December January February March Total -

130

APPENDIX
Details of Total Eligible Input tax credit on purchases (Clause 6, Part II) Annexure N (Refer para 5.6 of chapter 5)

Total Eligible Input tax credit Month Local Local Local Eligible Input Eligible Input Eligible Input Eligible URD Registered Registered Registered tax credit at tax credit at tax credit at URD Pur 4% tax at 4% Purchases at purchases at purchases at 1% 4% 12.5% 4% 12.5% 1% URD Pur 12.5%

Eligible URD tax at 12.5%

April May June July August September October November December January February March Total -

131

Details of Total Ineligible Input tax credit on purchases (Clause 7, Part II) Annexure O (Refer para 5.7 of chapter 5) Total ineligible Input tax credit Local Local Local In eligible Ineligible Ineligible Ineligible Registered Registered Registered Input tax Input tax Input tax URD Pur 4% URD tax at purchases at Purchases at purchases at credit at credit at 1% credit at 4% 4% 1% 4% 12.5% 12.5% -

Month

URD Pur 12.5%

Ineligible URD tax at 12.5%

April May June

A Guide to KARNATAKA VAT Audit

July August September October November December January February March Total -

132

APPENDIX
Total Turnover under CST law (Clause 10 of Part II) Annexure P (Refer para 5.10 of chapter 5) Gross CST Gross CST Total Sales @ 4% Sales @ 2% Turnover (Without C (Against C Form) Form) B A C Gross CST Sales @ 12.5% (Without C Form) Stock Transfer (Against Form F) D

Month

Deemed Export (against Form H) E

Direct Export F

High Sales Exempted Other sea to SEZ CST CST Sales Units Sales sales G H I

April May June July August September October November December January February March Total -

133

Taxable Turnover under CST law (Clause 10 of Part II) Annexure P (Refer para 5.10 of chapter 5) Month A April May June July August September October November December January February March Total Total Turnover Less: Total Exemptions & Deductions B

Taxable Turnover C=A-B

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134

APPENDIX
Deductions (Clause 11 of Part II) Annexure Q (Refer para 5.11 of chapter 5)

Total Exemptions & Deductions CST Tax Total Exemptions Sales Return at Exempted Collected-1% or Discount & Deductions 1%, 4% or 12.5% sales 4% or 12.5% K=(A:J) April May June July August September October November December January February March A B C D

Month

Agent sales E

Labour and like Payment to Other Frieght Interest charges(Actual/ subcontract deducti charges or ons Adhoc) F G H I

135

Taxable sales under CST law (Clause 12 of Part II) Annexure R (Refer para 5.12 of chapter 5) Gross CST Sales Gross CST Sales Gross CST Sales @ 2% (Against C @ 4% (Without C @ 12.5% (Without Form) Form) C Form) A April May June July August September October December January February March Total B C

Month

CST at 2%

CST at 4%

CST at 12.5%

Total CST tax payable D E F

G=(D:F)

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136

APPENDIX
Annexure S (Refer para 5.14 of chapter 5) Details of return filed (Clause 14 of Part II)

Details of returns filed -VAT 100 in original/Quarterly Month/Quarter April May June July August September October November December January February March Original/Revised Original Revised Original Revised Original Revised Original Revised Original Revised Original Revised Original Revised Original Revised Original Original Original Original Revised Due Date Date of Filing Date of Payment of tax Amount Paid Interest Paid

Penalty Paid

137

Annexure T (Refer para 5.15 of chapter 5) Details of Inspection of business premises details (Clause 15 of Part II) Date of visit / inspection Designation of the officer Additional tax assessed

Sl. No

Interest levied

Penalty levied

CF collected

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138

APPENDIX Annexure U (Refer 6.1 of chapter 5) Details of Sales as Commission Agents (Part III clause 1) Details of form 140 issued by Agent to Principal Total Amount April May June July August September October November December January February March Amount covered by Form VAT 140

No of forms filed -

Balance -

139

Annexure V (Refer 6.2 of chapter 5) Details of Purchase as Commission Agents (Part III clause 2) Details of form 145 issued by Agent to Principal Total Amount April May June July A Guide to KARNATAKA VAT Audit August September October November December January February March Amount covered by Form VAT 145 No of forms filed Balance -

140

APPENDIX Annexure W (Refer 6.3 of chapter 5)

Details of tax Deducted at source from the amount Payable to the dealer (Part III clause 3) Amount covered by Form VAT 156/158/161 -

Total Amount April May June July August September October November December January February March

No of forms filed -

Balance -

141

Annexure X (Refer 6.4 of chapter 5) Statement showing stock of declarations/certificates/delivery notes under the KVAT Act 2003 (Part III, Clause 4) (1) Stock of declarations/certificates/deliver FORM VAT 140 FORM VAT 145 y notes under the KVAT Act ,2003 Opening Stock Forms obtained during the year from CTD A Guide to KARNATAKA VAT Audit Forms utilized during the year Loss, if any Closing balance 2. Details of any misuse of forms FORM VAT 156 -

FORM VAT FORM VAT FORM VAT 158 161 505 -

142

APPENDIX Annexure Y (Refer para 6.5 of chapter 5)

Statement showing stock of declarations/certificates/delivery notes under the CST Act 1956 (Part III, clause 5)

(1) Stock of declarations/certificates under the CST Act,1956

Form C

Form E1

Form E11

Form F

Form H

Forms obtained during the year from CTD Forms utilized during the year Loss, if any Closing balance 2. Details of any misuse of C forms

143

Opening Stock

APPENDIX

118

APPENDIX3
PARA 11 OF CHAPTER 3(PART I) COUNCILS RESOLUTION ON PART TIME PRACTICE
It is further resolved that the general and specific permission granted by the Council is subject to the condition that i. any member engaged in any other business or occupation, in terms of general or specific permission granted as per Appendix No.{9} given above shall not be entitled to perform any attest function. However, a member engaging in any of following area(s), in terms of the specific or general permission so granted, shall be entitled to perform attest function: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Authorship of books and articles. Holding of Life Insurance Agency Licence for the limited purpose of getting renewal commission. Attending classes and appearing for any examination. Holding of public elective offices such as M.P., M.L.A. & M.L.C. Honorary office-bearership of charitable, educational or other non commercial organisations. Acting as Notary Public, Justice of the Peace, Special Executive Magistrate and the like. Part-time tutorship under the coaching organisation of the Institute. Valuation of papers, acting as paper-setter, head-examiner or a moderator for any examination. Editorship of professional journals- {not in employment} Acting as surveyor and lass Assessor under the Insurance Act, 1938- {not in employment}. Acting of Recovery consultant in the Banking Sector {not in employment}.

A Guide to KARNATAKA VAT Audit (l). (m) Any coaching assignment organized by the institute, its Regional Councils and Branches of Regional Councils. Engagement as Lecturer in as university, affiliated college, educational institution, coaching organization, private tutorship, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week. Engagement in any other business or occupation permitted by the Executive Committee from time to time.

(n). (ii) (iii)

A member who is not entitled to perform attest function shall not be entitled to train articled clerks. The decision (of the Council) taken at its 223rd meeting held in February, 2002 prescribing the criteria for individual cases of articleship shall to be operation, Mutatis mutandis.

The Council in this connection also clarified that the Attest function for the purpose of this resolution would cover services pertaining to audit, review, certification, agreed upon procedures, and compilation, as defined in the framework of Statements on Standard Auditing Practices and Guidance Notes on Related Services published in the July,2001 issue of the Institutes Journal. The Council also decided that aforesaid resolution, as passed by it, be incorporated as a part of and continuation of the existing resolution [under Regulation 190A, which appears as Appendix No. 9 to the Chartered Accountants Regulations, 1988 (2002 Edition)].

146

APPENDIX 4
PARA 14 OF CHAPTER 3(PART I) Disclosure of substantial interestRelevant extract from the code of Ethics, 10th Edition January, 2005 pages 197-201
Clause (4) : Expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has a substantial interest, unless he discloses the interest also in his report; If the opinions of auditors are to command respect and the confidence of the public, it is essential that they must disclose every factor which is likely to affect their independence. Since financial interest in the business can be one of the important factors which may disturb independence, the clause provides that the existence of such an interest direct or indirect should be disclosed. This is intended to assure the public as regards the faith and confidences that could be reposed on the independent opinion expressed by the auditors. The words financial statements used in this clause would cover both reports and certificates usually given after an examination of the accounts or the financial statement or any attest function under any statutory enactment or for purpose of income tax assessments. This would not, however, apply to cases where such statements are prepared by members in employment purely for the information of their respective employers in the normal course of their duties and not meant to be submitted to any outside authority. Public conscience is expected to be ahead of the law. Members, therefore, are expected to interpret the requirements as regards independence much more strictly than what the law requires and should not place themselves in positions which would either compromise or jeopardise their independence. Member must take care to see that they do not land themselves in situations where there could be conflict of interest and duty. For example, where a Chartered Accountant is appointed the liquidator of company, he should not qua a Charted Accountant himself, audit the Statement of Accounts to be filed under Section 551(1) of the Companies Act, 1956. The audit in such circumstances

A Guide to KARNATAKA VAT Audit should be done by a Chartered Accountant other than the one who is the liquidator of the company. In this connection, the Council has decided not to permit a Chartered Accountant in employment to certify the financial statements of the concern in which he is employed, or of a concern under same management as the concern in which he is employed, even though he holds certificate of practice and that such certification can be done by any Chartered Accountant in practice. This restriction would not however apply where the certification is permitted by any law; e.g., Section 228(iv) of the Companies Act,1956 and the companies (Branch audit Examination) Rules made thereunder.The Council has also decided that a Chartered Accountant should not by himself or in his firm name: (i) accept the auditorship of a college, if he is working as a part-time lecturer in the college. (ii) accept the auditorship of a trust where his partner is either an employee or a trustee of the trust. The Council has, in this connection, issued the following guidelines: Attention of the members is invited to the provisions of Clause (4) of Part I of the Second Schedule to the Chartered Accountant Act which provides that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he expresses his opinion on financial statements of any business or any business or any enterprise in which he, his firm or a partner in his firm has a substantial interest, unless he discloses his interest also in his report. Many new areas of professional work have been added, e.g., Tax Audit, Concurrent Audit of Banks, Concurrent Audit of Borrowers of Financial institutions, Audit of noncorporate borrowers of banks and financial institutions, audit of stock exchange, brokers etc. The Council wishes to emphasise that the aforesaid requirement Clause (4) are equally applicable while performing all types of junctions by the members. Some of the situations which may arise in the applicability of Clause (4) are discussed below for the guidance of members:

1.

Where the member, his firm or his partner or his relative has substantial interest in the business or enterprises
The independence of mind is a fundamental concept of audit and/or expression of opinion on the financial statements in any form and, 148

APPENDIX therefore, must always be maintained. Nothing can substitute for the essential and fundamental requirements of independence. Therefore, the Councils views are clarified in the following circumstances. (i) An enterprises/concern of which a member is either an owner or a partner The holding of interest in the business enterprise by a member himself whether as sole-proprietor or partner in a firm, in the opinion of the Council, would affect his independence of mind in the performance of professional duties in conducting the audit and/or expressing an opinion an financial statements of such enterprise. Therefore, a member should not audit financial statements of such business or enterprise. (ii) Where the partner or relative of a member has substantial interest The holding of substantial interest by the partner or relative of the member in the business or enterprise of which the audit is to be carried out and opinion is to be expressed on the financial statement, may also affect the independence of mind of the member, in the opinion of Council, in the performance of professional duties. Therefore, the member may, for the same reasons as not to compromise his independence, desist from undertaking the audit of financial statements of such business or enterprise. However, where a member undertakes the audit of such business or enterprise, he should disclose such interest in his report while expressing his opinion on the financial statements of such business or enterprise.

2.

Where the member or his partner or relative is a director or in the employment of an officer or an employee of the Company
Section 226 of the Companies Act specifically prohibits a member from auditing the accounts of a Company in which he is a director or in the employment of an officer or an employee of the Company. Although the provisions of the aforesaid section are not specifically applicable in the context of audits performed under other statutes; e.g., tax audit, yet the underlying principle of independence of mind is equally applicable in those situations also. Therefore, the Councils views are clarified in the following situations: (i) Where a member is a director 149

A Guide to KARNATAKA VAT Audit In cases where the member is a director of a company the financial statements of which are to be audited and/or opinion is to be expressed, he should not undertake such job and/or express opinion on the financial statements of that Company. (ii) Where a partner or relative of the member is a director in the Company who has a substantial interest. In such cases for the reason as not to compromise with the independence of mind, the member may desist form undertaking the audit of financial statements and/or expression of opinion thereon. However, if a member feels that his independence is not affected and undertakes the audit of such company, he should disclose such interest in his report while expressing his opinion on the financial statement of such company. The meaning of the words relative and substantial interest shall be the same as are contained in the Resolution passed by the Council in pursuance to Regulation, 190A of Chartered Accountants Regulations, 1988, (Appendix 9). An accountant is expected to be no less independent in the discharge of his duties as a tax consultant or as a financial adviser than as auditor. In fact, it is necessary that he should bear the same degree of integrity and independence of mind in all spheres of his work. Unless this is done, the accounts of Companies audited by Chartered Accountants or statements made by them during the course of assessment proceedings would not be relied upon as correct by the authorities. The Council has clarified that the members are not permitted to write the books of account of their auditee clients. A statutory auditor of a company cannot also be its internal auditor, as it will not be possible for him to give independent and objective report issued under sub-section 4A of Section 227 of the Companies Act read with the manufacturing and other companies (Auditors Report) Order, 1988. A member should satisfy himself before accepting an appointment as an auditor of an entity that his appointment is in accordance with the statute governing the entity. In case the entity is constituted under a trust 150

APPENDIX deed/ instrument, the member should satisfy whether his appointment is valid according to the instrument constituting the entity and rules and regulations made thereunder. In case the appointment is to be authorised by the regulatory authorities such as in case of co-operative societies, trusts etc. then the member must satisfy whether such regulatory authorities have authorised the managing committee of the society/trust for appointment of the auditors. In a case where any entity is being managed by Managing Committee or Board of Trustees or Board of Governors by whatever name called he should ensure that his appointment is duly made by a resolution passed of such Managing Committee or Board of Trustees or Board of Governors. Even in case of partnership or sole proprietary concerns, the member must ensure that a letter of appointment/engagement is given by the firm/sole proprietor before he accepts the appointment/ engagement.

151

APPENDIX 5
PARA 17 OF CHAPTER 3(PART I)
NOTIFICATION (Chartered Accountants)
No. 1-CA(7)63/2002: In exercise of the powers conferred by clause (ii) of Part-II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India hereby specifies that a member of the Institute shall be deemed to be guilty of professional misconduct if he accepts appointment as auditor of a concern while he is indebted to the concern or has given any guarantee or provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for amount exceeding Rs. 10,000/-. Explanation 1. 2. For the above purpose, the term 'auditor' does not include internal auditor, concurrent auditor or an auditor giving report to the Management. For the above purpose, the limit of Rs. 10,000/- shall be the aggregate amount in respect of the proprietor and/or the partner/s of the firm of chartered accountants.

APPENDIX 6
PARA 18 OF CHAPTER 3(PART I)
NOTIFICATION (Chartered Accountants)
No.1-CA(7)/60/2002 : In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India hereby specifies that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts the appointment as statutory auditor of Public Sector Undertaking(s)/ Government Company(ies)/Listed Company(ies) and other Public Company(ies) having turnover of Rs. 50 crores or more in a year and accepts any other work(s) or assignment(s) or service(s) in regard to the same Undertaking(s)/ Company(ies) on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company. Provided that in case appointing authority (ies)/ regulatory body (ies) specify (ies) more stringent condition(s)/restriction(s), the same shall apply instead of the conditions/restrictions specified in this notification. Explanation 1. The above restrictions shall apply in respect of fees for other work(s) or service(s) or assignment(s) payable to the statutory auditors and their associate concern(s) put together; For the above purpose, I. the term "other work(s)" or "service(s)" or "assignment(s)" shall include Management Consultancy and all other professional services permitted by the Council pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 but shall not include: (i) audit under any other statute; (ii) certification work required to be done by the statutory auditors; and (iii) any representation before an authority; II. the term "associate concern" means any corporate body or partnership firm which renders the Management Consultancy and all

2.

A Guide to KARNATAKA VAT Audit other professional services permitted by the Council wherein the proprietor and/or partner(s) of the statutory auditor firm and/or their "relative(s)" is/are Director/s or partner/s and/or jointly or severally hold "substantial interest" in the said corporate body or partnership; III. the terms "relative" and "substantial interest" shall have the same meaning as are assigned under Appendix (10) to the Chartered Accountants Regulations, 1988. 3. In regard to taking up other work(s) or service(s) or assignment(s) of the undertaking/company referred to above, it shall be open to such associate concern or corporate body to render such work(s) or service(s) or assignment(s) so long as aggregate remuneration for such other work(s) or service(s) or assignment(s) payable to the statutory auditor/s together with fees payable to its associate concern(s) or corporate body(ies) do/does not exceed the aggregate of fee payable for carrying out the statutory audit. This notification shall apply for any appointment(s) on or after 1st April, 2002.

4.

156

APPENDIX 7
REFER PARA 4 OF CHAPTER 3(PART II) Suggested format for - Appointment Letters / Re-appointment letters
To, Chartered Accountants Address Dear Sirs, Sub: Appointment of VAT Auditors (Joint Auditor)/Reappointment as VAT Auditors (Joint Auditor) u/s 31(4) of the Karnataka Value Added Tax Act, of 2003, for the previous year ending on 31st March, 2009. We are pleased to inform you that your firm has been appointed/re-appointed as VAT Auditors / Joint VAT Auditor of our Company carrying the business in the name and style as (Name of the client and address) for conducting the audit u/s 31(4) of the Karnataka Value Added Tax Act, 2003, for the previous year ended 31st March, 2009. The remuneration for conducting the said audit is fixed at Rs. All taxes, out of pocket expenses such as travelling, conveyance etc., shall be extra, at actual. Kindly confirm your acceptance for the above appointment Yours truly,

Authorised Signatory Place Date

APPENDIX- 7
REFER PARA 4 OF CHAPTER 3(PART II)
Acceptance Letter
Dear Sir, Sub: Acceptance of Appointment of VAT Auditors (Joint VAT Auditors) / Re-appointment as VAT Auditors (Joint VAT Auditors) under Section 31(4) of the KVAT Act, 2003 read with rule 34 of the KVAT rules, 2005 for the previous year ending on 31st March, 2009 Ref: Your Appointment / Re-appointment letter dated With reference to the above subject we confirm receipt of your captioned letter. We accept the Appointment/ Re-appointment as VAT Auditors / Joint VAT Auditors under Section 31(4) of the KVAT Act, 2003 read with rule 34 of the KVAT rules, 2005 for the year ended 31st March, 2009.

For Chartered Accountants

Proprietor/partner/Director Place: Date:

APPENDIX 8
REFER TO PARA 2.F OF CHAPTER 4 (PART I)
Suggested Audit Checklist (Advisable to read along with the contents of Chapter 5) Clients Name... Accounting Year... Checked Yes No N.A. Remarks By 1. 1.1 VAT Registration Certificate Have you checked registration details of: Head office Branch Sister Concerns Factory/Warehouse/Godown 1.2 Whether Name Board is displayed at the entrance of business including godowns / Branches Whether Registration certificate under CST law is verified Whether Registration certificate under Entry Tax law is verified (It may not be required if VAT Registration certificate is available) the

1.3 1.4

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By 1.5 Whether Registration certificate under Professional Tax (Employer and Employee) is verified Whether proof of payment of renewal fees verified Change in the registration details intimated in Form VAT 2 Obtain the copy of Registration Certificate for KVAT, CST Any change in Status of dealer and nature of business/ Additional place of business (VAT 3, VAT 4 and VAT 5)

1.6 1.7 1.8 1.9

1.10 Address of Branch with different TIN/ Goods sold intimated in Application form 1.11 Whether previous year VAT audit report has been verified. 2 2.1 General yardsticks verification of sales for

Vouching includes the following: Verification of the Tax Invoice or Bill of sale issued containing: Name, address and TIN of the seller Name, address and TIN of the Buyer Date, Serial No, Rate of tax 162

APPENDIX Checked Yes No N.A. Remarks By Description of goods, quantity, value Authorised Signatory 2.2 2.3 Prepare the list of products dealt by the dealer Have you checked correctness of Sales/Tax Invoice /Bill of sale with: Sales Register Monthly Return (VAT 100) 2.4 Whether the Tax Invoice/Bill of sale is cancelled for genuine reasons, if any. Name of party Details where applicable 2.5 What are the supporting documents attached to Tax Invoice / Bill of sale and whether Tax invoice is issued within the prescribed time Whether the goods are returned within the prescribed time and the credit note is issued to the party disclosing the tax component and the same is disclosed in the monthly return Have you test checked succeeding years invoices to ensure that no transaction 163

2.6

2.7

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By relating to current year is recorded in the succeeding year. 2.8 Have you made a list of items (months not vouched) remaining un-ticked after your vouching is complete. Stock Transfer Have you checked the stock transfer to the branch or to the agent outside the State and within the State Are there any entries showing consignment transfer in books of accounts and whether they are declared in the Monthly Return (original/revised) which are to be filed with the department. Have you made a list of stock transfer for which Form F is not issued Are there any sales through an agent within Karnataka and outside Karnataka and any stock transfer made to Agents Are all stock Inwards recorded in the books of Accounts and monthly return filed with the department

3 3.1

3.2

3.3

3.4

3.5

164

APPENDIX Checked Yes No N.A. Remarks By 3.6 Have you checked any goods are sent for job work within the state and returned with supporting documents Inter-State sales Have you checked Inter-State sales summaries in the VAT return (Original/Revised) Have you checked inter-State sale against Form C, without Form C, Form E1, Form H and export sale with the returns filed Have you checked sale of capital goods and the VAT charged and check whether they are included in the Books of Accounts Have you checked statutory Forms for Stock Transfer Interstate sale against C form/D form E-1 /E-2 forms Any other forms 4.5 Have you checked that statutory forms are issued for valid purposes as listed in the Registration Certificate and issued in accordance with the 165

4 4.1

4.2

4.3

4.4

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By CST law. 4.6 4.7 Have you checked the relevant statutory Form Issue register Have you correlated statutory forms with the Interstate sales declared in the books of Accounts Have you checked for any misclassification of sales like inter-State sales declared as stock transfer Have you checked for any goods sent for job work outside the State

4.8

4.9

4.10 Have you checked calculations of CST payable with reference to provisions of Central Sales Tax Act, 1956 4.11 Have you checked regular payments of CST payable with the books of accounts and VAT return 4.12 Have you checked for any interState sales return declared in the books of accounts and VAT returns and for any credit note issued 5 5.1 KVAT collections payment verification and

Have you checked whether tax 166

APPENDIX Checked Yes No N.A. Remarks By collected is paid within the prescribed time as per KVAT law 5.2 Have you checked balances of output tax payable to ensure that it is paid and it matches with the amount declared in the VAT return as output tax payable Is there any incident of unregistered dealer purchase where the output tax is payable at the regular VAT rate. Have you traced any unregistered dealer purchase forming part of the direct expenses Have you checked journal entries for tracing summaries wherever required e.g. Output tax payable, payment of tax, etc. Have you checked VAT payable reconciliation statement with the Taxable Turnover at different rates in the Monthly Return and with the Books of Accounts Have you checked entries with respect tax collected and output tax payable and reasons for any difference 167

5.3

5.4

5.5

5.6

5.7

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By 5.8 Have you checked the rate of tax as per schedule and if any notifications are applicable Have you checked the tax collected with the Revised Returns / Monthly Returns and ensured that they are reflected in the books of accounts Input tax credit allowable and not allowable verifications Have you checked the input tax credit with invoices from vendors Have you checked entries in purchase records for input tax and reconciled with invoices from the parties Have you checked the purchase records with monthly return (Original and Revised) and ascertained reasons for variations, if any Have you made a list of restricted input tax credit items as per the Fifth Schedule of the KVAT Act, 2003 Have you tallied monthly return with Input tax credit receivable, if any Have you reconciled tax 168

5.9

6 6.1

6.2

6.3

6.4

6.5

6.6

APPENDIX Checked Yes No N.A. Remarks By collections with payments and transfer of the balance to appropriate accounts 6.7 Have you checked adjustment of tax set-off by relevant journal entries Have you computed input tax credit deductible and non deductible as per special rebate and partial rebate formula Is there any pre registration purchase credit

6.8

6.9

6.10 Any carry forward of input tax credit of previous years 6.11 Any input tax credit adjusted against CST payable/ Entry tax payable 6.12 Any input tax credit on capital goods 6.13 Any Input tax credit on Agent purchase 6.14 Any Reversal of input tax credit for the goods sent for job work 7 7.1 Purchases, Purchases return & Debit notes verifications Have you checked purchase Invoice/ delivery challans with purchase register Have you checked purchases 169

7.2

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By with the monthly (Original/Revised) 7.3 return

Have you checked whether any input tax is added to the cost of purchase where input tax credit is not allowable Have you made a list of purchase invoices for which there are no corresponding entries in purchase records and VAT return Have you checked that purchases are classified between Local, Inter-State, Imports etc. Also the inter-State purchases are classified against Form C and without Form C and any Imports Have you ensured that purchases include purchase of consumables where the input tax is classified and Input tax credit is availed on such consumables. Have you checked that purchases of capital goods are booked as fixed assets and the VAT is paid thereon. Have you checked Assets which have depreciated 100%. Total and Taxable Turnover 170

7.4

7.5

7.6

7.7

APPENDIX Checked Yes No N.A. Remarks By (regular/ composition) 8.1 Have the total turnover is computed as per Rule 3 of the KVAT Rules separately prepared under KVAT and CST laws Have the deductions been claimed as specified in Rule 3 like discounts, labour and other like charges , etc. Are discounts claimed under the KVAT law reflected in the invoices Has the taxable turnover being computed as per Rule 3 ( Total Turnover less deductions) Is the taxable turnover classified rate wise Whether total turnover is computed separately for composition works contractor as per Notification and Section 15 of the KVAT Act, 2003 Maintenance of Books of Accounts Whether books of accounts are maintained as specified in Section 31 and Rule 33 Whether books of accounts are maintained electronically. Any specific software is used and

8.2

8.3

8.4 8.5

9 9.1.

9.2

171

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By informed to the department 9.3 Whether statutory forms /TDS certificates registers maintained and duly checked Whether the unit is enjoying the industrial exemption scheme and if yes whether certificate and Notification is verified Whether the special accounting scheme has been applied and if yes then copy of the commissioner permission (For retailers) Whether the agreements in case of civil works contractor are filed with the department as specified in Section 31(6) of KVAT Act. Is the dealer required to update the departmental website, has he done so Have you obtained the relevant copies of Memorandum and Articles of Association, Partnership deed etc. Have you obtained the copies of Financial Statements, monthly return (Form VAT 100), Professional Tax returns etc.

9.4

9.5

9.6

9.7

9.8

9.9

9.10 In case of a composite dealer

172

APPENDIX Checked Yes No N.A. Remarks By engaged in works contract: (a) Copies of relevant bank pass books and other records / books maintained (b) Copies of relevant IT Returns / Form 16A (TDS certificate under Income Tax Act) 10 General

10.1 Whether reliance is placed on any notifications / clarifications / advance ruling / judgement in respect of rate of tax charged and collected 10.2 Have you checked for any adverse reports issued by Internal / Statutory auditors 10.3 Have you checked for any adverse reports in the previous year 10.4 Have you checked that assessment orders / appeal orders / notices issued by the department, if any. 10.5 Is there any judicial pronouncement that could be applicable to the dealer 10.6 Have you discussed any adverse issues arising out of the audit with the client 173

A Guide to KARNATAKA VAT Audit Checked Yes No N.A. Remarks By 10.6 Have you taken the letter of appointment / issued the letter of acceptance of audit 10.7 Have you come across any unusual transactions 10.8 Have you checked miscellaneous receipts / other income 10.9 Have you come across any huge or unusual sales / purchases / tax credits / tax payments etc 10.10 Comments on internal controls, periodicity of updation of accounts / records etc 10.11 Comments on general awareness of tax laws of the staff etc., 10.12 Whether the dealer has availed the facility of digital signature 10.13 Others if any specify

Place: Reviewed by - Manager / Partner / Proprietor Date:

174

APPENDIX 9
REFER TO PARA 2.H OF CHAPTER 4 (PART I) List of Auditing Standards issued by the ICAI
Engagement and Quality Control Standards along with complete text (Formerly known as Auditing and Assurance Standards)

Standards on Quality Control (SQCs)

SQC 1 Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and other Assurance and Related Services Engagements

Audits and Reviews of Historical Financial Information

100-999 100-199 200-299 Standards on Auditing (SA) Introductory Matters General Principles and Responsibilities SA 200 (AAS 1) SA 200A(AAS 2) SA 210 (AAS 26) SA 220 (AAS 17) SA 230 (AAS 3) SA 230 (Revised) SA 240 (AAS 4) Basic Principles Governing an Audit Objective and Scope of the Audit of Financial Statements Terms of Audit Engagement Quality Control for Audit Work Audit Documentation under the Clarity Project, Documentation (Note -1) Audit

The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements (Note-1)

SA 240 (Revised)

A Guide to KARNATAKA VAT Audit SA 250 (AAS 21) SA 250 (Revised) SA 260 (AAS 27) SA 260 (Revised) SA 299 (AAS 12) 300-499 SA 300 (AAS 8) SA 300 (Revised) SA 315 (New) Consideration of Laws and Regulations in an Audit of Financial Statements Consideration of Laws and Regulations in an Audit of Financial Statements (Note-1) Communications of Audit Matters with Those Charged with Governance Communication with Those Charged with Governance (Note-1) Responsibility of Joint Auditors Audit Planning Planning an Audit of Financial Statements (Note-1) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment Audit Materiality The Auditors Responses to Assessed Risks Audit Considerations Relating to Entities Using Service Organisations Audit Evidence Audit Evidence (Note-1) Audit Evidence Additional Considerations for Specific Items External Confirmations Initial Engagements Opening Balances Initial Audit Engagements Balances (Note-1) Analytical Procedures 176 Opening

Risk Assessment and Response to Assessed Risks

SA 320 (AAS 13) SA 330 (New) SA 402 (AAS) 500-599 Audit Evidence SA 500 (AAS 5) SA 500 (Revised) SA 501 (AAS 34) SA 505 (AAS 30) SA 510 (AAS 22) SA 510 (Revised) SA 520 (AAS 14)

APPENDIX SA 530 (AAS 15) SA 530 (Revised) SA 540 (Revised) Audit Sampling Audit Sampling (Note-1) Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (Note-1) Related Parties Related Parties (Note-1) Subsequent Events Going Concern Going Concern (Note-1) Representations by Management Written Representation (Note-1) Using the Work of Another Auditor Relying Upon the Work of an Internal Auditor Using the Work of an Expert The Auditors Statements Comparatives The Auditors Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements Report on Financial

SA 550 (AAS 23) SA 550 (Revised) SA 560 (AAS 19) SA 570 (AAS 16) SA 570 (Revised) SA 580 (AAS 11) SA 580 (Revised) 600-699 SA 600 (AAS 10) SA 610 (AAS 7) SA 620 (AAS 9) 700-799 SA 700 (AAS 28) SA 710 (AAS 25) SA 720 (New)

Using Work of Others

Audit Conclusions and Reporting

800-899 20002699

Specialised Areas Standards on Review Engagements (SREs) SRE 2400 (AAS 33) Engagements to Review Financial Statements

177

A Guide to KARNATAKA VAT Audit

Assurance Engagements Other Than Audits or Reviews of Historical Financial Information

30003699 30003399 34003699 Standards on Assurance Engagements (SAEs) Applicable to All Assurance Engagements Subject Specific Standards SAE 3400 (AAS 35) The Examination of Prospective Financial Information

Related Services
40004699 Standards on Related Services (SRSs) SRS 4400 (AAS 32) Engagements to Perform Agreed-upon Procedures Regarding Financial Information SRS 4410 (AAS 31) Engagements Information to Compile Financial

178

APPENDIX - 10
REFER TO PARA 2 OF CHAPTER 4 (PART II) List of Accounting Standards notified by the Central Government
AS 1 AS 2 AS 3 AS 4 AS 5 AS 6 AS 7 AS 9 AS 10 AS 11 AS 12 AS 13 AS 14 AS 15 AS 16 AS 17 AS 18 AS 19 AS 20 AS 21 AS 22 Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements Contingencies and Events Occurring After the Balance Sheet Date Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Depreciation Accounting Accounting for Construction Contracts Revenue Recognition Accounting for Fixed Assets Accounting for The Effects of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Employee Benefits Borrowing Costs Segment Reporting Related Party Disclosures Leases Earnings Per Share Consolidated Financial Statements Accounting for Taxes on Income

A Guide to KARNATAKA VAT Audit AS 23 AS 24 AS 25 AS 26 AS 27 AS 28 AS 29 Accounting for Investments in Associates in Consolidated Financials Statements Discontinuing Operations Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Joint Ventures Impairment of Assets Provisions, Contingent Liabilities & Contingent Assets

180

APPENDIX 11
REFER TO PARA 2.K OF CHAPTER 4 (PART I)
Suggested format of letter of representation to be obtained from the client (suitable modifications may be made as required)
Dear Sir, Sub: Letter of Representation - KVAT Audit for the financial year ended March 31, 20XX With reference to the audit conducted by you, as required under the provisions of Section 31(4) of the Karnataka Value Added Tax Act, 2003 (In short KVAT Act, 2003) read with rule 34(3) of the Karnataka Value Added Tax Rules (In short KVAT Rules, 2005) for the financial year ended March 31, 20XX we acknowledge our responsibility for the maintenance of books of accounts and other related documents and registers in accordance with the requirements of the KVAT Act, 2003 and as per the recognised accounting standards and practices as issued by the ICAI. This letter is provided in connection with the audit under the KVAT Act, 2003 for the purpose of issue of certificate / report in Form VAT 240. We confirm to the best of our knowledge and belief that: 1. We have no other place of business within / outside the State other than those stated in Parts I, II & III of Form VAT 240 of the KVAT Rules, 2005. We confirm that each of the places of business stated in the said annexure is duly registered under the Commercial Tax / Value Added Tax Laws in the respective States. We have not effected any sale of goods or executed any other works contracts in the State of Karnataka other than those declared in Form VAT 240 and returns filed. All sales / sales returns including sale of fixed assets, if any, have been duly classified and properly accounted in the sales register. They have been properly reflected in the returns filed. We have not effected any local, inter-State purchases or imports in the State of Karnataka other than those declared in Form VAT 240 and the returns filed. All purchases / purchase returns including purchase of fixed

2.

3.

A Guide to KARNATAKA VAT Audit assets, if any, have been duly classified and properly accounted in the relevant register. They have been properly reflected in the returns filed. 4. 5. In respect of quantitative stock of goods, the inventory details furnished in the Trading / Manufacturing Account is correct and complete. The quantitative particulars furnished in the Manufacturing / Trading Account are commensurate with the consumption / sales effected during the year. The classification of goods effected by the Company / Firm / concern as shown in the trading account is correct. We have adopted the following method of accounting and valuation of closing stock: The method of accounting generally followed is Mercantile System. The same is more elaborately mentioned in notes to accounts attached to the audited balance sheet submitted to you separately; We consistently values stock at cost or market values whichever is lower. The cost prices are worked out after considering the invoice price and/or debit note/credit note and other incidental expenses. The stock transfers to our branch / head office / consignment agent is valued at excise clearance price / expected sale price / MRP less %....

6.

This method is consistently followed by us and there is no change in the method of valuation when compared to the previous year. We further certify that there is no significant change in the accounting policy followed by us. 7. We have not raised any tax invoices or sale bills other than the series reported in the sales ledgers. However, in respect of sale of Scrap / Exports / Deemed Exports and sales or dispatches from factories the invoice series differ and are duly accounted. During the year, we have not effected any purchases from unregistered dealers other than those supported by a valid self purchase bills declared in Form VAT 240 and the returns filed. Credit for value added tax paid / payable on purchases effected from unregistered dealers has been taken only when the goods are put to use and output tax has become payable. We have claimed sales returns only in respect of those transactions where the goods are delivered within a period of six months. 182

8.

9.

APPENDIX 10. We have claimed input tax credit only in the month in which the tax invoice or debit note is received and all such documents are in our custody / possession. None of the goods on which we have claimed input credit are subsequently lost or destroyed calling for the reversal of input credit and we understand the responsibility of preservation of various documents under the KVAT Act, 2003. We have issued only ONE ORIGINAL Tax Invoice / Bill of Sale / Debit Note or credit Note as the case may be, and all other copies are marked as DUPLICATE. We confirm that we have not taken any input tax credit in respect of goods covered under Fifth Schedule, except in the case of computers, printers which are used in computing, issue of tax invoices etc as permitted therein. We have deducted tax at source under sections 9A / 18 / 18A of the KVAT Act, 2003 in respect of all the expenditure / purchases specified under the said section and in respect of notified goods. In respect of high seas sales effected, we hereby confirm that the same has been effected before the goods have crossed the customs frontier of India and the bill of entry has been filed by the purchaser. None of the business premises were a subject matter of inspection by Commercial Taxes and allied authorities during the year. We further certify that inspections if any carried out during the preceding / succeeding years will not impact the trading / manufacturing accounts furnished for the purpose of your audit. No penalties were imposed during the year on us. The Statutory Forms under the KVAT / CST Acts and Rules, are issued by us in accordance with the relevant provisions of the Act. In particular, we confirm the following: (a) That C forms have been issued only for those transactions which are permissible under section 8 of the CST Act, 1956 read with rules 12 / 13 of the CST (R & T) Rules, 1957; (b) H forms have been issued only in respect of purchases specifically 183

11.

12.

13.

14.

15.

16.

17. 18.

A Guide to KARNATAKA VAT Audit made to comply with pre-existing export orders for those goods purchased which are used in the exports; . (c) E-I forms are issued only for those sales where the Company / Firm / Concern has sold the goods while they are in Inter State movement by way of transfer of documents of title to the goods and not in the cases where the purchaser had already taken delivery of the goods; (d) F forms are issued only for the receipt of goods from our principal / head office / branch otherwise than by way of purchase of goods. 19. 20. 21. We confirm that the relevant registers relating to Form _______________ etc have not been produced to you for your verification and report. We have not collected / paid any tax by way of deposit. We have not effected sales of fixed assets in Karnataka during the financial year. Sales of fixed assets, if any, within the State of Karnataka have been reported in the returns and taxes thereon have been remitted in accordance with law. We confirm that we have adhered to the provisions relating to time of sale of goods in terms of Section 7 of the KVAT Act, 2003. We confirm that we have classified the sales as local sales when there is no Inter State movement of goods and also in such of those cases wherein the sales are originating in Karnataka and terminating in Karnataka. We have classified the goods sold by us and charged the rate of tax, in accordance with the Section 4 read with applicable schedules and notifications of the KVAT Act, 2003. We have prepared the monthly returns based on the books of accounts maintained. The copies of the returns filed with the authorities were submitted for the purpose of KVAT audit. We have not maintained any records to track input tax credit available on URD Purchase, to track input tax claimed on purchase relating to interstate sales and export sales. We cannot bifurcate the transactions details of Profit and loss Account and Balance sheet for the transactions made outside the state of Karnataka. 184

22. 23.

24.

25.

26.

27.

APPENDIX 28. Purchase and sales turnovers have not been reconciled with KVAT audit books of accounts and Income Tax audit books of accounts due to the reason of valuation methods. We have recorded all kind of adjustment/deduction to/from sales and purchase, such adjustment/deduction are in conformity with the provision of law. All our sub contractors and suppliers are registered dealer and accordingly we have obtained the registration details (TIN) to claim the deduction and input tax credit. We have caused the entry of notified goods under Karnataka Tax on Entry of Goods Act, 1979 and paid the tax as applicable. We have registered under the Professions Tax Act, 1976 vide registration ............ and paid the tax as applicable. None of the branch transfers outside the State are marked / ear marked to any specific customers and are sent only to the branches / agents for further sales after they take the same into their inventory. We have noted the observations made in your audit report in Form VAT 240 and we hereby confirm that we shall be solely responsible for impact, if any, on our tax liability by virtue of such observations. We certify that the following statements submitted to you to be true and correct: (a) Statement of monthly summaries of sales and purchases (with tax analysis); (b) Statement of debit note and credit note as also journal entries (with tax analysis); (c) Statement of stock received inside the State and sent outside the State; (d) Sales and purchases of fixed assets; (e) Details of other income / miscellaneous income; (f) Details of expenses on which input tax credit is claimed together with tax analysis thereof; (g) Reconciliation of sales and purchases with ledger.

29.

30.

31.

32.

33.

185

A Guide to KARNATAKA VAT Audit We maintained our accounts in (SAP /Oracle /BAAN .. and / or ERP system) and the accounts are maintained centrally at (place) for operations of the Company / Firm / Concern across India. The Company / Firm / Concern has maintained accounts to enable the Company / Firm / Concern to generate segment wise / business constituents wise /division wise accounting / MIS reporting requirements. The accounts are closed and also audited by the statutory auditors based on the centrally maintained accounts. As such the computerised system does not allow to abstract records or to extract State-wise Profit and Loss account or Balance Sheet. However, we have maintained sales and purchase books or registers separately for our operations in the State of Karnataka which are submitted to you for your verification and audit. We confirm that the internal control system put in place by the management is adequate to ensure that the transactions of sale or purchases made in the State of Karnataka are duly reported in the sales or purchases book or registers maintained. In respect of receipt of materials like raw material, packing materials, stores, consumables or traded goods - a Goods Receipt Note (GRN) is prepared in / by the system. The relevant books of accounts are generated based on the said GRN. As specifically stated above, since the accounts are maintained at central level and with the given system / software constraints, we are not in a position to reconcile the turnover of sales and purchases to be reported in Form VAT 240 together with the audited ledger accounts. We, however, certify that the Day Book generated for the operations in the State of Karnataka represents the turnover of sales and purchases in the State of Karnataka. We have separately maintained records of purchases effected from local registered dealers on which input tax set off is claimed. 34. During the year assessment for the period . and appeals for the year are completed. We have preferred appeal / second appeal against the assessment / first appeal order for the period .. mainly on the ground of . We are enjoying fiscal / tax benefits under the package of incentives and concessions as per the particulars given hereunder : (a) Eligibility Certificate No. and Date :

35.

186

APPENDIX (b) (c) (d) (e) (f) (g) (h) Entitlement Certificate No. and Date : Period covered by EC : Monetary Ceiling : Eligibility products as per EC : Benefit availed as on 1.4.2007 Adjustment made if any on account of assessment / appeal order passed during the year. Amount utilised during the year KVAT Act, 2003 CST Act, 1956 The Company / Firm / concern certify that we have claimed the incentives in respect of eligible products and to the extent provided under the EC. 36. During the year there is no change in the business model followed. For .. Partner / Proprietor / Director / Authorised Signatory

187