Latest Procedure for Verification and Scrutiny of Service Tax Returns.

The CBEC vide its circular no 185/4/2015 dated 30th June 2015 has revised the procedure for scrutiny of the service tax returns. This is a step towards ensuring whether the self­assessment carried out by the assessees is in line with the provisions of the prevailing service tax law. A two fold procedure has been prescribed which consists of an online scrutiny of all the service tax returns and a detailed manual scrutiny of the returns of select assessees. The new procedure shall be applicable with effect from 1st August 2015. A brief about the new procedure is as below.

Online Scrutiny

• It shall be carried out for all the returns without exception.
• Purpose / Coverage of Online Scrutiny
• Arithmetic checks of the tax calculation.
• Timely compliance in terms of payments made and filing of returns.
• Ensuring completeness of the information furnished.
• Identification of Non­filers and Stop­filers.
• The online scrutiny is carried out by ACES and the returns containing any errors shall be marked for review and correction by the range officers.

Detailed Manual Scrutiny (“DMS”)

• Applicable from F.Y. 2014 ­15 and onwards and will be carried out on a yearly basis.
• Assessee Selection Criteria
• Tax Paid (Cash + Cenvat) should be less than Rs. 50 Lacs. The Chief Commissioner may select assessee with tax paid more than 50 Lacs in certain cases.
• Equal number of assessees shall be selected in each of the three bands based on the quantum of service tax payments viz. up to 10 Lacs, 10 ­ 25 Lacs and 25 – 50 Lacs.
• Assessees selected for audit in the past three years shall not be selected for DMS.
• An assessee cannot be subjected to both Audit and DMS.

Purpose / Coverage of DMS

• Taxability of Services, whether all taxable services covered, including taxability as per reverse charge mechanism.
• Valuation of services as per valuation rules.
• Appropriateness of Abatements, Exemptions and Tax Rates.
• Appropriateness of Cenvat Credit.
• Detailed reconciliation with the Income Tax Return (ITR) and Records.

Process and level of verification.

• The scrutiny will be carried out at the Range office. No visits to the assessee premises.
• 15 days intimation to be given to the assessee before initiating the DMS process.
• The data as per the service tax returns and the income tax returns shall be compiled and analysed for the past three years viz. FY 2012 – 13 to FY 2014 ­15. This is to facilitate a better understanding of the details of the assessee by the assessing officer. This shall be done by referring to the service tax returns and income tax returns filed by the assessee.
• Sample invoices, debit / credit notes, agreements and any other relevant documents shall be verified for determining the taxability and valuation of service.
• Whether Service tax liability on reverse charge has been discharged appropriately.
• The abatements and exemptions claimed, if any, are after fulfilling the prescribed conditions.
• The eligibility and availment of cenvat credit, with specific reference to Rule 6 of the cenvat credit rules shall be verified. (Rule 6 applies in a case where the assessee is a provider of both taxable services as well as exempted service)
• Appropriate applicability of the various rules, for eg. The place of provision rules to check the export of services.
• Every possible aspect of the service tax return shall be reconciled with the information furnished in the income tax return. Some areas are indicated below:

1. Total amount of output service provided with the total revenue as per ITR.
2. Category wise classification of output service shall be broadly linked with the section under which TDS has been deducted as per the Form 26AS. An indicative list correlating the service categories with the TDS sections is given in annexure III to the above referred circular.
3. Payments made in foreign currency as appearing in ITR along with service tax paid on import of services. (Eg. Legal and professional expenses incurred in foreign currency are required to be disclosed separately in the ITR)
4. Certain expense heads in the ITR which prima facie appears to be of the nature of services covered under the reverse charge mechanism along with the service tax paid on reverse charge basis. (Eg. Freight expense may get covered under reverse charge provisions of transport of goods by road service)
5. Reconciliation of tax amounts – both output tax collected and input credit claimed.
6. Advances received from the customers as appearing as a liability in ITR and whether service tax has been paid on the same.

Time Limits

• The intimation letters for FY 2014 – 15 shall be issued by the 15th July 2015 and the DMS process shall be initiated by 1st August 2015.
• A time limit of one month to three months has been prescribed for completion of the DMS.