Date post: | 12-Apr-2017 |
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Relevance of taxation in Internal audit
Why to look into tax?
Component Value INR
Total Cost INR
Cost of raw materials/services 100.00 100.00
Input Excise duty/ Service Tax 12.5%/14%
12.36
112.36
VAT/CST on raw material 14.5%
16.85
129.21
Output Excise duty/ Service Tax 12.36%
15.97
145.18
VAT on Finished Good 14.5%
21.78
166.96
Tax on manufacture & sale of Good worth INR
100
66.96
Tax % 40%
Cost of production 100%
Tax component 67%
VAT-Value Added Tax
►VAT is Sales Tax levied on sales made within a particular state►Different VAT rates are prescribed such as 0%, 1%, 5% , 14.5% and other special rates based on the goods listed under VAT schedules►VAT is not to be paid for sales & transfers made from one state to another state
Input Tax Credit (ITC):-►Input Tax Credit is allowed for all eligible VAT purchases made in the state►Input is not allowed on certain goods such as fuel, coal, office maintenance expenses etc as per the negative list.►VAT Input is not allowed for First point of sale items in the state (FPOS)►Input is allowed proportionately for goods sold within the state only.
What and Why?
AP-VAT Act AP-VAT Rules
Additional study material
CST-Central Sales Tax
►CST is Sales Tax that is levied on sales made outside a particular state►No input Tax credit is available for CST Payments made►CST Act is a central Act. However the rules are prescribed by the respective states.►CST proceeds belongs to the state government and not the central government.
Vital CST Forms:-►Form-C to be obtained/ issued for all sales/purchases made outside the state ►Form-C can be issued only if the goods are purchased for resale or for use in the manufacturing process►Form- F to be obtained/issued for all inter-state transfers made within the company►Non-filing of these forms amounts to VAT sales along with non-availment of ITC
Additional study material
What and Why?
Hyderabad-Factory
Kolkata-Regional Office
Ahmedabad- Direct Dealer Sale
CST-Act CST (Andhra Pradesh) Rules
TOT & WCT
TOT- Turnover Tax:-►Turnover Tax on sale of goods to be paid by TOT dealers whose total turnover is less than the minimum turnover for VAT liability ( Ex: Above 5 Lakhs & Below 50 Lakhs in Andhra Pradesh)►The TOT is governed by state VAT Acts►The current rate of TOT is 1% in Andhra Pradesh►No input tax credit is allowed for Turnover tax
WCT- Works Contract Tax:-►“Works Contract” includes any agreement for any valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property►The WCT is governed by state VAT Acts►The tax is to be paid by the contractee in case the contractor does not levy►The current rate of WCT is 2.5% & 5% in Andhra Pradesh►No input tax credit is allowed for Works contract tax
Additional study material
What and Why?
WCT & TOT rules
Value Added Tax – Cycle from Input on raw materials to Vat Payment
VAT paid on Raw materials FACTORY Finished Goods Sale within State
Value Added Tax – Cycle from Input on raw materials to Vat Payment
Vat paid on Raw materials FACTORY Finished Goods Sale within State
Linking from Journal entry to Trial Balance in SAP
ABC Industries LimitedTrial Balance - 31 December 2012
Account Particulars Debit INR Credit INR
1525101 Vat Input Credit 5,00,000 - 1525040 Service tax - Accumulation a/c - 664,100 1525042 Service tax - Remittance a/c - - 1531225 Pro-Vat West Bengal - 25,00,000 6607013 Consultancy Charges 250,000 - 1525033 CST Deffered a/c - 8,679,540
Grand Total 15,355,000 15,355,000
Calculation of landed Cost: Scenario 1 & 2
Particulars
Scenario 1 A company situated in Hyderabad plans to purchase good “X” on which the VAT rate is 14.5% in Hyderabad and input tax credit is allowed
Scenario 2 A company situated in Hyderabad plans to purchase good “X”- a special rate good on which the VAT rate is 22% in Hyderabad & no input tax credit is allowed as it falls under negative list
Option 1 (Purchase from Hyderabad Vat
14.5%)
Option 2 (Purchase from other state say
Mumbai CST 2%)
Option 1 (Purchase from Hyderabad
Vat 22%)
Option 2 (Purchase from other state say
Mumbai CST 2%)
Basic cost of the good
100,000.00 105,000.00 100,000.00 105,000.00
(+) Cost of transportation
1,000.00 6,000.00 1,000.00 6,000.00
(+) VAT/ CST 14,500.00 2,100.00 22,000.00 2,100.00Gross Cost 115,500.00 113,100.00 123,000.00 113,100.00(-) Input Tax Credit
14,500.00 - - -
Net Cost 101,000.00 113,100.00 123,000.00 113,100.00
Advisable Option
Buy locally from Hyderabad only even though the basic cost of the good is more since the net cost of the good inclusive of taxes is cheaper when compared to purchase from other state
Consider buying from outside the state even though the basic cost of the good is more since the net cost of the good inclusive of taxes is cheaper when compared to purchase locally in Hyderabad
Calculation of landed Cost: Scenario 3Scenario 3:A company situated in Hyderabad plans to purchase good “X” on which the VAT rate is 14.5% in Hyderabad and input tax credit is allowed. Out of the total sales of the company 80 % are through regional offices in other states
Advisable Option: Consider buying from outside the state even though the net cost of the good is greater since the final cost of the good inclusive of taxes and disallowance
is cheaper when compared to purchase locally in Hyderabad
Particulars Option 1 (Purchase from Hyderabad)
Option 2 (Purchase from other state say
Mumbai) Basic cost of the good 1,000,000.00 1,020,000.00(+) Cost of transportation 10,000.00 20,000.00
(+) VAT (14.5%)/ CST (2%) 145,000.00 20,400.00Gross Cost 1,155,000.00 1,060,400.00(-) Input Tax Credit 145,000.00 - Net Cost 1,010,000.00 1,060,400.00(+) Input Tax Disallowed by VAT Act (80%)
116,000.00 -
Final Cost to the company 1,126,000.00 1,060,400.00
Questions - VAT
Can you compute the landed cost of the material from quotation or invoice?
What is the rate of CST?
What is the difference between circular & notifications?
What is the difference between Act & Rules?
GL Codes linked to transactions relating to VAT
• Raw materials GL• VAT Input Account• Fixed assets• Vendor master for state• Vendor Ledger• Fixed assets disposal Account• Turnover Tax• CST• Service tax• TDS• High Sea sales & Employee
reimbursements
Value added tax
FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document
Exception elimination
Objective Analysis Potential Issues
Vendor Ledger account Scrutiny Compare the transactions of the vendors against the Vat Input GL
Instances of under availment of VAT
General Ledger account Scrutiny Compare the transactions accounted in the specified GL's against the TDS GL
Instances of under availment & excess availment of VAT Input credit
Eliminate the transations exception elimination Compare the exceptions noted from the above analysis to other specified GL to eliminate exceptions
Instances of under availment & excess availment of VAT Input credit
Differential Vat Rates for same material Analyze the PO's raised material-wise with vat rates applied Excess payment of VAT output
VAT Analysis
Potential Issues in Value added tax
Under availment of Vat Input credit Procurement from VAT or CST Vendor to save cost Restructuring of Trade promotion schemes resulting in Vat
Savings Inconsistencies in landed cost Comparisons Dealer reimbursements to be routed through trade
discounts schemes Differential vat rates levied by vendor for same nature of
products
Cost Savings
Tax Invoice not received/issued as per Vat requirements Vat Input availed on procurement of Goods in Negative list Excess vat Input availed Vat input availed on CST purchases Vat Invoices not authorized as per the requirements Vat Provisions not made on debit notes passed for
recognizing the sale
Non compliances
TDS-Tax Deduction at source
►TDS is not a type of Tax or a contribution►It is merely one of the modes of payment of Income Tax►It is an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.”►TDS to be deducted at prescribed rates by the payer
► Benefits to Government:► Regular source of revenue► Greater reach► Covers wider base► Ensures payment of income tax
►Benefits to Taxpayer:►Distribution of total tax liability over a period►Most comfortable mode of payment
What and Why?
TDS Rates
Additional study material
TDS other than salaries
TDS on salaries
PAN-Permanent Account Number
►PAN is a UID number for Tax payers
►A valid PAN is mandatory in all payments liable to TDS
►Non mentioning/Incorrect PAN attracts TDS deduction @ 20 % or
applicable TDS rate, whichever is higher
►TDS rates differ for corporate and non-corporate entities in some
cases
►PAN is a 10 digit number. Ex: AGRPS1234J where the first five and
last character is an alphabet and the remaining four are numeric digits
►The fourth character is an entity identifier.
Ex: C-Company, P-Individual, F-Firm, H-HUF,T-Trust, B-BOI, A-AOP,
G-Government etc
►The Fifth character is the first alphabet of the surname in case of
individuals and in case of others, the first alphabet of any one part in
the name
►Other important PAN based registration numbers are Excise Number
and service tax number
What and Why?
Additional study material
PAN-Macro
Linking from Journal entry to Trial Balance in SAP
ABC Industries LimitedTrial Balance - 31 December 2012
Account Particulars Debit INR Credit INR
6607002 Office & Godown rent 15,105,000 - 1525040 Service tax - Accumulation a/c - 664,100 1525042 Service tax - Remittance a/c - - 1522004 Withholding tax – 194I - 225,000 6607013 Consultancy Charges 250,000 - 1525032 Entry tax - 5,786,360 1525033 CST Deffered a/c - 8,679,540
Grand Total 15,355,000 15,355,000
Tax Deduction at Source – Deduction payment to authorities
Questions - TDS
What would be the risk implication of Duplicate vendor codes?
What would be the base amount for TDS, if invoice includes both sales & service?
What section would you apply, if you have paid for renovation of your house?
What percentage of TDS is applied on reimbursement to employees for expenses?
Document linking in SAP for TDS Journal Entry
Rent payable Document no 190001660
Reflects in Vendor Ledger
Reflects in TDS payable GL
Reflects in rent GL
In the document header text
Document linking in SAP
GL Codes linked to transactions relating to TDS
• Consultancy, Technical fees & Audit Fee
• Rent payable• Maintenance & repairs,
AMC• Professional charges• TDS accumulation GL• Leaf processing Charges
GL• WCT• VAT Input• CST• Excise duty & TOT• Employee reimbursements
Tax deducted at source
TDS ledger - TDS transactionsFBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document
Exception elimination TDS Analysis
GL Codes linked to transactions relating to TDS
Objective Analysis Potential Issues
Updation of incorrect PAN To validate PAN against the criteria as prescribed
Incorrect PAN resulting in short deduction of TDS 20%
Duplicate vendor codes resulting in short deduction of TDS
Incorrect updation of tax masters
Verify the percentages of TDS updated against each section as per the TDS rate
chart
Incorrect updation of TDS rates resulting in short deduction or excess deduction of TDS
Vendor Ledger account Scrutiny
Compare the transactions of the vendors against the TDS GL
Instances of short deduction of TDS for all transactions of specific vendors
General Ledger account Scrutiny
Compare the transactions accounted in the specified GL's against the TDS GL
Instances of short deduction of TDS for all transactions of specified GL’s
Eliminate the transactions with exception elimination analysis
Compare the exceptions noted from the above analysis to other specified GL to
eliminate exceptionsInstances of short deduction of TDS
Potential Issues in Tax deduction at Source
Incorrect PAN updation of the vendors
Incorrect updation of tax masters resulting in incorrect deduction of
TDS
Incorrect section applied for deduction of TDS resulting in incorrect
deduction of TDS
Duplicate vendor codes resulting in short deduction of TDS
Incorrect date considered for TDS exemption certificates
Exemption allowed beyond the limits prescribed in TDS Exemption
certificates
Delay in payment & filing returns for TDS
Under payment or excess payment of TDS
TDS not deducted on the advances paid to vendors
Incorrect base amount considered for deduction of TDS
Incorrect TDS deduction as a result of incorrectly designating the
deductee as company/individual
Inconsistencies in TDS
deductions
Service Tax
►Service Tax is tax levied on the services provided in India based on Finance Act ,1994.(Except Jammu & Kashmir)►The word “India” includes land, air and water limits of the country►Service Tax is levied on all services other than those mentioned in the Negative list as declared through notifications►There is a single rate for service tax which currently is 14 %►Liability: The Service Provider is primarily responsible for collection & payment of Service Tax. However in certain cases the service receiver is required to remit service tax under the “Reverse charge mechanism”►CENVAT Credit is available against the service tax paid for services received for goods manufactured or for providing further services►Service Tax No. is a 15 digit number based on the 10 digit PAN number followed by the letters like “ST” and 3 digit code of the unit of the entity. Ex: AVRCV2222MST001
Additional study material
What and Why?
Additional study material
The Finance Act,1994
Service Tax rules
Notification-Reverse charge
Negative List of Service Tax
Excise- The Manufacturing Tax
►Excise duty is a duty on goods produced or manufactured in India.► The basic conditions for levy of Excise duty is as follows:
► There must be goods;► The goods must be excisable► The goods must have been produced or manufactured► Such production or manufacture must be in India► The Commodity should be ‘marketable’ and ‘movable’► Actual sale is not necessary
► Excise payable at the point of removal of goods from the factory
► CENVAT Credit allowed for excise paid on raw materials used in manufacture of goods
► ECC No. is a 15 digit number based on10 digit PAN number followed by the letters “XD” and 3 digit code of the unit of the entity. Ex: AVRCV2222MXD001
► Examples of Manufacture :► Oil produced from oil seeds► Making of pan masala by mixing various Ingredients► Stitching of cloth to make clothes
Additional study material
What and Why?
Central Excise Act Central Excise rules
Excise Tariff Central Excise overview
CENVAT-Not a brother of VAT
►CENVAT Credit implies the input that can be availed on the excise duty paid on raw materials as well as service tax paid on services received►Further CENVAT Credit Rules, 2004 permit availment of CENVAT credit across goods and services, broadly in the following manner :
► Manufacturer can avail CENVAT credit of service tax paid on input services which can be set off against excise duty payable on final products manufactured i.e., excisable products.
► Service provider can avail CENVAT credit of duties paid on inputs/capital goods which can be set off against service tax payable on output services i.e., taxable services.
►”input” means all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.
Additional study material
What and Why?
CENVAT Credit Rules
Document linking in SAP for Service tax Journal Entry
Vat Input GL account Document no 190004488
Reflects in Vendor Ledger
Reflects in ST Accumulation GL
a/c
Reflects in Office & Godown rent
Reflects Header text
Document linking in SAP
Document linking in SAP for Service tax reverse charge - Journal Entry
Vat Input GL account Document no 190004488
Reflects in Vendor Ledger
Reflects in ST Accumulation GL
a/c
Reflects in ST Expense remittance
GL
Reflects in Professional fee -
GL
Document linking in SAP
GL Codes linked to transactions relating to Service tax
• List of transporters with vendor codes
• Transport vendor ledger account• Service tax accumulation GL account• Service tax• Taxi Hire GL a/c• Vendor ledger of vendors reflecting in
Taxi Hire GL• Legal charges• Director fees• Insurance Agent• Supply of manpower• Vat Input • TOT• CST• Cenvat
Service tax (GTA – Reverse charge
method)
FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document
Exception elimination Service tax Analysis
GL Codes linked to transactions relating to Service tax
• Service tax accumulation GL a/c• Legal charges• Professional fee & Consultancy charges• Insurance Agent• Hotel Stay• Supply of manpower• Technical services• R&D Charges• Advertising charges• Vat Input & TOT• CST• Cenvat
Service tax (Cenvat Credit)
FBL3N - GL line itemsFBL1N - Vendor LedgerFB03 - View document
Exception elimination Cenvat Credit Analysis