VAT audit is an integral part of a VAT compliance / self-assessment system. It is important to note that, the role of VAT Audit is to undertake business investigation at dealer’s place of business with prior intimation to the VAT dealer.
The VAT auditor is not expected to exercise powers relating to enforcement, viz, search or seizure. However, wherever necessary, VAT auditor has to seek help of Investigation team so that the potential evidence is not destroyed. The objective of a VAT audit is to close the gap between the tax declared by VAT dealer and the tax legally due. Using a risk based audit selection system, the Sales Tax Department (STD) should be able to fulfill the dual purpose of maximizing revenue collection and ensuring voluntary compliance by providing a reasonable chance that defaulters will be identified and undeclared tax, interest and penalties are collected.
The aim of VAT audit is to encourage the highest possible level of voluntary compliance using a system of self-assessment. The VAT dealer calculates his own liability and makes his payment of the tax declared as due while the STD reviews the self-assessment subsequently by means of a VAT audit.
A self-assessment system relies for its effectiveness on a number of integrated components:
- VAT dealers maintaining proper books of account and records, if appropriate, as prescribed by the Law and or Rules
- An effective taxpayer education campaign so that VAT dealers are aware of their obligations.
- Simple, understandable and effective procedures and forms so that a VAT dealer who wants to comply can do so without undue cost
- Effective penalties for non-compliance which are enforced by the STD
- Simple and effective controls which reduce the scope for fraud
- Prompt and effective action against VAT dealers who have not filed VAT returns and / or who have not paid the tax declared or assessed.
Elements essential to a VAT compliance system
a. Registration of VAT dealers
- This provides the basis for control of VAT dealers. It identifies those dealers who have an obligation to account for VAT and brings them under the control of the administration. Failure to register at the appropriate time is dealt with in the relevant provisions of the respective VAT Act of the particular state.
b. VAT return
- The VAT return is the most important form in VAT administration as it provides the basis for the audit of the VAT dealer and the means for collecting the tax. It is essential that the dealer is using the correct VAT return for his business and the filing of those VAT returns is strictly enforced and the tax declared is collected. Failure to take action in these areas renders VAT audits ineffective.
c. Keeping books of account and records
- As VAT is levied by reference to the financial transactions of the business, books of account and records must be kept by dealers to enable STD to check and confirm that the registered dealers have complied with their legal obligations to maintain proper accounts.
d. Tax invoices
- The tax invoice is a crucial document in the operation and control of a VAT system. The tax invoice establishes the VAT liability of the seller of taxable goods and most importantly is also the authority for a buyer to claim a credit for the tax paid on inputs, without tax invoices effective compliance cannot be achieved. Tax invoices provide an audit trail for dealers involved in both the sale and purchase of taxable goods.
e. Access to books, records and documents
- For effective verification of VAT returns, STD auditors require access to the books and records of all dealers. Ordinarily, the VAT dealer is required to keep his accounts, registers and documents at the place or places of business specified in his registration certificate, unless agreed otherwise by theCommissioner.
Objectives of VAT audit
The overall aim is to check the correct amount of tax is collected and improve compliance by dealers. To achieve this objective, auditors should be required to:
- Confirm the dealer is correctly registered
- List the activities undertaken by the business
- Note the accounting records used by the dealer
- Ensure the records correctly reflect the business activities of the dealer
- Assess the level of risk posed by the dealer to the VAT regime and identify the appropriate counter measures
- Educate the dealer and give the dealer the opportunity to ask questions which the auditor either answers on the visit or seeks guidance at the office and provides the dealer with written advice.
- Ensure that any unsatisfactory features discovered on an earlier visit have been corrected.
- Ensure that return and other statutory filings are timely done by dealers