Scrutiny of Service Tax Returns

Dr. Sanjiv Agarwal,

The Board vide Circular No. 113/07/2009-ST had laid down the procedure for carrying out detailed scrutiny of Service Tax Returns (ST-3) and had circulated a return scrutiny manual for Service Tax.

However, with the introduction of Point of Taxation Rules, 2011 and advent of Negative List in July, 2012, CBEC has now revised the instructions on detailed scrutiny of ST-3 returns, with effect from 01.08.2015 vide Circular No. 185/4/2015-ST dated 30.06.2015.

The Board Circular states, “Even after the introduction of GST, it may be appreciated that the basic principles of scrutiny of returns and reconciliation of records would remain the same.” The Department wants to extend this to GST.

The following is the gist of guidelines issued for manual scrutiny for understanding and guidance.

A. Preliminary Online Scrutiny:

(i) The purpose of preliminary scrutiny of returns includes :

• ensuring the completeness of the information furnished in the return,
• arithmetic correctness of the amount computed as tax and its timely payment,
• timely submission of the return and identification of non-filers and stop-filers.

(ii) Scrutiny is done online in ACES and the returns having certain errors are marked for Review and Correction (RnC).

(iii) These have to be processed accordingly by the Range Officers.

B. Detailed Manual Scrutiny

a. Objective

The purpose of detailed manual scrutiny of returns is to ensure the correctness of the assessment made by the assessee.

b. Scope

• Checking the taxability of the service,
• The correctness of the value of taxable services (Section 67 of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006 ) and ,
• The effective rate of tax after taking into account the admissibility of an exemption notification (25/2012-ST), abatement (26/2012-ST), or exports (Rule 6A) , if any; ensuring the correct availment/utilization of CENVAT Credit in terms of the CENVAT Credit Rules, 2004, etc.

c. Eligibility / Selection

(i) The list of returns to be taken up for detailed scrutiny would be finalized by the Additional/Joint Commissioner in-charge of Division (or in his absence by the Commissioner).

(ii) Main focus on small assessees whose total tax paid (Cash + CENVAT) during FY2014-15 is less than Rs. 50 lakhs, though on the direction of Chief Commissioner, scrutiny of ST-3 can be made of assessee whose monetary limit exceeds Rs. 50 lakhs. Each Commissionerate has to select equal number of assessees for carrying out returns scrutiny from three tax paid bands viz: Rs. 0 to Rs. 10 lakhs, Rs 10-25 lakhs and Rs 25- 50 lakhs for the FY 2014-15.

(iii) The assessees who have been selected for audit or have been audited recently (in the past three years) should not be taken up for detailed scrutiny. In no event should an assessee be subjected to both audit and detailed manual scrutiny.

(iv) Time limit

Scrutiny process should be completed in a period not exceeding 3 months.

(v) Findings

In order to ensure transparency of the scrutiny process, it is important to document the findings flowing from the scrutiny effort. For this purpose, an Observation Sheet should be prepared. The scrutiny officer must record his findings under each of the subject of the checklist namely, reconciliation, taxability, classification, valuation and CENVAT credit. Under each of these heads, the officer should record any action that needs to be taken by the Range. The findings should clearly outline the process of scrutiny that led to the outcome.

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