Chapter 11 Audit of Value Added Tax (VAT)

Transcription

1 Chapter 11 Audit of Value Added Tax (VAT) Index Topics Pages Introduction to Value Added Tax (VAT) Main Documents for Audit 11.3 Audit Approach to VAT 11.4 Appendix 1 - Schedule of Main Documents and Records 11.5 Appendix 2 - Key Questions Checklist - VAT /8/ Chapter- 11 Audit of Value Added Tax (VAT)

2 Chapter 11 - Audit of Value Added Tax (VAT) Introduction to Value Added Tax (VAT) 1. The main legislation relating to Value Added Tax (VAT) is: Value Added Tax Act, 1991; Value Added Tax Rules, 1991; Finance Acts - annually. 2. VAT is usually levied on goods and services at the rate of 15% of the value of goods imported and supplied within Bangladesh and the services provided within Bangladesh. Certain goods (mentioned in the First Schedule to the Act) are, however, exempt from payment of VAT. Similarly, there are a number of services mentioned in the Second Schedule to the Act which are exempt from VAT. 3. For the purpose of levying VAT, the value of goods and services is determined as follows: In the case of imported goods, the value for levying VAT is determined on the basis of the value chargeable to import duty under Section 25 or Section 25A of the Customs Act, 1969 plus supplementary duty and other duties and taxes except advance income tax. In the case of goods supplied, VAT is determined on the basis of the value receivable by the manufacturer, producers or traders which will include the value of inputs purchased, all charges, commissions, fees, all duties and taxes including supplementary duty (except VAT) and profits. 4. With the exception of certain cases, mentioned in Sub-section (1) of Section 9 of the Act, credits for input tax against the output tax paid by the suppliers, traders or providers of taxable services are allowed. 5. VAT is computed on the basis of assessable value (also known as custom value or landing cost) in the case of imported goods and on the basis of value of turn over in the case of goods and services manufactured/produced or provided within Bangladesh. The basis for computation of assessable value in the case of imported goods has recently been changed. Value for the purpose of levying Custom Duty and VAT is now taken to be the value certified by the pre-shipment inspection agencies (PSI) with the exception of some items, which are exempted from certification by the PSI. 6. VAT is collected by the Customs, Excise and VAT authorities. The appraisers of Custom Houses and the inspectors of land custom and airport customs propose the assessment of VAT, together with custom duty. The assessments are required to be 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

3 approved by the Principal Appraisers at the custom houses and by the Superintendents in the land and air custom offices. 7. Registration for importers, exporters, suppliers, traders and service providers whose annual turn over exceeds Tk 20,00, each is compulsory. Others may have optional registration. However, exemption from registration may be granted by the government on certain terms and conditions. 8. In the case of imported goods, VAT is leviable on all items irrespective of value. In the case of other goods and services, VAT is leviable at the rate of 15% on turnovers exceeding Tk 20,00, Turnovers up to Tk 20,00, are chargeable to turnover tax at the rate of 4% of value. 9. Supplementary duty at the prescribed rates is leviable on luxury goods and the goods and services which are socially undesirable. The latest rates of Supplementary duty have been prescribed by the Finance Act, VAT/Supplementary duty/turnover tax paid due to errors, inadvertence or misinterpretation can be refunded on submission of claims by the aggrieved persons. The limitation for submission of claims of refunds is four months. 11. Drawbacks of VAT/Supplementary duty paid on imported goods which are subsequently exported can be allowed. It is understood that to be eligible for drawbacks such imported goods should ordinarily be used for export production. 12. Goods on which VAT due is not paid are liable to attachments and forfeitures by the officers authorised by the Commissioner of Customs, Excise and VAT. Goods forfeited after giving the owner or claimant an opportunity of being heard are disposed of by public auction. A person guilty of violating the provisions of the Act or the Rules made thereunder is liable to fines determined under the Rules. 13. Persons aggrieved by the decisions of the concerned departmental officers assessing turnover tax may, within sixty days of such decisions, appeal to the Turnover Tax Commission. A decision of the Turnover Tax Commission is final, and no legal remedies can be sought in the court(s). Appeals against the decisions of the officers of the rank of Additional Commissioner and below in respect of VAT lie before the Commissioner (Appeals). Appeals against the decisions of the Commissioner(s) or the Commissioners (Appeal) can be preferred before the Customs, Excise and VAT Appellate Tribunal. Decisions of the Tribunal can go before the High Court Division. Government can also review the decisions of the Tribunal. 14. In case VAT/Supplementary duty/fines/amounts due under the provisions of the Act, or under rules or bonds or documents are considered irrecoverable due to the bankruptcy of an assessee or other reasons, such dues can be written off by the Government. 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

4 15. VAT and Supplementary Duty can be paid into the branches of Bangladesh Bank and the designated branches of Sonali Bank through treasury challans or through Account Current. 16. Self-clearance of VAT is permissible, and the system has gained wide popularity and has yielded substantially increased revenue. Computation of VAT whether under the self-clearance system or appraisement by Custom, Excise and VAT officials is simple. In the case of imported goods, it is usually levied at the rate of 15% of the total taxed value (see example below). In the case of goods supplied or services provided within Bangladesh, VAT is usually levied at the rate of 15% of total turnover. A large number of items are exempted from VAT to the extent notified by the National Board of Revenue through SROs. An example of computation of VAT is shown below: VAT payable on importation of a brand new 1649 cc car on : 1. C&F Value as per Bill of Entry US$ 15, Value in Taka (if 1 US$ = Tk 55.00) Tk 8,25, Add of C&F Value or actual Tk 8, Add landing of Tk 8,33,250 (2+3) Tk 8, Assessable value (landing cost) (2+3+4) Tk 8,41, Customs of Assessable Value Tk 3,15, Duty paid value (5+6) Tk 11,57, Supplementary of duty paid value Tk 7,52, of total taxed value Tk 2,86, VAT Payable = Tk 2,86, Main Documents for Audit 17. There are a substantial number of records and documents available for audit covering everything, e.g., bills of entry, import ledgers, shipping documents and invoices, pre-shipment certificates, registers of custom duty and VAT receipts, treasury challans, accounts current. A fuller list is given in Appendix 1. 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

5 Audit Approach to VAT 18. As with other taxes, the audit approach will be structured and on a top down basis as follows: review management arrangement of the tax (per Chapter 8) and consider overall risks; review data available on trends in income, compare actuals with targets and budgets for each custom house or district and identify areas for further examination; review the application of the systems, procedures and rules for assessing, collecting and accounting for VAT; carry out substantive tests of the systems at VAT offices as needed; and report findings to the appropriate authorities. 19. The main risks and possible controls on VAT are listed below: 1. The value of goods and services is incorrectly assessed, resulting in over or underpayment of tax. 2. The wrong tax tariff is applied, resulting in over or under-payment of tax. 3. Collusion between VAT staff and assessed importers/ producers/ manufacturers/ suppliers/ traders results in less tax being collected. 4. VAT due is not recorded accurately or banked promptly. 5. Theft or loss of goods may occur in customs/ factory warehouses. 6. Goods are smuggled into/out of the country to avoid taxes. 1. sound valuation procedures, independently scrutinised. Adequate reviews and checking of assessments. 2. Adequate system of testing application of tax rates, supervision, post-audit, etc. 3. VAT staff subject to independent checks by appropriate authorities. 4. Up-to-date cash records, reconciled with receipts/ accounts 5. All goods are recorded and stored securely. 6. Appropriate authorities take adequate counter smuggling measures. 20. Substantive audit tests should be carried out on a sample basis, based on the checklist in Appendix 2, which is illustrative and not exhaustive. 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

6 Value Added Tax (VAT) Appendix 1 1. Bills of entry/export Schedule of Main Documents and Records 2. Bill of Lading/Airway Bill 3. Pre-shipment inspection agencies certificates 4. Valuation Certificate files 5. Shipping documents, invoices, etc. 6. Bond register and bond documents 7. Register of VAT Receipts 8. Register of Penalties and Fines. 9. Register of Seizures, Attachments and Forfeitures. 10. Register of unclaimed goods. 11. Importer/Exporter Ledger. 12. Account Current. 13. Treasury Challan of VAT paid. 14. Refund documents. 15. Drawback/ Exemption papers. 16. Registration Certificates/ Licenses for importers/exporters/ producers/ manufacturers/ traders. 17. Letters of Credit. 18. Trans-shipment Advice Notes. 19. Files of monthly/ quarterly/ annual returns. 20. Declaration of Value Basis. 21. Annual declaration of turnover. 22. Credit Notes/ Debit Notes. 23. Registers of Purchases/Sales. 24. Register of unused/unusable inputs. 25. Register of damaged/destroyed/unserviceable goods. 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

7 Appendix 2 Key Questions Checklist - VAT (1) Audit Objective Key Questions/Tests Yes No W/P Assessment 1. Regulations and procedures adequately provide for the proper assessment of VAT and those regulations work in practice. 1.1 Are there adequate regulations in place to ensure that all persons, transactions, events or activities liable for VAT are duly identified? 1.2 Do these procedures work in practice on VAT? 1.3 Are there adequate regulations and procedures to ensure that persons, transactions, events or activities as liable for VAT are properly assessed? 1.4 Do they work in practice? Collection 2. Regulations and procedures adequately provide for the collection of sums assessed and the regulations and procedures operate in practice? 2.1 Are there adequate regulations and procedures to ensure that all sums assessed as due are correctly recorded? 2.2 Are those procedures working? 2.3 Are the procedures and regulations adequate to ensure that VAT recorded as due is collected without undue delay? 2.4 Is VAT collected without undue delay? 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

8 Key Questions Checklist - VAT (2) Banking Audit Objective Key Questions/Tests Yes No W/P 3. Regulations and procedures adequately cover the prompt banking of sums due. 3.1 Are the procedures and regulations adequate to ensure that VAT due is banked promptly? 3.2 Do these procedures work? Allocation 4. Regulations and procedures adequately provide for sums collected to be allocated to the appropriate code of account. 4.1 Are there adequate procedures to ensure that: Records of tax paid are reconciled with amounts banked? All receipts are coded correctly? All recorded receipts are properly shown in the account? 4.2 Are these procedures working? Arrears 5. Procedures for following up arrears of VAT are adequate 5.1 Are there adequate procedures to ensure that tax unpaid or underpaid is pursued promptly? 5.2 Are these procedures working? 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)

9 Key Questions Checklist - VAT (3) Audit Objective Key Questions/Tests Yes No W/P Write - offs 6. Procedures for writing off unpaid VAT are sound and adequate. 6.1 Are there adequate procedures to ensure that write-offs or remissions of VAT are appropriate and properly sanctioned? 6.2 Are they working in practice? Refunds 7. Procedures for refunding VAT are adequate. 7.1 Are there adequate regulations to ensure that: Repayments are properly assessed? Only valid repayments are made? Repayments are made to the proper recipients and for the correct amounts? All valid repayments are properly coded and recorded? Repayments are properly shown in the account? 7.2 Do they work in practice? 31/8/ Chapter- 11 Audit of Value Added Tax (VAT)