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Saturday, September 04, 2010 |
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| Important Policy Initiatives During The Year 05-06 |
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| Several policy initiatives were taken during the year to strengthen and
institutionalize the system of EA 2000. While some of these were aimed at improving the information base of the auditor, others were meant to
incentives working in audit.
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Measures to improve the information base of auditors
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 Risk Assessment |
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During the year the
Directorate General
was able to get data
from the Directorate
of Systems and carry
out the risk
assessment by
employing the two
risk parameters R1
and R2 on the units
paying annual PLA
revenue of Rs. 1
crore and below.
Commissionerate-wise
list of assesses in
the descending order
of their rupee risk
value was circulated
to all the
Commissioners to
facilitate them to
select the assesses
for auditing. For
the first time since
the inception of EA
2000, this
calculation was done
in a centralized
manner. |
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Introduction of the
Annual Financial
Statement (ER4
return) |
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1. This Directorate
General, after
extensive
discussions,
prepared the Annual
Financial Statement
which was prescribed
in November 2004 as
ER 4 return to be
submitted by
assesses paying
annual PLA duty of
more than Rs. One
crore. The DG
(Audit) in his DO
letter addressed all
the Chief
Commissioners and
Commissioners of
Central Excise has
inter-alia given the
background for the
purpose of
prescription of the
said return,
provided reasons for
the information
called for and have
enumerated
guidelines for use
of the information
by the auditors.
Since the return has
to be filed by
assesses paying
annual PLA duty of
more than Rs. One
crores and such
assesses are being
mandatory audited
every year, the
information
contained in return
is be used for
carrying out Desk
Review and
verification of
CENVAT utilization
and also checking
valuation issues.
The letter provides
in great details the
modalities of
carrying out pre
audit work like
verifying trend
analysis, revenue
risk analysis.
2. This Directorate
is collecting
information about
the extent of
compliance in filing
these returns and
their usefulness to
audit. Of the 5487
units paying annual
Central Excise
revenue exceeding Rs.
1 crore in 2004-05,
as many as 3721
units have already
filed their first
ER4 return (for the
year 2003-04) that
was due in November
2004. It has been
reported that some
Commissioners have
already initiated
action against the
defaulters. D.G.
(Audit) is
addressing a letter
to all the Chief
Commissioners of
Central Excise and
asking them to hold
meetings with the
defaulting units in
their zone and
advising them to
file these returns.
3. Further, these
returns have already
been used for
conducting Desk
Reviews in about 800
audits. Since the
annual audit of
units paying more
than Rs. 1 crore is
mandatory, the
returns in the rest
of the cases would
be utilised as and
when the units are
taken up for audit
during this
financial year.
4. The feedback
received from the
Commissionerates
indicates that the
information
contained in the ER4
returns has been
found to be
extremely useful
particularly as it
gleans information
from the Balance
Sheet and the Profit
and Loss Statement
and presents it in a
form relevant for
Central Excise
auditors. Some audit
objections have been
raised based on the
information
contained in ER4.
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Proposal to amend
Rule 22 of the
Central Excise Rules
2002 |
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1. EA 2000 technique
of audit, envisaged
validation of data /
information
disclosed by the
assessed in the
periodical returns
(filed with the
Department) with
that contained in
his books of
accounts and
financial statements
(ledgers, trial
balance, Profit and
Loss Account,
Balance Sheet etc.).
This is so because
all statutory
records prescribed
under the Central
Excise law have been
dispensed with.
2. The only rule in
the Central Excise
Rules pertaining to
the maintenance of
records was Rule 10
which required that
every assesses shall
maintain proper
records, on a daily
basis, in a legible
manner indicating
the particulars
regarding
description of the
goods manufactured,
opening balance,
quantity produced or
manufactured,
inventory of goods,
quantity removed,
assessable value,
the amount of duty
payable and the
particulars
regarding the amount
actually paid. The
Rule 22 of these
rules (prior to its
amendment) further
provided that every
assesses shall
furnish to the
officer empowered by
the Commissioner to
access his premises
(i.e. the Range
Superintendent) a
list of all records
maintained by the
assesses for
accounting of
transactions in
regard to receipt,
purchase,
manufacture,
storage, sales or
delivery of the
goods including
inputs and capital
goods.
3. The erstwhile
Sub-rule (3) of rule
22 cast an
obligation on the
assesses to make
available to the
audit party deputed
by the Commissioner
for its scrutiny the
following records-
(i) the records
maintained or
prepared by the
assesses in terms of
sub rule (2) ;
(ii) the
cost-audit reports,
if any, under
section 233B of the
Companies Act, 1956;
and
(iii) the
Income-tax audit
report, if any,
under section 44AB
of the Income Tax
Act, 1961.
4. It was pointed
out by some of the
field formations
that this provision,
did not bind the
assesses to produce
his financial
ledgers, accounts
and annual financial
statements (balance
sheet, profit and
loss account etc.)
all of which are
critical to the EA
2000 methodology.
Audit parties had
reported that they
have faced problems
on account of some
assesses taking
shelter under the
wording of rule 22
in refusing to part
with these documents
for audit scrutiny.
5. In order to
remove this
impediment to the
proper working of EA
2000, this
Directorate General
proposed an
amendment to rule 22
by prescribing that
every assesses shall
furnish to the
officer empowered
under sub-rule (1),
a list of all
records, including
financial records
and statements. This
would place the
matter beyond doubt
and facilitate
compliance for the
purpose of EA 2000.
The proposal was
accepted by the
Board and the
amendment was
carried out.
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Circulation of Modus
Operandi circulars |
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The Directorate
General circulated
four important modus
operandi to all the
Commissionerates
during the year. The
basis of the
selection was the
uniqueness of audit
objection, amount of
revenue involve and
frequency of the
type of issue. Few
objections have been
raised based on the
modus operandi
circulated by the
Directorate.
II. Measures to
induce and
incentives
compliance with EA
2000
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Reward scheme for
officers posted in
IAD of the
Commissionerate |
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The issue of
differential
treatment in the
matter of rewards to
Audit and
anti-evasion was
examined afresh
particularly in view
of increasing
reliance on audit
for ensuring
compliance. A
detailed proposal
for extension of
Reward Scheme to
cover officers of
audit containing
elaborate
justification was
submitted to the
Board by DG (Audit)
vide letter F. No.
381/87/2004/404
dated 2.2.2005. This
was followed up by a
D. O. letter of even
number dated
01.4.2005
reiterating the
earlier proposal and
also citing a live
example of extra
ordinary detection
and recovery by the
audit officers of
Thane-II
Commissionerate.
This Directorate
also proposed that
the existing bar on
sanction of reward
in cases of
voluntary payments
under Section 11 A
(2B) should be done
away with. |
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Seminars for
sensitisation of
senior officers |
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As part of its
strategy for
improving the
internalization of
EA 2000 among the
field officers, this
Directorate has
identified training
as a key area of
focus. In pursuance
of this goal, it
organized seminars
for senior officers
handling audit in
the Central Excise
Commissionerates at
Mumbai Kolkata,
Chennai, Pune, Patna
and Coimbatore. The
seminars included
sessions on ‘Role of
auditors under EA
2000’, ‘Steps of EA
2000’, ‘Leadership
requirements of EA
2000’, ‘Audit
results and the
importance of
financial literacy’,
‘EA-2000-Experience
so far’ -
Presentation on the
Quality Assurance
Review results,
‘Significance of
monitoring and
follow-up action in
EA 2000’,
‘Developing a
focused Audit Plan’
and ‘Relevance of
Examination of
Financial Accounts
for EA 2000’ by
experienced
officers. |
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Pilot Project for
Cenvat Verification |
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This Directorate
identified a list of
300 assesses paying
duty below Rs. One
crore from PLA for
conducting CENVAT
verification on
pilot project basis.
The basis for
selection of units
was their CENVAT
credit behavior over
a period of two
years- 2002-03 and
2003-04. The growth
in CENVAT credit
utilization as a
proportion of total
duty paid (PLA+CENVAT)
was studied for
these two years. The
difference between
the ratios for these
two years was
calculated. This
difference was then
converted into
‘Rupee Risk’ by
multiplying it with
the total duty paid
by the assesses
during 2003-04. This
was done to quantify
the revenue
significance of the
assessor's ratio. In
a sense, it denotes
the ‘risk’ to
revenue owing to an
adverse movement in
the CENVAT ratio
from one year to the
next. The units were
then arranged in
descending order by
their rupee risk and
the most adverse
units were selected. |
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