anti evasion measures in vat
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Anti- Evasion Measures: Best Practices in Maharashtra
ANTI EVASION MEASURES IN VATBest Practices In
Maharashtra
Presented by-
Shri. J.P.DangeChairman, 4th State Finance Commission &
Former Chief Secretary to the Government of Maharashtra
14/08/2013
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Anti- Evasion Measures: Best Practices in Maharashtra
TOPICS FOR DISCUSSION What is Sales Tax? Revenue Receipts under VAT Functional Branches Types of evasions Evasion Cases Policy options on fraud Anti Evasion Measures
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Anti- Evasion Measures: Best Practices in Maharashtra
ORGANISATIONAL STRUCTURE Council of Ministers Finance Minister Finance Secretary Commissioner of Sales Tax (1)- Cadre Post IAS Special Commissioner of Sales Tax (1)- Cadre Post IAS Chief Vigilance Officer (Special IGP) (1)- IPS Additional Commissioners of Sales Tax (9) Joint Commissioners of Sales Tax (72)- IAS 3 Deputy Commissioners of Sales Tax (401) Assistant Commissioners of Sales Tax (590) Sales Tax Officers (1191)
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Anti- Evasion Measures: Best Practices in Maharashtra
SALES TAX In its present form, Sales Tax, a tax on transactions of
sales, came into existence after First World War. The taxable event in case of Sales Tax is the sale of
goods as in case of Customs is bringing of the goods into India and in case of excise, the manufacture of goods.
The powers are derived by State Governments from Entry 54 of State List (List II) of the Seventh Schedule to the Constitution of India and they are subject to Entry 92A of Union List (List I)
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Anti- Evasion Measures: Best Practices in Maharashtra
WHAT IS INPUT TAX CREDIT (ITC) Input Tax Credit (ITC)- amount of tax credit Tax charged on the purchased goods Credit can be adjusted against the VAT payable on sales Balance of VAT has to be paid to the Government; Any registered dealer who not opted to pay tax by way of
composition Generally set-off for the full amount of tax paid on purchases, Including capital assets, raw material, trading goods, packing
goods, parts, components, spares, purchases debited to profit and loss account is available
Subject to retention in specified contingencies or other than on goods covered by a negative list;
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Anti- Evasion Measures: Best Practices in Maharashtra
MAHARASHTRA: FROM ST TO VAT (…CONTD.) Comprehensive Sales Tax Act, viz, Bombay Sales Tax
Act, 1946, from 1st October 1946 and tax on goods dispatched to other States introduced in 1949.
Constitution came into effect from 26th Jan 1950. Powers of State to levy tax came to be controlled by
Entry 54 of State List Bombay Sales Tax Act, 1953 was enforced from Mar
1953 whereas Bombay Sales Tax Act, 1959 came into effect from 1st Jan 1960.
Replaced by Maharashtra Value Added Tax Act, 2002 from 1st April 2005.
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Anti- Evasion Measures: Best Practices in Maharashtra
MAHARASHTRA: FROM ST TO VAT Generally guided by best international practices with
regard to legal framework Operating procedures and eliminates cascading impact
of double taxation. Self-policing, self-assessment system Improved control mechanism for better compliance Comprehensive legislation covering works contract,
lease transactions etc with Standard VAT rate 12.5%
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Anti- Evasion Measures: Best Practices in Maharashtra
WHO PAY VAT TO GOVERNMENT Manufacturers Importers Wholesalers Distributors Retailers Works Contractors Lessers
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Anti- Evasion Measures: Best Practices in Maharashtra
BENEFITS OF VAT OVER SALES TAX(…CONTD.) Lower and stable rates of tax (no frequent changes) Rationalization of tax burden Great reduction in number of rates of 5% and 12.5% Goods taxable @ 5% to be specified and Rest of others liable to tax @ 12.5% Less scope for litigation and full set-off taxes paid at
every stage
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Anti- Evasion Measures: Best Practices in Maharashtra
BENEFITS OF VAT OVER SALES TAX(…CONTD.) Transparent system, greater reliance on self
assessment and voluntary compliance by dealers; Schedule A (tax free goods), B (gold, silver and
precious stones), C (goods of national importance, industrial raw material, IT products), D (liquor and petroleum products) and E (goods not covered elsewhere) are lists of goods for which rates of tax are @ Nil or 0%, 1%, 5%, 20% or above and 12.5% respectively.
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Anti- Evasion Measures: Best Practices in Maharashtra
REVENUE RECEIPTS TREND(SOURCE: STD WEB SITE)
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Revenue receipts FY 1970-71 Rs. 160 crores
BST MVAT
Anti- Evasion Measures: Best Practices in Maharashtra
COMPARATIVE TAX COLLECTION (VAT)YEAR MAHARASHTRA (Actual) WEST BENGAL (Actual)
FY 2006-07 23574 3878
FY 2007-08 27052 4550
FY 2008-09 29809 5454
FY 2009-10 32154 6797
FY 2010-11 41512 8826
FY 2011-12 50562 10198
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Anti- Evasion Measures: Best Practices in Maharashtra
FUNCTIONAL BRANCH FUNCTIONAL BRANCH EXPECTED WORK
Survey- New Branch under VAT
Identify unregistered dealers, follow them up for getting registered & bring them into tax net, collating data collected from outside agencies, door to door or survey in selected areas
Registration (threshold limit Rs 5 lakhs)
Registration of dealer- Bring evidences about business & businessman on record in proper manner- PAN based TIN
Returns Monitor periodic filing of returns, Ascertain Non filers and Short filers; follow them up
Advisory – New Branch under VAT
Educate dealer about provisions of law, monitor initial filing of returns and risky category cases
Central Repository- New Branch
Issuance of declarations under CST Act (Form C, H, F, EI, EII) with proper scrutiny
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Anti- Evasion Measures: Best Practices in Maharashtra
FUNCTIONAL BRANCH FUNCTIONAL BRANCH EXPECTED WORK
Refund – New BranchCarry out Refund Audit to ascertain correctness of excess ITC claim over payable VAT and grant refunds
Business Audit- New Branch
Carry out audit of business- cases identified on various risk based criteria
InvestigationDetection of cases of concealment of sales and purchases, gather market intelligence, study modus operandi of evasion of taxes
Recovery Recovery actions under Land Revenue Code
Issue Based Audit- New Branch
Scrutiny of only communicated particular issue
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Anti- Evasion Measures: Best Practices in Maharashtra
VAT FRAUDS VAT fraud a “SCHEME”
Avoid paying VAT on sales and
Claim refunds of VAT never paid by procuring bogus
purchase invoices
Actualize criminal intents using different methods
Investigating and checkmating VAT frauds costly
Huge amounts of money required
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Anti- Evasion Measures: Best Practices in Maharashtra
TYPES OF VAT FRAUDS Under reported sales; Inflated Refund Claims; Fictitious Traders; Domestic sales disguised as Inter State Sales; Failure to get registered; Misclassification of commodities; Taxes collected but not remitted; Goods coming from outside the State escaping tax; Credit claimed for VAT on purchases that are not
credible; Bogus traders
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Anti- Evasion Measures: Best Practices in Maharashtra
UNDER REPORTED SALES Conceal actual sales in domestic market Evade obligation to pay VAT Enables to claim more refunds (credit) than they
deserve Has the potential of boosting the business of such
traders Will encourage patronage due to relatively cheap
goods
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Anti- Evasion Measures: Best Practices in Maharashtra
INFLATED REFUND CLAIMS(HAWALA BENEFICIARIES) Traders acquire invoices for purchases they never
make Intent is to claim inflated refunds than they deserve Acquire fake invoices needed to claim refunds Give evidence of merchandise purchase on which
refundable VAT is paid Established crime network (HAWALA) dealing in
such fabricated invoices “purchased” to defraud Government
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Anti- Evasion Measures: Best Practices in Maharashtra
FICTITIOUS TRADERS Traders set up unreal enterprises Get themselves registered for VAT Creating fictitious traders of themselves Issue fake sale invoices and Prepare ground for VAT refund claims Before being exposed, make fast profits and disappear
quickly
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Anti- Evasion Measures: Best Practices in Maharashtra
LOCAL SALES AS INTER STATE SALES Traders sell goods in local market but claim to have
sold them in Inter State Trade
For this purpose, fake invoices
Fake transport documents
Fake declarations under CST Act are arranged
Concessional rate of CST applies and
VAT paid on purchases become refundable
Instead of accruing incremental tax
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Anti- Evasion Measures: Best Practices in Maharashtra
FAILURE TO GET REGISTERED Small businesses operating close to the threshold level
of turnover
At which registration becomes compulsory
Failing to get registered
Saving VAT as well as VAT compliance costs
Mainly retailers predominate this group
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Anti- Evasion Measures: Best Practices in Maharashtra
MISCLASSIFICATION OF COMMODITIES Sales liable to tax at different rates, or Being goods exempted from VAT May reduce tax liability By exaggerating the proportion of sales in the lower
tax categories
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Anti- Evasion Measures: Best Practices in Maharashtra
TAX COLLECTED BUT NOT REMITTED By false accounting or By engineering bankruptcy before tax is paid or “missing trader” fraud wherein registered business
disappears
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Anti- Evasion Measures: Best Practices in Maharashtra
GOODS COMING FROM OUTSIDE THE STATE ESCAPING TAX Levy of tax accounts based
No tax levied at the State border
No record of goods entering into the State
Scope for goods coming from outside the State escaping the tax
No machinery to check that goods meant for Inter State Resale entering State have gone out without being unloaded
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Anti- Evasion Measures: Best Practices in Maharashtra
INPUT CREDIT CLAMES THAT ARE NOT CREDIBLE in two forms: business supplies variety of outputs- subject to VAT
and exempt there from; incentive to allocate inputs to production of the taxed
items; than the exempt; Ineligible Inputs misrepresented as eligible; VAT liability reduced.
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Anti- Evasion Measures: Best Practices in Maharashtra
BOGUS TRADERS Businesses set up solely to “generate invoices” to
allow recovery of VAT; Invoice prima facie evidence, unless otherwise
proved, that earlier tax has been paid; “invoice mills” exploit practical impossibility of
crosschecking; Frauds known as “Hawala” in India and as “carousel
fraud” in western countries.
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Anti- Evasion Measures: Best Practices in Maharashtra
UNETHICAL PROFESSIONALSDECLARATION
MISUSEDBY WHOM MODUS OPERANDI
Form C under CST Act during Sales Tax period
Sales Tax Practitioner (STP)
In moffusil areas, Sales Tax offices are located at District Headquarters. A STP, coming from a Taluka on a State boarder used to appear before Registering Authority & submit application on behalf of dealer of Taluka place for registration under BST as well as CST Act. Immediately after receipt of CST RC No, he used to submit application, already with him on which signature of the said businessman was obtained by fraud, for declarations in Form C. These declarations then were sold to those who want them for a consideration. Later on he was caught and prosecuted.
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Anti- Evasion Measures: Best Practices in Maharashtra
UNETHICAL PROFESSIONALS DECLARATION
MISUSEDBY WHOM MODUS OPERANDI
Form BC under BST Act during Sales Tax period
Chartered Accountant (CA)
Units from backward areas of the State were given Sales Tax Incentives, either by way of deferment of taxes collected on sales or exemption from payment of taxes, for dispersal of industries. To claim exemption from payment of taxes while purchasing the raw material required by the unit, declaration in Form BC was required to be issued. Units were required to get the forms printed on their own and get blank forms authenticated from Assessing Authority concerned. A Chartered Accountant got forms printed, used fake Seals and Stamps of authorities as well as units operating in Beed District and sold forms for consideration. Was caught during cross checks and prosecuted.
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Anti- Evasion Measures: Best Practices in Maharashtra
EVASION METHODS & MEASURESEVASION METHOD
EVASION PURPOSE
ANTI EVASION MEASURES BY
WHOM
Imaginary name & TIN, such Fabricated Tax Invoices accounted for in books of accounts
To defraud exchequer by claiming wrong ITC
ITC verification report will flag such cases
Hawala Operator will issue Tax Invoices, as per requirement. No tax deposited into Govt Treasury.
To defraud exchequer by claiming wrong ITC
ITC verification report will flag such cases
Genuine Tax Invoices fabricated to alter amounts or multiply their numbers
To defraud exchequer by claiming wrong ITC
ITC verification report will flag such cases
Local sales claimed as Inter State Sales
Pay 2% CST and claim ITC at a rate which is higher than 2%
BCP to monitor movement of goods outside State, Central Agency
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Anti- Evasion Measures: Best Practices in Maharashtra
EVASION METHODS & MEASURESEVASION METHOD EVASION
PURPOSEANTI EVASION MEASURES
BY WHOM
ITC claim on purchases more than tax liability shown by seller
To claim incorrect amount of ITC
Analysis of VAT Audit Report as well as ITC report to flag such cases. Confirmation from seller required for allowance of such claims
ITC claim on purchases from particular dealer but seller not showing any sales to the claimant
To claim incorrect amount of ITC
Analysis of VAT Audit Report to flag such cases. Confirmation from seller required for allowance of such claims
ITC claim more than tax liability disclosed by seller in his return for corresponding period
To claim incorrect amount of ITC
ITC verification report to flag such cases. Confirmation from seller required for allowance of such claims
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Anti- Evasion Measures: Best Practices in Maharashtra
EVASION METHODS & MEASURES EVASION METHOD EVASION PURPOSE
ANTI EVASION MEASURES BY WHOM
Concealment of Sales & Purchases
To deprive exchequer of its legitimate tax
Can not be detected by analytical tools being unrecorded transactions. Answer Investigation visits.
Local sales claimed as stock transfer/consignment sales outside State
To claim NIL tax liability as these are Non Sale Transactions
BCP to monitor movement of goods outside State.
You run business but all property in the name of spouse.
Intention of defrauding the state
Legal issues.
Misclassification of purchases for claiming ITC
To claim wrong ITC At present manually only
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Anti- Evasion Measures: Best Practices in Maharashtra
POLICY OPTIONS ON FRAUDS Essence of fraud that money is made quickly Time gap between sale transaction & remittance of tax to
Government Once money disappears, tracking & recovering unjustified
credit time consuming & costly Audit or Investigation post transaction, while important,
unlikely to forestall loss of revenue Difficult balance to strike- Ensure not to impose excessive
burden on business in general but system not unduly exposed to fraud
More bureaucratic measures may reduce VAT frauds but may have less desirable side effects
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Anti- Evasion Measures: Best Practices in Maharashtra
POLICY OPTIONS & RISKSOPTIONS RISKS
Slowing down VAT refunds relative to collection of VAT due
Will impose severe cash flow burden on legitimate business
Higher checks on firms seeking to register for VAT
Only genuine business may be affected.
Requiring guarantee in dubious cases Dubious case will have to be defined & invite protests
Adopting or strengthening joint & several liability rules by which trader held responsible for fraud elsewhere in the chain they are expected to be aware of
Will invite protests
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Anti- Evasion Measures: Best Practices in Maharashtra
TRANSITION: BST TO VAT ERA During Sales Tax era, cross verification of ITC or Set-off non
existent. Claims allowed without question. Limitations of manual process. With advent of computerized systems, cross checking of every single transaction possible. Hawala transactions flagged;
Transition not without protests- all kinds of excuses made to stall transition- Government tackled protests skillfully but went ahead with them. Armed with High Court decision- that process being carried out electronically & no manual interference or subjectivity, in favour, there is no looking back;
Earlier Inter State Sales or Stock Transfer/ Consignment Sales claims allowed on production of documents, no independent authentication of them. Now BCP & Central Agency acting as Clearing House will map them.
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Anti- Evasion Measures: Best Practices in Maharashtra
RATIONALE FOR BCP CST Receipts during FY 2011-12 @2% CST Rs
3804.98 Cr. Size of Inter State Sales effected by registered dealers only work out to 190249 Crore.
Add to this transactions of unregistered dealers of which no precise figures are available.
Add to this, transactions claimed as stock transfers or consignment transfers outside the State for which no consolidated data available other than individual case;
Stock transfer transactions no less than Inter State Sales considering Maharashtra as leading manufacturing State.
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Anti- Evasion Measures: Best Practices in Maharashtra
OBJECTIVES: BORDER CHECK POSTS To capture real time data/ information of incoming &
outgoing goods and capture real time movement of goods vehicles;
Verify whether turnover of all taxable goods imported into State by the dealer is disclosed in the returns and corresponding taxes have been paid;
THIS IS AN ENTIRELY NEW MEASURE ADOPTED
22 BCP: common to State Transport Department, State Excise & Sales Tax: Cost 1000 crore;
8 BCP exclusively for Sales Tax covering Mumbai Port Trust, JNPT, Mumbai Air Port & Railway Terminus
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Anti- Evasion Measures: Best Practices in Maharashtra
WHY BCPWHAT ACTUALLY
HAPPENSWHAT IS
PRETENDEDOBJECTIVE
Goods sold locally
Claimed as ISS, 2% CST paid & ITC on input claimed (which is higher than 2% )
Ascertain whether goods have moved outside State & receipt outflow by way of ITC is genuine
Goods sold locally
Claimed as Non Sale transactions like Stock Transfer or Consignment Sales
Ascertain whether goods have moved outside State
Imported goods at JNPT sold locally
Goods imported at JNPT were transported to other State
Ascertain whether goods have moved outside State
Goods meant for export at JNPT & coming from other States sold locally
Goods meant for export at JNPT
Ascertain whether goods are really exported
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Anti- Evasion Measures: Best Practices in Maharashtra
HOW BCP WILL WORKENTITY INVOLVED PROCESS INVOLVED
Registered Dealer of Maharashtra dealing in Inter State Sales/ Purchases
Will upload Way Bill on BCP website using TIN & authenticated on Mahavat website
Unregistered entity dealing in Inter State Sales/ Purchases
Will upload Way Bill on BCP website using PAN/UID/TAN. PAN to be authenticated on NSDL website on real time basis
Transporter
To be enrolled first. User ID allotted. Will upload Transporter’s Way Bill/ Transit Pass along with Transaction ID of RD/ URD
Transit Pass for dealers outside Maharashtra
Transporter will upload declaration for Transit Pass on BCP website
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Anti- Evasion Measures: Best Practices in Maharashtra
TRANSIT PASS Transit of goods by road through the State require
transit pass u/s 68 to be delivered at last check post or barrier before exit from State;
Failure to comply, to attract penalty equal to twice the amount of tax leviable on the goods transported
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Anti- Evasion Measures: Best Practices in Maharashtra
ITC VERIFICATION: AUDIT REPORT Matching of VAT Audit Report of Seller and
Purchaser: disclosed tax liability by seller in respect of a dealer
matched with ITC claim by purchaser in respect of that seller.
Claimant purchaser given opportunity to prove claim by obtaining confirmation from seller in case of discrepancies, otherwise claim to be disallowed.
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Anti- Evasion Measures: Best Practices in Maharashtra
ITC VERIFICATION: RETURN STATUS Seller doing business with number of entities. Tax payable by seller, as per return, must be equal to
greater than ITC claim of claimant for the said corresponding period.
In case of discrepancies, confirmation from seller dealer required for allowing ITC;
If no returns furnished by seller disclosing his tax liability, confirmation required for allowing ITC;
Purchases from identified Hawala and from TIN cancelled cases are flagged in the verification
report.
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Anti- Evasion Measures: Best Practices in Maharashtra
ITC VERIFICATION: AREAS NOT COVERED BY ANALYTICAL TOOLS There are certain areas which are not covered by analytical
tools and has to be dealt with manually currently; Ineligible Inputs for ITC (NEGATIVE LIST) covered by rule
54; Retention, u/r 53, under contingencies the specified ; Goods purchases of which debited to Profit & Loss Account or
Trading Account-Gifts or other as Sales Promotion expenses; Misclassification of commodity for claiming ITC. Example:
Software, being goods of incorporeal or intangible nature, are eligible for ITC to traders only. Purchasers classify them as Computer Spares to avoid detection and claiming ITC.
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Anti- Evasion Measures: Best Practices in Maharashtra
ELECTRONIC DATAMajor internal data sources:
e-Registration; e-Returns; e-Payments; e-704 Audit Reports; e-501 Refund Applications; Central Repository
Major external data sources for exchange: Central Board of Excise and Customs (CBEC); Central Board of Direct Taxes (CBDT); Customs for Import data; Central Excise & Service Tax;
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Anti- Evasion Measures: Best Practices in Maharashtra
ECONOMIC INTELLIGENCE UNIT (EIU) Audit Form (e-704) data analysis; Inter State data analysis;Registration data analysis;Return analysis;Dealer Profiling (Star Rating) & commodity analysis Analysis of Profession Tax;Package Scheme of Incentives;Data Management & feedback analysis;Cyber Forensic;360 Degree analysis;Business Intelligence & Data Warehouse
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Anti- Evasion Measures: Best Practices in Maharashtra
E-704 (…CONTD.) Electronic Audit Reports from FY 2008-09
Facility to upload e-report available 24*7;
2 lakh dealers liable to file report out of 6.61 lakh registered dealers, others to file annexure
Details of sales and purchases which become available help cross checking electronically;
Dealer wise Input Tax Credit claim is matched with the tax liability disclosed by the seller;
Detection of hawala operators easier;
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Anti- Evasion Measures: Best Practices in Maharashtra
E-704 (…CONTD.) Mandatory to the dealers:
Having turnover more than 60 lakhs;
Liquor dealers;
Dealers enjoying benefits under Package Scheme of Incentives
Audit Report by Chartered Accountant or Cost Accountant;
Auditor to advise dealer on his findings of audit on the tax liability of the dealer
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Anti- Evasion Measures: Best Practices in Maharashtra
E-ANNEXURE For dealers not filing e-704 VAT Audit report; This way entire data of sales and purchases carried out
by every dealer is captured electronically; Tax Deducted at Source (TDS) Certificates received
and issued by the dealer Declarations under Central Sales Tax Act received and
yet to be received by the dealer Declarations for sale in the course of export (Form H)
received by the dealer Customer wise sales Supplier wise purchases
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Anti- Evasion Measures: Best Practices in Maharashtra
TINXSYS TINXSYS (Tax Information Exchange System): in
coordination with other States to plug revenue leakages in inter state transactions of sales, purchases or stock / consignment transfers
Exchange of data of declarations issued under CST Act to dealers for claiming reduced rate of CST
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Anti- Evasion Measures: Best Practices in Maharashtra
VIGILANCE BRANCH Under the direct control of Chief Vigilance
Officer of the rank of Special Inspector General of police (IGP);
Watchdog on complaints against employees; Control over Investigation Proceedings on real
time basis.
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