Performance evaluation of sales tax (VAT) audit: a case of Maharashtra

Abstract

This research has been carried out in the background of new tax policy of VAT adopted by Maharashtra Sales Tax Department in 2005. In VAT system, earlier assessment function is replaced by audit. Audits are conducted in selective cases only over earlier 100% assessments. The concept of field audit is new to department as well as dealers. Audit being field activity has clearly new dimensions over earlier assessment. The department does not have adequate experience of field audit and hence facing certain problems relating to audit. This paper attempts to evaluate the performance of present audit system in terms of costs, efficiency and effectiveness, for Maharashtra State. The paper also examines the need for any change in existing strategy and makes suggestions for improvement. For the Study, the primary data of perceptions of stakeholders i.e. audit officers, dealers and tax practitioners; was collected through questionnaires. Secondary data included data of audits completed during 2009-10 from Mumbai, Pune and Nasik. The convenient sampling was used collection of primary data whereas the stratified random sampling was used for collection of secondary data. Audit may be termed productive, if it creates extra demand of tax. However, the study reveals that about half of cases from business audit and 1/3rd from LTU are unproductive, not creating any significant extra demand but costing to department. Audit productivity is questionable in view of its fate in post-audit actions (appeal, rectification/cancellation) and also in view of reasons of demand. Major demand of audit (57%) is related to CST demand for want of declarations which doesn t require field audit for its enforcement. The compliance and opportunity cost of audit to dealers is also relatively high. The department has audited only 0.8% dealers during the year. Comparison with U.S. States suggests that this coverage is not adequate to achieve audit objectives i.e. for creating deterrence to tax evaders and also for recovering tax gap, particularly in the backdrop of earlier 100% assessments. The time taken for completion of audit is also relatively high i.e. in business audit-7months and LTU audits- 6 months. It is also seen that selection criteria are not yet developed scientifically and hence not performing well. It is seen that certain resource constraints as well as inappropriate audit procedures have made the audit system inefficient and ineffective. The inadequate manpower has come up as the top most important constraint followed by additional work (non-audit)allotted to audit officers. Among the other problems in expertise of auditors of field audit, inadequate support of department s automation system, comprehensive method of audit, ineffective selection criteria and complex audit procedures are the major hurdles of audit system. The paper concludes that present audit system is not efficient and effective in achieving its objectives. It has certain inefficiencies which need to be dealt-with. The recommendations include reallocation of manpower of organization such that 30%would be allotted to audit function, non assignment of other work to auditors, adoption of policy of mixed audits i.e. comprehensive as well as issue based audits, simplification of audit procedure incorporating statistical sampling methods, designing proper mix of selection criteria respecting ground realities of noncompliance, specialized training to auditors/staff etc. The paper finally projects the likely outcome of new policies suggested.