Technical Guide On Tamil Nadu VAT Audit

Technical Guide on
Tamil Nadu VAT Audit
DISCLAIMER:
The views expressed in this Guide are those of author(s). The Institute of
Chartered Accountants of India may not necessarily subscribe to the views
expressed by the author(s).
Professional Development Committee

The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
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Foreword
It is always one of the cardinal principles of economic administration that
goods and services should be made available to the general public at
affordable prices. Through centuries, nations have experimented with various
types of tax systems with the twin objectives of deriving revenue as well as to
keep in check the rise in prices of commodities.
After several attempts to tackle with the inflationary effect on prices, a
system of Value Added Tax was evolved. VAT is a tax, based on sound
economic rationale and, if implemented effectively, will result in the reduction
in prices of goods and services. It is a transparent system of tax since
meticulous documentation is a sine quo non for its proper implementation.
From the 1st of April 2005 onwards, a system of State-Level VAT has been
introduced in a majority of the States of India. The most important ingredient
for the success of State-Level VAT is widespread education among the
traders, general public, Government authorities and professionals. The ICAI
has published “State-Level VAT in India – A Study” which explains the
general principles for State-Level VAT.
In order to assist the members to understand the provisions of individual
State-Level VAT legislations with particular reference to audit requirements,
the Professional Development Committee has taken this initiative to bring a
Technical Guide on Tamil Nadu VAT Audit.
Certainly, this Guide on Tamil Nadu VAT Audit will help the members to
understand the intricacies of the provisions of Tamil Nadu VAT Act and its
audit implications.
I compliment CA. Charanjot Singh Nanda, Chairman, Professional
Development Committee and his dynamic team for taking this excellent
initiative which will assist the members in discharging their responsibilities
under Tamil Nadu VAT Act.
Date: 6th February, 2013 CA. Jaydeep Narendra Shah

Place: New Delhi President, ICAI
Preface
VAT is revolutionary in the realm of taxation of commodity and services. It is
an internationally recognized multipoint tax system providing for levy of tax
on sale of goods as well as on rendering of services on the value addition
occurring at every stage of sale or transfer. The principle of VAT
contemplates levy of tax at the point of consumption and realization of full tax
on the final sale value from the consumer.
This guide is an attempt to explain the applicable Value Added Tax Audit
Guidelines under the Tamil Nadu Value Added Tax Laws and is written with a
view to create awareness among the users and send the message of
usefulness of VAT audit to State administration.
An attempt has been made in this technical guide to cover areas that are
related to the basic principles, policies and special issues pertaining to
conduct of a Value Added Tax Audit. However, it does not deal with legal
interpretations and rulings. This guide is intended to give a general guidance
to chartered accountants to address various issues that may arise in the
course of audit. Of course, various individual’s practical issues have to be
solved by exercising professional judgement.
Realizing the importance of giving guidance to the members in discharging
their responsibilities relating to State-Level VAT, I express my sincere
gratitude to CA. Rajendra Kumar P., CA. J. Murali, CA. J. Purushothaman,
CA. L. Seshadrinathan, CA. N. R. Govindarajan, CA. Netal Munoth, CA. P.
Ravindranath Naidu, CA. P. Sankaran, CA. Prasanna Krishnan, CA.
Uttamchand Jain, CA. V. Gayathri, CA. V. Swaminathan, CA. V. V. Sampath
Kumar for their sincere efforts in drafting the entire technical guide. I am also
happy to acknowledge the active support rendered by CA. Jaydeep Narendra
Shah, President, ICAI and CA. Subodh Kumar Agrawal, Vice- President, ICAI
for their unstinted support and encouragement to the activities of the PDC.
I am also thankful to CA. Naveen N. D. Gupta, Vice-Chairman and CA.
Namrata Khandelwal, Secretary and CA. Akshika Dhingra, Executive Officer
of Professional Development Committee and other members of the
Committee for their active support.
I am sure that this guide will give enough technical guidance to Chartered
Accountants to have an understanding of the Tamil Nadu State VAT laws.
Date: 6th February, 2013 CA. Charanjot Singh Nanda

Place: New Delhi Chairman, Professional Development Committee
vi
Contents
Foreword ..................................................................................................... iii
Preface ......................................................................................................... v
Chapter 1 Introduction ............................................................................... 1
Chapter 2 VAT Auditor .............................................................................. 5
Chapter 3 Approach to VAT Audit ............................................................ 14
Chapter 4 Accounting Standards ............................................................. 22
Chapter 5 Code of Ethics and Other Matters ........................................... 29
Chapter 6 Relevant Statutory Provisions ................................................. 41
Chapter 7 Frequently Asked Questions on Audit under Tamil
Nadu VAT Act, 2006 (TNVAT Act, 2006) ................................. 90
Chapter 1
Introduction
Value Added Tax (VAT)
Value Added Tax (VAT) that exists in many countries is a multi-point tax levy
on goods as against the sales tax which was generally taxed at single point.
In India, the VAT on goods is a State subject. The entry 54 of the State list of
the Constitution of India mentions about the States’ power to levy taxes on
the sale or purchase of goods. Under the VAT system, the concept of
exemption on second sales is not available. VAT is collected on the value
addition to the goods made at various stages involved in the supply chain
distribution of goods till it reaches the end consumer. The selling dealer gets
credit for the VAT paid on the purchases effected by him. The effect of
offsetting VAT on purchases against VAT on sales is to impose the tax on
the added value at each stage of production – hence Value-Added Tax. For
the final consumer, not being VAT-registered, VAT simply forms part of the
purchase price.
1. Objectives of VAT
Some of the objectives of the VAT on sales of goods are:
• Minimizing the cascading effect of sales tax,
• Widening of tax net,
• Self policing system and minimization of tax evasion,
• Simplification of procedures,
• Optimizing the tax cost, etc.
2. Audit under VAT Legislation

2.1 Tamil Nadu Value Added Tax Act (TNVAT Act),
2006
By Act 18 of 2012, Section 63-A was inserted vide notification in Gazette 145
dated 1st June 2012 which was made effective from 30th August 2012, vide
GO.Ms.No.118 dated 30th August 2012. According to Section 63-A(1), every
registered dealer whose total turnover including zero-rate sale and sale in
Technical Guide on Tamil Nadu VAT Audit
the course of inter-State trade or commerce as specified in Section 3 of the

Central Sales Tax Act, 1956 (Central Act 74 of 1956) in a year, exceeds one
crore rupees, shall get his accounts in respect of that year, audited by an
Accountant and submit a report of such audit in the prescribed Form, duly
signed and verified by the Accountant, to the Assessing authority, within
such period as may be prescribed.
Explanation—For the purpose of this section “Accountant” means, a
chartered accountant as defined in the Chartered Accountants Act, 1949
(Central Act 38 of 1949) or a cost accountant as defined in the Cost
and Works Accountants Act, 1959 (Central Act 23 of 1959).
The above requirement of audit shall not apply to the departments of Central
and State Governments, local authorities, the railway administration as
defined under the Railways Act, 1989 (Central Act 24 of 1989), the Tamil
Nadu State Road Transport Corporations and similar such registered
dealers, as may be notified by the Government.
Other legal provisions relating to VAT Audit/Inspection by Commercial Taxes
Departmental Officials are covered in Section 64(4) and Section 65 of
TNVAT Act, 2006.
The Departmental Audit under Section 64(4) by VAT officials of the
Department is a special provision which is with prior intimation to dealer
concerned. The surprise inspection by VAT audit officials is as per the
provisions of Section 65.
2.2 Scope of Audit
The comparative scope and other related aspects of audit by chartered
accountants and by the commercial taxes officials is tabulated below:
2
Introduction
Particulars Audit by Departmental Surprise Inspection

Chartered Audit by Department
Accountant
Section Section 63A Section 64(4) Section 65
Time Within seven Any time Any time
months from the
end of financial
year
Period Assessment year Without reference Without reference to
to Assessment Assessment Year
Year
Audit by Chartered Departmental Enforcement Wing
Accountant in Officials Officials
full time Practice
Outcome Report in Form Notice will be Proposals are
WW with issued by formulated by
annexures and Assessing Officer Enforcement Wing.
enclosures. based on the audit
findings.
Place At dealers’ At registered place At any place of
place(s)/auditors’ of business where transactions where
place, etc. accounts and stock suppression is
are kept. suspected.
3. Audit Report
Further, Rule 16A has also been inserted to TNVAT Rules, 2007 w.e.f. 30th
August, 2012 which states as follows:
Procedure for filing Audit Report under Rule 16A:
(1) Every registered dealer is liable to get his accounts audited as per
sub-section (1) of Section 63A and shall furnish the audit report in
Form-WW within seven months from the end of the year in duplicate.
(2) The notice of penalty will be issued in Form-RR.
(The specimen Form WW and Form RR is given in the CD along with the
Technical Guide)
3
Form WW prescribes annexures containing certain prescribed particulars and

a descriptive report of the findings on non compliance, short comings and
deficiencies in the returns filed by the dealer along with the copies of trading,
profit and loss account and balance sheet.
The trading, profit & loss account and balance sheet referred above pertains
to the activities of the dealer within Tamil Nadu only and if separate accounts
are maintained in respect of operations outside Tamil Nadu, it may be
convenient to prepare the statements and submit the same by the dealer.
Where the Principal is a non resident of the State of Tamil Nadu, the
transactions of Agent will be reported in the returns filed by the Agent in the
State of Tamil Nadu. The VAT Auditor shall verify the purchases/sales as
disclosed in the returns filed, with relevant records and documents.
4. Penalty
As per Section 63-A(2), if such registered dealer fails to get his accounts
audited and submit a report of such audit within the prescribed period, as
required in sub-section (1), the Assessing authority may, after giving a
reasonable opportunity of being heard, direct such registered dealer to pay
by way of penalty of sum of rupees ten thousand, in addition to any tax
payable, in respect of the said period.
The audit provisions stipulates about the levy of not only the penalty but also
the recovery of taxes. The Assessing authority has got the powers under the
Act to compel the dealer to submit the audit report (vide Section 81).
4
Chapter 2
VAT Auditor
1. Introduction
The VAT audit has been introduced in TNVAT Act, 2006 by the Tamil Nadu
Value Added Tax (Third Amendment) Act, 2012 and the reasons for
introduction of VAT audit are given as follows:
1.1 Statement of Objects and Reasons

Extracts from the G.O. Ms. No. 119 dated 30.08.2012; “At present there is
no provision in the TNVAT Act, 2006 (Tamil Nadu Act 32 of 2006) for
auditing the accounts of a registered dealer by a chartered accountant
or a cost accountant, if the total turnover of the said dealer including zero-
rate sale and sale in the course of inter-state trade or commerce exceeds
one crore rupees in a year. In order to ensure the correctness of the
accounts of the registered dealers, the Government have decided to amend
the TNVAT Act, 2006 (Tamil Nadu Act 32 of 2006) suitably”.
1.2 Books of Accounts and VAT Audit

Section 64 of TNVAT Act, 2006, deals with the maintenance of books of
accounts, documents and records.
New Section 63-A relates to audit. As per the said Section, accounts are to
be audited in certain cases as explained below.
(1) Every registered dealer whose total turnover including zero-rate sale
and sale in the course of inter-State trade or commerce as specified in
section 3 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) in a
year, exceeds one crore rupees, shall get his accounts in respect of that
year, audited by an Accountant and submit a report of such audit in the
prescribed form, duly signed and verified by the Accountant, to the Assessing
authority, within such period as may be prescribed.
Explanation.—For the purpose of this section “Accountant” means, a
chartered accountant as defined in the Chartered Accountants Act, 1949
(Central Act 38 of 1949) or a cost accountant as defined in the Cost
and Works Accountants Act, 1959 (Central Act 23 of 1959).
(2) If such registered dealer fails to get his accounts audited and submit
a report of such audit within the prescribed period, as required in sub-section
(1), the Assessing authority may, after giving a reasonable opportunity of
being heard, direct such registered dealer to pay by way of penalty of sum of
rupees ten thousand, in addition to any tax payable, in respect of the said
period:
Provided that, this section shall not apply to the departments of Central and
State Governments, local authorities, the railway administration as defined
under the Railways Act, 1989 (Central Act 24 of 1989), the Tamil Nadu State
Road Transport Corporations and similar such registered dealers, as may be
notified by the Government.
1.3 Audit Report

Rule 16A has been inserted to TNVAT Rules, 2007 wef 30th August, 2012
and it states as follows:
Procedure for filing Audit Report under Rule 16A:
(1) Every registered dealer is liable to get his accounts audited as per
sub-section (1) of Section 63A and shall furnish the audit report in
Form-WW within seven months from the end of the year in duplicate.
(2) The notice of penalty will be issued in Form-RR.
(The specimen Form WW and Form RR is given in the CD along with the
Technical Guide)
2. Chartered Accountant
In terms of Section 2(1)(b) of The Chartered Accountants Act, 1949(No. 38 of
1949) [As amended by The Chartered Accountants (Amendment) Act, 2006
(No. 9 of 2006)], a chartered accountant means a person who is a member of
the Institute.
2.1 Members in Practice

In terms of Section 2(2) of The Chartered Accountants Act, 1949 (No.38 of
(No. 9 of 2006)] a chartered accountant in practice means, a member of the
Institute shall be deemed to be in practice, when individually or in partnership
with chartered accountants in practice, he, in consideration of remuneration
received or to be received:
6
VAT Auditor
(i) engages himself in the practice of accountancy; or

(ii) offers to perform or performs services involving the auditing or
verification of financial transactions, books, accounts or records, or
the preparation, verification or certification of financial accounting
and related statements or holds himself out to the public as an
accountant; or
(iii) renders professional services or assistance in or about matters of
principle or detail relating to accounting procedure or the recording,
presentation or certification of financial facts or data;
(iv) renders such other services as, in the opinion of the Council, are or
may be rendered by a chartered accountant in practice; and the
words be in practice with their grammatical variations and
cognate expressions shall be construed accordingly.
2.2 Certificate of Practice

In terms of Section 6 of The Chartered Accountants Act, 1949 (No. 38 of
(No. 9 of 2006)]:
(1) No member of the Institute shall be entitled to practice whether in
India or elsewhere unless he has obtained from the Council a certificate of
practice;
Provided that nothing contained in this sub-section shall apply to any person
who, immediately before the commencement of this Act, has been in practice
as a registered accountant or a holder of a restricted certificate until one
month has elapsed from the date of the first meeting of the Council.
Section 63-A of the TNVAT Act, 2006 provides that in certain circumstances,
the accounts are to be audited by a chartered accountant. In terms of the
above definition and as per the provisions of The Chartered Accountants Act,
1949, no member can practice without holding a certificate of practice.
Therefore, only a chartered accountant holding certificate of practice can
audit accounts.
Similarly, Section 2(2) of The Chartered Accountants Act, 1949 provides that
a member of the Institute is also deemed to be in practice when he provides
services in partnership with chartered accountant(s). In view of this provision,
the audit can also be conducted by a firm of chartered accountants. In such a
case, it would be necessary to state the name of the partner who has signed
an audit report on behalf of the firm. A member of the Institute can practice
7
either in his individual name or in the trade name e.g. “ABC & Co.''. The
member signing the report as a partner of the firm or in his individual
capacity or in trade name should also give his membership number as well
as firm registration number below his name.
Section 63-A of the TNVAT Act, 2006 does not stipulate that the statutory
auditor appointed under the Companies Act, 1956 or other similar statutes
should only perform the audit. Hence, the audit can be conducted either by
the statutory auditor or by any other chartered accountant who is in full time
practice or by a firm of chartered accountants.
2.3 Members in Part Time Practice

The Council at its 242nd Meeting has passed a Resolution, effective from 1st
April 2005, that any member in part time practice (holding certificate of
practice and also engaging himself in other business or occupation) is not
entitled to perform attest function. It was also clarified in this regard that
certain circumstances like engagement in part time lecturer ship, editorship
of magazine, etc. are not considered as part time practice, subject to the
condition mentioned in the resolution.
The audit under the TNVAT Act, 2006 being an attest function, the resolution
of the Council is therefore, also applicable for such audit. Therefore, any
member in part time practice cannot perform an audit under the TNVAT Act,
2006.
A member in part time practice can be a partner in a firm of chartered
accountants, but if the audit under the TNVAT Act, 2006 is to be conducted
by the firm, then the audit has to be conducted by the member who is in full
time practice only. In other words, a partner holding a part time certificate of
practice cannot sign the audit report/certificate under the TNVAT Act, 2006.
3. Joint Auditors and VAT Audit

A dealer can appoint two or more chartered accountants as joint auditors
under the TNVAT Act, 2006 in which case the audit report will have to be
signed by all the joint auditors. In case of disagreement, they can give their
report separately. In this regard, attention is invited to SA 299 -
Responsibility of the Joint Auditors. The responsibility of joint auditors under
the TNVAT Act, 2006 will be the same as in the case of other audits e.g.
audit under the Companies Act, 1956 or the Income- tax Act, 1961.
8
VAT Auditor
4. Branch VAT Auditors

It is also possible for a dealer to appoint separate auditor(s) under the
TNVAT Act, 2006 for conducting the audit in respect of any
branch/division/additional place of business, etc. and there could be separate
auditor(s) for principal place of business. In such a case, the branch
auditor(s) will have to submit report(s)/certificates to the management or, if
requested, to the auditor(s) appointed for conducting the audit for the
principal place of business and such reports will have to be considered and
dealt with appropriately by such auditor(s) while consolidating the report for
the business as a whole.
5. Relatives or Employees as VAT Auditor

The TNVAT Act, 2006 does not prohibit a relative or an employee of the
dealer being appointed as an auditor under Section 63-A. However, it is to be
noted that in the application of framework to specific situations, as per Para
290.148 given at page no. 57 of Code of Ethics, Eleventh Edition, January
2009, it has been stated that “No person who is an officer or employee of the
entity shall be qualified for appointment as auditor of that entity”.
It may also be noted that as per clause (4) of Part I of Second Schedule of
the Code of Ethics, a chartered accountant in practice shall be deemed to be
guilty of professional misconduct if he expresses his opinion on Financial
Statements of any business or enterprise in which he, his firm or partner in
his firm has substantial interest. This would cover any attest function under
any statutory enactments
Therefore, an employee of the dealer and also where the member has
substantial interest in a concern, cannot audit the accounts of the dealer
under Section 63-A of the TNVAT Act, 2006.
6. Consultant as VAT Auditor

Chartered Accountant/Firm of Chartered Accountants, appointed as tax
consultant/s of the dealer, can conduct audit or not under Section 63-A of the
TNVAT Act, 2006 depends upon the facts and circumstances of the scope
and terms of engagement. As long as the position of Consultant does not
compromise the independence of audit assignment, it may be undertaken.
In relation to audit under Companies Act, 1956, the Council has clarified that
the statutory auditor of a company cannot be its internal auditor. The same
principle may not apply in respect of VAT audit under the TNVAT Act, 2006.
9
7. A member of the Institute in practice shall not accept the

appointment as statutory auditor of Public Sector Undertaking(s)/Government
Company(ies)/Listed Company(ies) or any other Public Company(ies) having
turnover of Rs. 50 crores or more in an year where he accepts any other
work(s) or assignment(s) or service(s) with regard to the same
Undertaking(s)/Company(ies) on a remuneration which in total exceeds the
fee payable for carrying out the statutory audit of the same
Undertaking/Company.
Provided that, appointing authority(ies)/regulatory body(ies) specify(ies)
more stringent condition(s)/restriction(s), the same shall apply instead of the
conditions/restrictions specified under these Guidelines.
The above restrictions shall apply in respect of fees for other work(s) or
service(s) or assignment(s) payable to the statutory auditors and their
associate concern(s) put together.
For the above purpose,
(i) the term “other work(s)” or “service(s)” or “assignment(s)” shall
include Management Consultancy and all other professional services
permitted by the Council pursuant to Section 2(2)(iv) of the
Chartered Accountants Act, 1949 but shall not include:-
(a) audit under any other statute;
(b) certification work required to be done by the statutory
auditors; and
(c) any representation before an authority;
(ii) the term “associate concern” means any corporate body or
partnership firm which renders the Management Consultancy and all
other professional services permitted by the Council wherein the
proprietor and/or partner(s) of the statutory auditor firm and/or their
“relative(s)” is/are Director/s or partner/s and/or jointly or severally
hold “substantial interest” in the said corporate body or partnership;
(iii) the terms “relative” and “substantial interest” shall have the same
meaning as are assigned thereto under Appendix (9) to the
Chartered Accountants Regulations, 1988.
In regard to taking up other work(s) or service(s) or assignment(s) of the
undertaking/company referred to above, it shall be open to such associate
concern or corporate body to render such work(s) or service(s) or
assignment(s) so long as aggregate remuneration for such other work(s) or
10
VAT Auditor
service(s) or assignment(s) payable to the statutory auditor/s together with

fees payable to its associate concern(s) or corporate body(ies) do/does not
exceed the aggregate of fee payable for carrying out the statutory audit.
Therefore, an audit under Section 63-A of TNVAT Act, 2006 will be
considered as an audit under any other Statute for the purpose of this
notification and thus, the above restriction shall not apply in respect of audit
fees.
8. Appointment of an Auditor when he is

Indebted to a Concern
A member of the Institute in practice or a partner of a firm in practice or a
firm shall not accept appointment as auditor of a concern while indebted to
the concern or given any guarantee or provided any security. In connection
with the indebtedness of any third person to the concern, for limits fixed in
the respective statutes and in other cases the limit is fixed for amount
exceeding Rs. 10,000/-.
9. Audit Engagement
A dealer liable to get his accounts audited under the provisions of Section
63-A of the TNVAT Act, 2006 is required to appoint a Chartered
Accountant or a Firm of Chartered Accountants as VAT Auditor. No
procedure has been specified under Section 63-A or under any other
provisions of the TNVAT Act, 2006 or the Rules there under.
It is suggested that the following procedure shall be followed by an auditor
for appointment under Section 63-A of TNVAT Act, 2006:
(a) A letter of appointment is to be obtained from the registered dealer,
subject to VAT audit. The said letter is to be obtained shall be
signed by a person competent to appoint such VAT auditor. In case
of a Company or certain other legal entities, the appointment must
be made, following the procedures or policies of the entity. There
are no specific provisions in this regard, either under the TNVAT
Act, 2006 or under the Companies Act, 1956.
(b) When there is a principal auditor for carrying out the VAT audit of a
dealer and when there is any appointment of different auditors for
each of the branches/units of a dealer separately, it would be
advisable to incorporate the fact that the appointment is for a
11
particular branch or unit, and that the branch VAT audit report shall
be sent to the dealer/principal auditor.
(c) The letter of appointment must be in terms of SA 210 - Terms of
Audit Engagement, indicating the terms of the engagement, the
scope and the extent of the coverage. In case, joint auditors are
appointed by the dealer under the TNVAT Act, 2006 then the name
and address of such joint auditors must be specified in the letter of
appointment. The letter of appointment may stipulate the
fee/remuneration. The said letter of appointment must be duly
acknowledged by the VAT auditor and accordingly a letter of
acceptance of audit should be issued to the dealer.
(Suggested format of letter of appointment and acceptance is given in the
CD along with the Technical Guide).
10. Acceptance
(1) Before acceptance of VAT audit, the VAT auditor is expected to
ensure that he is eligible to conduct the audit. It may be noted that
under the TNVAT Act, 2006 there is no ceiling in respect of the
number of the audit assignments that an auditor can accept.
(2) It is recommended for the auditor accepting the VAT audit
assignment to communicate with the previous auditor who has
conducted the VAT audit in the prior year(s). While communicating it
would be advisable to find out whether there are any professional or
any other reasons as to why the auditor should not accept the
appointment. It may be noted that, it is not required for the VAT
auditor to communicate with the statutory auditor who has
conducted the audit of the dealers under any other law for time
being in force.
11. Audit Fees

There are no separate guidelines issued by the ICAI in respect of audit
fees for an audit under the TNVAT Act, 2006. The minimum
recommended scales of fees for professional services issued by the ICAI
from time to time may be adhered to (the said scale is given in the CD along
with the Technical Guide). Normally, VAT auditor is expected to charge his
audit fee based on the quantum of work, scope of the engagement,
personnel deployed, etc. However, it must be noted that the turnover of a
dealer, quantum of tax paid, refunds envisaged etc., cannot be a basis for
12
VAT Auditor
fee to be charged. Fees cannot be fixed, based on the percentage of trading

profits or any such method.
12. Removal and Filling up of Vacancy of VAT

Auditor
TNVAT Act, 2006 is silent on this issue. Generally, a dealer being the
appointing authority, may remove the VAT auditor for delay in submission of
reports; unreasonable delay in conducting the audit, etc.
However, a VAT auditor cannot be removed on the ground that he has given
an adverse report or on the possibility of qualifying the report. Reference can
also be made to ICAI pronouncements, if any, in this regard.
Where any such vacancy is created on account of removal, death,
resignation, etc. of a VAT auditor, the dealer being the appointing authority
can appoint another auditor under TNVAT Act, 2006.
13. Submission of the VAT Audit Report

A VAT auditor is required to submit the report to the dealer appointing him,
as prescribed under the TNVAT Act, 2006.
13
Chapter 3
Approach to VAT Audit
There are no prescribed or specified approaches for conduct of an audit
under the TNVAT Act, 2006. However, certain similarities may be drawn
between a VAT Audit, Tax Audit under Section 44AB of the Income Tax Act,
1961 and audit under Companies Act, 1956. While a VAT auditor is not
required to express his opinion on true and fair view of the financial
statements, he is required to certify the correctness and completeness as
prescribed by the TNVAT Act, 2006.
In this background, certain time tested methods of conducting an audit have
evolved suggested guidelines, which among others are as follows:
(1) Agreeing the terms of Audit Engagement – SA 210
(2) Obtaining prior knowledge of the business and comparing them with
similar businesses; SA 315
(3) Discussion with the audit team on how to proceed with the audit; SA
315, SA 320 and SA 330
(4) Study and evaluation of systems and internal control of the business
entity; SA 315
(5) Assessment of the audit risk and deployment of personnel,
preparation of an audit plan/audit program; SA 315, SA 320 and SA
330
(6) Risk appetite of the entity; SA 315
(7) Conducting the audit in accordance with an audit plan and program,
review meeting with the audit team; SA 500
(8) Drawing conclusions on the basis of audit evidence obtained
in the course of conducting the audit and a discussion with the
client on the observations and findings; SA 500
(9) Obtaining the various management certificates; SA 580
(10) Reporting the observations in the prescribed format; Form WW
(11) Compiling audit working papers and preparing a master file of the
clients/or permanent master file; SA 230
(12) Filing of documents either in permanent file or working papers file;

SA 330
While adhering to each of the above said stages of audit, an auditor should
bear in mind the scope of his engagement, objectives of the audit as well as
the requirements of the Statute. The audit tools to be used for conducting the
VAT audit depend upon the environment in which the audit is being
conducted. In an IT (Information Technology) record keeping environment,
computerized audit approach using various information technology audit
techniques and tools would be appropriate. The guidelines stated above are
briefly explained hereunder:
1. Agreeing to the Terms of Engagement

The auditor shall agree the terms of audit engagement with the management
or those charged with the governance, as appropriate. The agreed terms
shall be recorded in an audit engagement letter or any other suitable written
format. It shall contain the following:
(i) The objective and scope of audit of the financial statements.
(ii) The responsibility of the auditor and that of the management.
(iii) Identification of applicable financial reporting framework (if any).
2. Knowledge of the Business

An auditor is expected to identify and assess risks of material misstatements
in financial statements and this is done through an understanding of the
business of the entity, its environment and its internal control. The knowledge
of the business must be used by the auditor in assessing the inherent control
risks in determining the nature, timing and extent of audit procedures/
verification. He must be aware of the trade practices. It is possible that
certain types of trades have very localized or seasonal business practices.
3. Discussion with the Audit Team

Before the commencement of the audit, the VAT auditor should have a pre-
audit meeting with his audit team. In this meeting, the auditor should brief the
team on matters such as general background of the dealer, nature of
business, history of the dealer, industry specific points, key financial
parameters and accounting policies, organisation of the business,
maintenance of accounts, key-products dealt by the dealer, assessment
history, litigation, etc. He should also clearly spell out the scope of work,
15
extent and manner of checking the various transactions. The auditor would
do well, if he has the basic audit plan, audit program and the various audit
checklists at this stage itself which could be suitably modified later on during
the course of the audit, if required.
4. Systems and Internal Control

The systems, processes and controls put in place by the business entity will
largely define the scope of the auditor in conducting an audit. While
conducting a VAT audit, a study of the internal control systems would be an
important step for assessing the risks of the audit as well as for planning the
audit. A note on the software used by the client and the specific merits and
demerits of the software will help the audit team(s).
5. Assessment of Audit Risk and Deployment

of Personnel
An audit risk can be inherently present or surface in many forms in a
business entity. In many cases, it would be camouflaged and in such
circumstances an audit risk can be combated or mitigated by an auditor in
many ways. Some of the proven methods would be to apply audit
techniques, audit tools, professional expertise, and comparative analysis with
similar businesses or evolving techniques, which suit the business. It would
also be worthwhile for an auditor to seek expert opinions in certain
circumstances to mitigate audit risks. The extent of check by the auditor
would depend on the nature of audit risk and the expertise of the
personnel deployed by the business.
6. Audit Plan and Audit Program

Audit program is a written document setting forth the procedures to
implement the audit plan. Planning encompasses developing a plan for the
conduct of the audit and developing an audit program showing the nature,
timing, and extent of audit procedures in accordance with the scope of the
audit. Planning is a continuous process and changes in case of unexpected
results during audit, would require a relook of the audit program. Along with
the procedures, the program must also contain the audit objective for each
area of the business and should have sufficient details to serve as a set of
instructions to the audit assistants involved in the audit and as a means to
control proper execution of audit work. For this, a detailed checklist should
be devised which clearly states the various details to be checked, manner of
16
checking and the extent of checking. This ensures that important issues are
not overlooked during delegation of work.
7. Risk Appetite of an Entity

Risk appetite of an entity cannot be defined in a clear-cut manner. Normally
risk appetite would mean the extent of chance that an entity would be willing
to take. For e.g. claiming an exemption or classifying a product at a lower
rate of tax, based on certain interpretations or judicial pronouncements. In a
situation, where the risk appetite of a business entity is extremely high, it
would be worthwhile for an auditor to place reliance on external expertise
and suitably comment on the same in the report. An auditor can decide upon
the extent of check, depending upon the risk appetite of the entity.
8. Conduct of an Audit
The success of an audit primarily depends upon, the quality of the audit, the
verification of the records, transactions in accordance with the audit plan and
program. This would help collect audit evidence to form an opinion or draw
conclusion on the transactions upon which the auditor is called upon to
comment. The conduct of the audit must not be mechanical as per the plan
and program, but it must be done with an open mind. It would be of great
advantage if the compliance testing or the substantive verification is carried
out to complete the VAT audit as per the provisions of the TNVAT Act, 2006
and the Rules framed there under. The knowledge about the judicial
pronouncements, Government orders, circulars, notifications, etc. would be
relevant. The conduct of an audit, as in the case of any other audit
assignment, is substantially dependent upon the judgment of the auditor.
Largely an audit must be conducted keeping in mind the concept of
materiality, knowledge of local laws, general auditing and accounting
practices, the accounting and auditing standards, guidance notes, etc.,
issued by the ICAI.
Responsibilities of Joint Auditors
In case of joint audits, the roles and responsibilities of each of the joint
auditors should be clearly defined. Some of the points, based on SA 299,
which have to be kept in mind for this purpose are:
The division of work among the joint auditors should be based on identifiable
units. Where owing to the nature of the business of the dealer, division is not
possible as above, the division can be done based on items of assets and
17
liabilities or income or expenditure or with reference to period of time. The

scope and division of work should be documented and communicated to the
dealer.
During the audit, if the VAT auditor comes across any matter which are
relevant to the areas covered by the other joint auditors and deserve their
attention, the same should be communicated in writing to them. This should
be done before the final audit report is submitted.
The joint auditor is responsible for the work allocated to him except in the
following cases where the responsibility of the joint auditors is joint and
several:
• In respect of work not specifically allotted to any one auditor and
jointly carried out by all the auditors.
• In respect of the decisions taken by all the auditors regarding the
nature, timing and extent of the audit procedures to be adopted by
any of the joint auditors.
However, this responsibility is restricted only to the extent of the
appropriateness of the decision regarding the timing, nature and extent of the
audit procedures. The responsibility concerning the actual execution of the
audit procedures is a separate and specific responsibility of the respective
joint auditor.
It is the responsibility of each of the joint auditors to determine the nature,
timing and extent of audit procedures for his area of work, manner of making
enquiries, etc. For e.g., the extent of test check for a given area of VAT audit,
has to be determined by the concerned joint auditor after the evaluation of
the accounting policies and the internal control system concerning his area of
work.
In case of a dealer having several branches, the joint auditor concerned shall
be responsible for the review of the branch auditor’s report, concerning his
area of work and not pertaining to the other joint auditor. In case, one or
more branch auditor’s report is not concerning any of the joint auditor’s area
of work, then for such branch audit reports, the joint auditors may mutually
decide regarding the division of work.
It is the responsibility of the concerned joint auditors to obtain and evaluate
the information, explanations and documents from the dealer pertaining to
his area of work.
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Each of the joint auditors is entitled to assume that the other joint auditors
have carried out their part of the audit work in accordance with the
generally accepted audit procedures including matters pertaining to
applicable statutory disclosures in the VAT audit report and other legal and
professional requirements. It is not necessary for the joint auditor to review
the work performed by the other joint auditor.
Each of the joint auditors will issue a final VAT audit report. However, where
the joint auditor is in disagreement with regard to any of the matters covered
in the VAT audit report, each of them should express his own opinion through
separate report. The joint auditor is not bound by the views of the majority of
the joint auditors regarding matters to be covered in such audit report.
9. Periodical Meeting with the Audit Team

It is advised to have regular and periodical review meeting with the Audit
Team. A preview meet, will help in removing the bottlenecks and the hurdles
rather than making the whole audit procedure redundant.
10. Reporting
An auditor has to form an opinion and draw conclusions on the basis of the
audit evidence and decide upon the issues, which are required to be reported
and commented upon which has the bearing on the TNVAT law and
procedure to be adhered by the dealer. In forming such an opinion, the
auditor should be diligent to ensure that no material misstatement creeps into
the report and also no material matters have been left out from reporting. It
would be a good practice to report on matters on which an auditor while
conducting an audit under the TNVAT law has placed reliance upon. Before
the audit is finalised, a meeting with the client is required discussing with him
the audit observations and qualifications, if any. Many of the observations
which might look to be major issues to be qualified can be clarified with the
client before reporting.
11. Management Representation Certificates

It is advised to obtain all the relevant management representation certificates
from the client before the VAT Audit Report is signed. (Format of the same is
given in the CD along with the Technical Guide).
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12. Audit Report

The auditor has to submit the findings of the VAT audit in Form WW. The
report has to be dated & signed and should be accompanied by the relevant
annexures. Since, Form WW does not provide for any comments,
observations or qualifications, the auditor could carry out the audit and
additional notes could be attached to the Form WW.
13. Audit Working Papers File

Once the audit is completed, auditor must ensure that all working papers are
segregated and filed in the respective files of the client. It is also very
important to ensure the audit working file (both master file and current file) is
updated and the filing is done systematically according to the different areas
covered in the audit. This will ensure compliance with the professional
practice guidelines including peer review requirements.
14. Master File

Every dealer’s documents should be bifurcated into permanent file and the
working papers file. Generally, the following documents should be included
in the permanent file:
(1) Name, address and contact details of the dealer;
(2) Brief profile of the dealer, nature of business and locations of
branches/godowns, etc., if any along with the details of branch
management. The addition/deletion, if any, in such locations or any
change in the nature of the business, etc. during the year;
(3) A list of products being dealt with, the various notifications
and clarifications applicable, copies of important judgments and
clarification, if any, with reference to the goods dealt with by the
dealer;
(4) Copies of the registration certificates issued under the TNVAT Act,
2006 and under the Central Sales Tax Act, 1956 (CST Act) and
other allied laws;
(5) Copy of TNVAT Audit Report, if any, relating to previous year;
(6) Copies of the constitution of the dealer, like Memorandum, Articles
of Association, Partnership Deed, Addendum to deeds, etc; the list
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of names of Directors, Partners, etc. of the dealer during the year

and changes, if any;
(7) Copies of the application made for Composition Scheme, Special
Accounting Scheme, Partial Rebating Application, etc;
(8) A list of visits by the various department officials, notices received
and replies thereof, pending litigations before various authorities and
other important issues unresolved, if any;
(9) Copies of other relevant statutory forms;
(10) Copies of financial statements and other audit reports;
(11) Copies of intimations to TNVAT authorities about addition/deletion of
any products deal with, change in address, inclusion of
branch/godown, etc.
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Chapter 4
Accounting Standards
1. Introduction
With a view to maintain uniformity in the preparation and presentation of the
financial statements and facilitate inter firm comparison of various entities,
the ICAI has issued various Accounting Standards. These standards are
applied while issuing General Purpose Financial Statements to the public by
commercial and business enterprises as specified by the ICAI and which are
subject to attestation by the members of the Institute. The term General
Purpose Financial Statements includes Balance Sheet, Profit and Loss
Account, Cash Flow Statements along with the Explanatory Notes there on.
Various stakeholders such as investors, Government, financial institutions
and the public at large use these statements. In addition, the ICAI has also
issued various clarifications and guidance notes on accounting and auditing
standards.
2. Applicability of Accounting Standards

The Companies Act, 1956 requires that the financial statements should give
a true and fair view of the financial position of the entities which are subject
to audit. This view is implicit even in the absence of such a statutory
requirement. What constitutes ‘true and fair view’ has not been defined either
under the Companies Act, 1956 or any other statute. The accounting
standards including clarifications and guidance notes which describes the
accounting principles and the methods of applying these principles in
preparing the financial statements so that they give a true and fair view. It is
worth noting that Section 211(3A) of the Companies Act, 1956 provides that
every profit and loss account and balance sheet should comply with
accounting standards. Section 211(3B) of the Companies Act, 1956 provides
that where the profit and loss account and the balance sheet do not comply
with any accounting standards, such a fact needs to be disclosed along with
reasons for non-compliance and the effect of the same on the financial
statements.
Sub section (3C) of Section 211 of the Companies Act, 1956 further provides
that the expression “accounting standards” means the standards of
accounting recommended by the ICAI as may be prescribed by the Central
Government in consultation with the National Advisory Committee on

Accounting Standards established under sub section (1) of Section 210A.
Further, under Section 227(3)(d) of the Companies Act, 1956, the auditor has
to state in his audit report whether the profit and loss account and the
balance sheet comply with the accounting standards referred under Section
211(3C).
In this regard, the Central Government has notified the Companies
(Accounting Standards) Rules, 2006 (‘hereinafter referred to as ‘rules’) for all
accounting periods commencing on or after 7th December, 2006 vide
Notification G.S.R. 739(E) dated 07.12.2006. The accounting standards as
notified by the Central Government are a virtual reproduction of accounting
standards issued by the ICAI except for a few changes. Thus, for all
accounting periods commencing on or after the above date, it is the Central
Government notified accounting standards that are mandatory.
As per the rules, every company and its auditor shall comply with the
accounting standards as per the annexure to the said rules. However, there
are some relaxation and exemptions prescribed for Small and Medium Sized
Companies (SMC) from compliance requirements under some accounting
standards. Further, there are other compliance and disclosure requirements
applicable for all companies including SMC under the rules. The term SMC
has been defined as:
Definition of SMC
“Small and Medium Sized Company” (SMC) means, a company –
(i) whose equity or debt securities are not listed or are not in the
process of listing on any stock exchange, whether in India or outside
India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees
fifty crore in the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in
excess of rupees ten crore at any time during the immediately
preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is
not a small and medium-sized company.
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Explanation: A company shall qualify as a Small and Medium Sized

Company, if the conditions mentioned therein are satisfied as at the end of
the relevant accounting period.
It is to be noted that, in the case of non-compliance by entities such as
partnership firms, proprietorships, etc., the ICAI has directed its members to
qualify their audit reports in case the accounting standards issued by it have
not been followed.
3. Harmonised Criteria for Classification of

Entities
Following is the criteria for classification of non-corporate entities as decided
by the Institute of Chartered Accountants of India.
A. Level I Entities
Non-corporate entities which fall in any one or more of the following
categories, at the end of the relevant accounting period, are classified as
Level I entities:
i) Entities whose equity or debt securities are listed or are in the
process of listing on any stock exchange, whether in India or outside
India.
ii) Banks (including co-operative banks), financial institutions or entities
carrying on insurance business.
iii) All commercial, industrial and business reporting entities, whose
turnover (excluding other income) exceeds rupees fifty crore in the
immediately preceding accounting year.
iv) All commercial, industrial and business reporting entities having
borrowings (including public deposits) in excess of rupees ten crore
at any time during the immediately preceding accounting year.
v) Holding and subsidiary entities of any one of the above.
B. Level II Entities (SMEs)
Non-corporate entities which are not Level I entities but fall in any one or
more of the following categories are classified as Level II entities:
i) All commercial, industrial and business reporting entities, whose
turnover (excluding other income) exceeds rupees forty lakhs but
24
does not exceed rupees fifty crore in the immediately preceding

accounting year.
ii) All commercial, industrial and business reporting entities having
borrowings (including public deposits) in excess of rupees one crore
but not in excess of rupees ten crore at any time during the
immediately preceding accounting year.
iii) Holding and subsidiary entities of any one of the above.
C. Level III Entities (SMEs)
Non-corporate entities which are not covered under Level I and Level II are
considered as Level III entities.
4. Applicability of Accounting Standards to

Non-corporate Entities (as on 1.4.2008)
The following accounting standards are applicable to all Non-corporate
Entities in their entirety (Level I, Level II and Level III):
AS 1 Disclosures of Accounting Policies
AS 2 Valuation of Inventories
AS 4 Contingencies and Events Occurring After the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 16 Borrowing Costs
AS 22 Accounting for Taxes on Income
AS 26 Intangible Assets
25
Exemptions or Relaxations for Non-corporate Entities falling in Level II

and Level III (SMEs)
(A) Accounting Standards not applicable to Non-corporate Entities
falling in Level II in their entirety:
AS 3 Cash Flow Statements
AS 17 Segment Reporting
(B) Accounting Standards not applicable to Non-corporate Entities
falling in Level III in their entirety:
AS 3 Cash Flow Statements
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 24 Discontinuing Operations
(C) Accounting Standards not applicable to all Non-corporate Entities
since the relevant Regulators require compliance with them only by certain
Level I entities:
AS 21, Consolidated Financial Statements
AS 23, Accounting for Investments in Associates in Consolidated Financial
Statements
AS 27, Financial Reporting of Interests in Joint Ventures (to the extent of
requirements relating to Consolidated Financial Statements)
(D) Accounting Standards in respect of which relaxations from certain
requirements have been given to Non-corporate Entities falling in Level II
and Level III (SMEs):
AS 15, Employee Benefits (revised 2005)
AS 19, Leases
AS 20 Earnings per Share
AS 28 Impairment of Assets
AS 29, Provisions, Contingent Liabilities and Contingent Assets
(E) AS 25, Interim Financial Reporting does not require a non-corporate
entity to present interim financial report. It is applicable only if a non-
corporate entity is required or elects to prepare and present an interim
financial report. Only certain Level I non corporate entities are required by
26
the concerned regulators to present interim financial results, e.g., quarterly

financial results required by the SEBI. Therefore, the recognition and
measurement requirements contained in this Standard are applicable to
those Level I non corporate entities for preparation of interim financial
results.
Thus, the VAT auditor has to be aware of the regulatory or statutory
framework under which the dealer’s accounts are prepared. Further, the VAT
auditor should also keep in mind that the financial statements given by the
dealer for the VAT audit would comply with the accounting standards. Hence,
it is essential that the VAT auditor possesses knowledge about the
applicability of the various accounting standards.
5. Disclosure of Accounting Policies

The accounting policies adopted by dealer are very important for the VAT
auditor to conduct the VAT audit under the TNVAT Act, 2006. In this regard,
the disclosure requirements under AS 1 should be kept in mind while
conducting the VAT audit. Some of the aspects that need to taken into
account are as follows:
• The accounting policies adopted by the dealer;
• The effect of change of any accounting policy during the year which
may have a substantial effect on the financials of the year under
audit or in any subsequent year;
• The accounting policies of the dealer should enable the VAT
auditor to correctly determine the sales and purchase and the input
credits;
The major considerations for selection and application of the accounting
policies are:
• Prudence
• Substance over form
• Materiality
If the fundamental accounting assumptions relating to going concern,
consistency and accrual are followed in the financial statements, specific
disclosure in respect of such assumptions are not required. If the
fundamental accounting assumptions are not followed, such a fact should be
disclosed.
27
6. Implication of Non-compliance with

In case of non-compliance with the accounting standards, the chartered
accountant who had carried out the statutory audit would have qualified his
audit report or made specific disclosures. In such cases, the VAT auditor
should refer to the statutory audit report of the dealer in order to ascertain
any specific comment/qualification in the report. The qualifications in the
statutory audit may or may not impact the details that are to be certified by
the VAT auditor. It has to be noted that the VAT auditor is required to certify
the completeness and correctness of the returns filed under the TNVAT
Act/CST Act and at the same time, compute the VAT/CST liability to be
disclosed in Form WW. Any change in the accounting method or policy could
impact the VAT/CST liability.
28
Chapter 5
Code of Ethics and Other Matters
1. Ethics
Ethics are the rules or standards governing the conduct of a person or the
members of a profession. Morality can be measured in terms what is right or
wrong of an action or a decision, whereas ethics are the standards we use or
propose for judging such actions or decisions. Thus, accepting an audit
conducted hitherto by a co-professional may be moral or immoral according
to us but ethics tells us why we call it so and how we made up our minds. It
can be said in a nutshell that ethics is sometimes called moral philosophy;
we use it to criticise, defend, promote, justify and suggest moral concepts
and to answer questions of morality, such as:
• How should we treat each other?
• What are right and wrong?
• How can we know or decide?
• Where do our ethical ideas come from?
• What are rights? Who or what has them?
• Should we coerce one another?
• Can we find an ethical system that applies to everyone?
• What do we mean by duty, justice and other similar concepts?
Shri R. C. Cooper, Past President, in his foreword to the first edition of ‘Code
of Ethics’ published in 1963 wrote:
“Ethics is a State of the mind, and there may be some act which, though it
may not strictly fall under one of the items of the Schedule, may be one
which may not be proper by any moral or ethical standards. In the larger
interests of the institute, the Council exhorts all members to search their
hearts and conscience whenever in doubt, and thereby assist towards the
maintenance of high principles of professional conduct established by the
Council.”
He further writes:
“The highest standards of ethical behaviour can only evolve from the conduct
of members and the Council feels sure that whenever members are
confronted with two interpretations on a matter relating to professional
conduct-one ethical and the other legalistic-they would adopt the stricter
interpretation than the more liberal one, even though the later may be
perfectly legal.”
The world has undergone substantial changes since the above views were
echoed. Our country too, is no exception. However, one thing which has not
changed is the stress on high ethical and moral standards by Chartered
Accountants.
Shri Sunil Goyal, Past President, writing foreword for the tenth edition of
‘Code of Ethics’ in 2005, echoed his feelings in following words:
“The Information Technology revolution and globalization of economy have
changed the world for ever and every profession is facing challenges in this
era of tough competition. Accountability of any profession is crucial for its
survival and prosperity. In formulating the Code of Ethics for the profession,
the Institute has always considered the motto “Pride of service in preference
to personal gain as a litmus test. User expectation and public perception are
crucial criteria while formulating the Code of Ethics so that there should not
be any expectation gap between the ‘standards expected’ and ‘those
prescribed’.”
Ethics is at the core of our profession. It is the high ethical standards set by
the profession that has made the profession of accountancy command the
respect and confidence of general public.
The International Federation of Accountants (IFAC), in its guidelines on
Professional Ethics for the Accountancy Profession, has stated;
“Persons who pursue a vocation in which they offer their knowledge and
skills in the service of the affairs of others have responsibilities and
obligations to those who rely on their work. An essential pre-requisite for any
group of such persons is the acceptance and observance of professional,
ethical standards regulating their relationship with clients, employers,
employees, fellow members of the group and the public generally.”
The Institute through the ‘Code of Ethics’ (eleventh edition) has laid down
certain fundamental principles to be observed by professional accountants
and has stated therein as under
30
“A distinguishing mark of the accountancy profession is its acceptance of the

responsibility to act in the public interest. Therefore, a professional
accountant’s responsibility is not exclusively to satisfy the needs of an
individual client or employer. In acting in the public interest a professional
accountant should observe and comply with the ethical requirements of this
Code.”
The “Code of Ethics” requires the professional accountant to fulfil the
following principle namely:
Fundamental Principles and conceptual framework for applying the said
principles
(a) Integrity
A professional accountant should be straightforward and honest in all
professional and business relationships.
(b) Objectivity
A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional judgments.
(c) Professional Competence and Due Care
A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in
practice, legislation and techniques. A professional accountant should act
diligently and in accordance with applicable technical and professional
standards while providing professional services.
(d) Confidentiality
A professional accountant should respect the confidentiality of information
acquired as a result of professional and employment relationships and
should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to
disclose. Confidential information acquired as a result of professional and
employment relationships should not be used for the personal advantage of
the professional accountant or third parties.
(e) Professional Behaviour
A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
31
2. Conceptual Framework, Threats and

Safeguards
The threat may differ from nature of engagements and work assignments and
accordingly the safeguards may also differ. Hence, the professional
accountant has to identify, evaluate and address threats in relation to
compliance with the fundamental principles, rather than merely comply with a
set of specific rules which may be arbitrary. The Code of Ethics as issued by
the ICAI provides a framework to assist a professional accountant to identify,
evaluate and respond to threats to comply with the fundamental principles.
The above fundamental principles may be potentially be influenced by the
under mentioned enumerated categories of threats,
• Self Interest Threats
• Self Review Threats
• Advocacy Threats
• Familiarity Threats
• Intimidation Threats
The professional accountant is expected to take safeguards against the
above categories of threats and the said safeguards can be grouped into
broad categories as stated in the “Code of Ethics” namely
• Safeguards created by the profession, legislation or regulation; and
• Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation include, but
are not restricted to:
• Educational, training and experience requirements for entry into the
profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary procedures.
• External review by a legally empowered third party of the reports,
returns, communications or information produced by a professional
accountant.
32
2.1 Ethical Conflict Resolution

In order to comply with the above mentioned fundamental principles, a
professional accountant may have to resolve the conflict in application of the
said fundamental principles. While doing so the professional accountant is
expected to consider the following, either individually or together with others,
as part of the resolution process:
• Relevant facts;
• Ethical issues involved;
• Fundamental principles related to the matter in question;
• Established internal procedures; and
• Alternative courses of action.
Wherever the professional accountant is not in a position to resolve the
ethical conflict after considering all relevant possibilities, should refuse to
remain associated with the matter creating the conflict. The professional
accountant, if deemed fit, should withdraw from the engagement or
engagement team or specific assignment or resign altogether from the
engagement, the firm or the employing organization.
2.2 Integrity
The “Code of Ethics” states that the professional accountant is obliged to be
straight forward and honest in the professional endeavours or employment as
the case may be, which in turn implies fair dealing, impartial attitude and
truthfulness.
A professional accountant is expected not to be associated with the reports,
communications or other information, where one believes that the information
is materially false or misleading, furnished negligently or omissions or
obscure or are of misleading nature.
2.3 Objectivity
The professional accountant is obliged not to compromise the professional
duty while carrying out the work, assignment or attestation function or
employment, as the case may be, which may be due to relationship bias or
undue influence.
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2.4 Professional Competence and Due Care

The professional accountant is obliged by the principles of professional
competence and due care to maintain professional knowledge and skill to
deliver the competent professional service and to act diligently in delivering
the same. In order to deliver competent professional service the professional
accountant requires continuous awareness and understanding of relevant
technical professional and business developments, which in turn has to
diligently be delivered in accordance with the assignment, carefully,
thoroughly and on a timely basis.
2.5 Confidentiality
The professional accountant is imposed with an obligation to refrain from
disclosing to anyone the information acquired as a result of professional
assignment or employment without proper and specific authority or the legal
or professional right or duty to disclose the same or using the information for
personal advantage or advantage of a third party.
2.6 Professional Behaviour

The Professional Accountant should comply with the relevant laws and
regulations and should not act in a manner which would bring disrepute to
profession.
3. Misconduct
The Chartered Accountants Act, 1949 has made stringent provisions in
Chapter V to provide for, regulate and punish any misconduct on the part of
Chartered Accountants.
Misconduct is defined under Section 22 of the Chartered Accountants Act,
1949 as follows:
22. Professional Misconduct defined
“For the purposes of this Act, the expression “professional misconduct” shall
be deemed to include any act or omission specified in any of the Schedules,
but nothing in this section shall be construed to limit or abridge in any way
the power conferred or duty cast on the Council under sub-section (1) of
Section 21 to inquire into the conduct of any member of the Institute under
any other circumstances.”
The First Schedule and Second Schedule to the Chartered Accountants Act,
1949 lays down various do’s and don’ts for the Chartered Accountants. Any
34
violation will be either acted upon through the Disciplinary Committee

constituted under Section 17 of the Chartered Accountants Act, 1949 or
referred to the High Court with its recommendations.
The punishment may involve (i) reprimand (ii) removal of name from register
of members or (iii) such other punishment as may be decided by the Council
and/or the High Court.
A VAT auditor is a professional accountant bound by the provisions of the
Chartered Accountants Act, 1949. He/She is expected to have high
professional and ethical standards and live up to the expectations of the
public and the Government. The Government of Tamil Nadu had reposed
confidence in the ‘Chartered Accountants’ and it constitutes our duty to live
up to its expectations. Auditors should strive to uphold the objectives of the
accountancy profession mentioned in Code of Ethics which are:
(i) To work to the highest standards of professionalism.
(ii) To attain the highest level of performance.
(iii) To meet the public interest requirement.
4. Do’s/Don’ts
The First Schedule and the Second Schedule to the Chartered Accountants
Act, 1949 lays down a charter of good professional behaviour. Any violation
of the said charter will amount to professional misconduct, punishable under
the Chartered Accountants Act, 1949. It should however, be remembered
that apart from the misconduct specified under First Schedule and Second
Schedule, the Council is empowered under Section 22 of the Chartered
Accountants Act, 1949 to “inquire into the conduct of any member of the
Institute under any other circumstances.”
The auditor should familiarize with the provisions of First and Second
Schedule and maintain high professional standards expected.
5. VAT Audit
The VAT auditor appointed under the provisions of TNVAT Act, 2006 can be
a Chartered Accountant and hence liable for all the professional liabilities
under the Chartered Accountants Act, 1949.
35
The auditor shall be deemed guilty of professional misconduct if the he

(1) fails to disclose a material fact known to him which is not disclosed
in a financial statement, but disclosure of which is necessary to
make the financial statement not misleading;
(2) fails to report a material misstatement known to him to appear in a
financial statement, but disclosure of which is necessary to make the
financial statement not misleading;
(3) is grossly negligent in the conduct of his professional duties;
(4) fails to obtain sufficient information to warrant the expression of an
opinion or his exceptions are sufficiently material to negate the
expression of an opinion;
(5) fails to invite attention to any material departure from the generally
accepted procedure of audit applicable to the circumstances.
6. Liability of Members as Employee of CA

Attention is invited to notification no. 1-CA (15)60 dated 4th November, 1960
which is reproduced below:
“In exercise of the powers conferred by clause (ii) of Part II of the Second
Schedule to the Chartered Accountants Act, 1949, the Council of the Institute
of Chartered Accountants of India is pleased to specify, that a member of the
Institute, whether in practice or not, who is employed by a Chartered
Accountant in practice or by a firm of Chartered Accountants, shall be
deemed to be guilty of professional misconduct if he is grossly negligent in
the conduct of his duties.”
7. Liability of Member as an Employee

Attention is invited to notification no. 1-CA (7)/65 dated 6th November, 1965
“In exercise of the powers conferred by clause (ii) of Part II of the Second
of Chartered Accountants of India specifies that a member of the Institute
who is an employee shall be deemed to be guilty of professional misconduct
if he is willfully and grossly negligent in the conduct of his duties as such
employee.”
36
8. Relying on the work of Qualified Assistants

The primary responsibility for any audit is of the member who has signed the
audit report and relevant statements. He is expected to take all reasonable
care, caution and diligence in the conduct of the audit and satisfy himself that
the work done by his assistants is reasonable and reliable.
However, the qualified assistants are also liable for necessary disciplinary
action under the Chartered Accountants Act, 1949 if they are found to be
grossly negligent in the performance of their duties.
The VAT auditor who has signed the audit report will be entitled to prove that
he has relied on the work of a qualified assistant and he has no reason to
believe that he should not have so relied and he has taken due care and
diligence in the performance of his duties.
9. Relatives with Substantial Interest

Attention is invited to notification no. 1-CA (44)/71 dated 2nd March, 1971
“ In exercise of the powers conferred by clause (ii) of Part II of the Second
of Chartered Accountant of India specifies that a member of the Institute
shall be deemed to be guilty of professional misconduct, if he expresses his
opinion on financial statement of any business or enterprise in which one or
more persons who are his “relatives” within the meaning of Section 6 of the
Companies Act, 1956 have either by themselves or in conjunction with such
member a substantial interest unless he discloses the interest also in his
report.
Explanation: - For this purpose the expression “substantial interest” shall
have the same meaning as is assigned thereto under Explanation 3 of
Section 13 of the Income Tax Act, 1961.”
“Relative” has been defined in “Code of Ethics” as per Section 6 of
Companies Act, 1956 read as under:
“A person shall be deemed to be a relative of another if, and only if, -
(a) they are the members of a Hindu undivided family; or
(b) they are husband and wife; or
(c) the one is related to the other in the manner indicated in Schedule I-
A”
37
For convenience of reference, Schedule I-A is reproduced hereunder.

SCHEDULE I-A
List of relatives
1. Father 12. Son’s Daughter
2. Mother (including step mother) 13. Son’s Daughter’s Husband
3. Son (including step son) 14. Daughter’s Husband
4. Son’s wife 15. Daughter’s Son
5. Daughter (including step 16. Daughter’s Son’s Wife
daughter
6. Father’s Father 17. Daughter’s Daughter
7. Father’s Mother 18. Daughter’s Daughter’s
Husband
8. Mother’s Mother 19. Brother (including step brother)
9. Mother’s Father 20. Brother’s Wife
10. Son’s Son 21. Sister (including Step Sister)
11. Son’s Son’s Wife 22. Sister’s Husband
Explanation 3 of Section 13 of Income-tax Act 1961 reads as under:
“For the purpose of this section, a person shall be deemed to have a
substantial interest in a concern,-
(i) In a case where the concern is a company, if its shares (not being
shares entitled to a fixed rate of dividend whether with or without a
further right to participate in profits) carrying not less than twenty per
cent of the voting power are, at any time during the previous year,
owned beneficially by such person or partly by such person or partly
by one or more of the other persons referred to in sub-section (3);
(ii) In the case of any other concern, if such person is entitled or such
person and one or more of the other persons referred to in sub-
section (3) are entitled in the aggregate, at any time during the
previous year, to not less than twenty per cent of the profits of such
concern”.
38
10. General
Some of the issues, which are commonly raised in regard to different aspects
of VAT audit vis-à-vis the liabilities/obligations of VAT auditor, are considered
hereunder.
• The liability of the VAT auditor in respect of VAT audit will be the
same as in any other audit assignment.
• In case a dealer is found guilty of having concealed his turnover or
tax liability, it would not ipso facto mean that the VAT auditor is also
responsible.
• The Assessing Officer or any other authority who is authorised to
issue summons to the dealer and call for evidence or documents,
can also summon the VAT auditor who has audited the accounts to
give any evidence or produce documents (other than his working
papers) on which reliance was placed upon, in finalising and issuing
Form WW to the dealer.
• If the actual work relating to the examination of books and records is
done by a qualified assistant in a firm of chartered accountants and
the partner of the firm signing the audit report has relied upon his
work, action, if any, for professional negligence can be initiated
against the member who has signed the report and in such an event,
it would be open for the member concerned to prove that he has
taken due care and diligence in the performance of his duties and is
not aware of any reason to believe that he should not have so relied.
• If the qualified assistant (whether or not holding the certificate of
practice) is found to be grossly negligent in the performance of his
duties, the Institute can take disciplinary action against the qualified
assistant.
• A VAT auditor who conducts the audit under the TNVAT Act, 2006
can also accept the assignments of tax representation.
• The VAT auditor cannot charge the professional fees by way of
percentage of turnover or percentage of profits. In this context,
reference is invited to Clause (10) of Part I of the First Schedule to
the Chartered Accountants Act and the commentary on the subject
at page nos. 116 - 117 of the Code of Ethics (2003 Reprint of Ninth
Edition). Certain exceptions are made in Regulation 192, but these
exceptions do not apply in respect of charging fees for VAT audit.
39
• Under reporting requirements of Form WW, the VAT auditor is

expected to advise the dealer to file a revised return for a particular
period and pay any difference in tax liability or claim additional
refund. Therefore, the VAT auditor virtually steps into the shoes of
the assessing authority. While conducting VAT audits, figures
declared by the dealer are duly verified by the VAT auditor, the tax
authorities are expected to accept the figures certified by the VAT
auditor.
• The opinion expressed by the VAT auditor is not binding on the
dealer. If the VAT auditor has qualified his report and expressed an
opinion on a particular item, the dealer may take a different view and
may not take steps on the advice given by the VAT auditor.
• In case a member is a director or employee of a company, the
financial statements of which are to be audited and/or opinion has to
be expressed, he should not undertake an audit of that company.
This applies to the VAT audit also.
• Holding of substantial interest by a partner or a relative of the
member in the business or enterprise of which an audit has to be
carried out and opinion has to be given on the financial statements,
may affect the independence of the member, in the performance of
his professional duties. Therefore, a member may, not to
compromise his independence, desist from undertaking the VAT
audit of such business or enterprise.
40
Chapter 6
Relevant Statutory Provisions
The relevant statutory provisions relating to accounts and audit under the
TNVAT Act, 2006 are as follows:
I. Definitions
1. Section 2(9) - Branded means any goods sold under a name or
trade mark registered or pending registration or pending registration of
transfer under the Trade & Merchandise Marks Act, 1958 (Central Act 43 of
1958) or the Trade Marks Act, 1999 (Central Act 47 of 1958).
The definition states that pending registration of a name or trade mark and
pending registration of transfer is also to be considered as “branded”.
2. Section 2(11) - Capital goods means
(a) Plant machinery, equipment, apparatus, tools, appliances or
electrical installation for producing, making, extracting or
processing of any goods or for extracting or for bringing
about any substance for the manufacture of final products;
(b) Pollution control, quality control, laboratory and cold storage
equipments
(c) Components, Spare parts and accessories specified at (a)
and (b) above;
(d) Moulds, dies, jigs and fixtures;
(e) Refractors, and refractory materials;
(f) Storage tanks, and
(g) Tubes, pipes and fittings thereof;
used in the State for the purpose of manufacture, processing, packing or
storing of any goods in the course of business excluding civil structures and
such goods as may be notified by the Government.
From the above definition, it is clear that the machinery, etc. enumerated
above, used in this State of Tamil Nadu, up to the stage of manufacture, etc.
is to be considered as “capital goods”.
Section 19 & Rule 10 speaks about the eligibility of input tax credit and the
related procedural compliances involved in respect of claim of input tax credit
its availment and reversals, if any.
3. Section 2(20) - Exempted goods means goods falling under the
Fourth Schedule and goods exempted by the Government, by notification
from time to time.
Fourth Schedule contains two parts viz., Part A and Part B. Various
notifications were issued subsequent to the introduction of VAT law.
The details and the text of the Notifications can be accessed from the
website of the Department which is http://tnvat.gov.in
The above mentioned website of the department can also be accessed for
the clarifications, notifications, circulars and rate of tax and commodity code
applicable to the goods, TIN search, etc.
4. Section 2(23) - Input means any goods including capital goods
purchased by a dealer in the course of his business;
5. Section 2(24) - Input tax means the tax paid or payable under this
Act by a registered dealer to another registered dealer on the purchase of
goods including capital goods in the course of his business.
As per the above, the input tax is based on the tax paid or payable on the
purchases. For input tax credit claim, its availment and for reversal, etc.
please refer Section 19.
6. Section 2(27) - Manufacture with its grammatical variations and
cognate expressions, means producing, making, extracting, altering,
ornamenting, finishing, assembling or otherwise processing, treating or
adapting any goods and includes any process of goods which brings into
existence a commercially different and distinct commodity but does not
include any activity as may be notified by the Government.
Till 31st October 2012, no activity has been notified by the Government in this
regard.
7. Section 2(28) - Output Tax means tax paid or payable under this
Act by any dealer in respect of sale of any goods.
8. Section 2(29) - Place of business means any place in the State
where a dealer purchases or sells goods and includes –
(i) a warehouse, godown or other place where a dealer stores his
goods;
42
(ii) a place where the dealer processes, produces or manufactures

goods; and
(iii) a place where the dealer keeps his accounts, registers and
documents.
When the goods are sent to a site(s) of a works contractor such site(s) may
also be considered as place of business.
9. Section 2(32) - Reversal of Tax Credit means reversal of input tax
credit already claimed and availed under this Act.
Section 19 lists out the various situations in respect of which the reversal of
input tax already claimed, has to be carried out and such reversal is to be
reported in the Annexure III of the monthly returns to Form I.
10. Section 2(36) - Tax Invoice means an invoice issued by a
registered dealer who sells taxable goods to another registered dealer in the
State showing the tax charged separately and containing such details as may
be prescribed.
11. Section 2(38) - Taxable Turnover means the turnover on which a
dealer shall be liable to pay tax as determined after making such deductions
from his total turnover and in such manner as may be prescribed.
12. Section 2(40) - Total turnover means the aggregate turnover in all
goods of a dealer at all places of business in the State, whether or not, the
whole or any portion of such turnover is liable to tax.
13. Section 2(41) - Turnover means the aggregate amount for which
goods are bought or sold, or delivered or supplied or otherwise disposed of
in any of the ways referred to in clause (33), by a dealer either directly or
through another, on his own account or on account of others whether for
cash or for deferred payment or other valuable consideration, provided that
the proceeds of the sale by a person of agricultural or horticultural produce,
other than tea and rubber (natural rubber latex and all varieties and grades of
raw rubber) grown within the State by himself or on any land in which he has
an interest whether as owner, usufructuary mortgagee, tenant or otherwise,
shall be excluded from his turnover.
Explanation I.- “Agricultural or horticultural produce” shall not include such
produce as has been subjected to any physical, chemical or other process
for being made fit for consumption, save mere cleaning, grading, sorting or
drying;
43
Explanation II.- Subject to such conditions and restrictions, if any, as may

be prescribed in this behalf—
(i) the amount for which goods are sold shall include any sums charged
for anything done by the dealer in respect of the goods sold at the
time of, or before the delivery thereof;
(ii) any cash or other discount on the price allowed in respect of any
sale and any amount refunded in respect of articles returned by
customers shall not be included in the turnover;
Explanation III.- Any amount realised by a dealer by way of sale of his
business as a whole, shall not be included in the turnover;
Explanation IV. - Any amount, charged by a dealer by way of tax separately
without including the same in the price of the goods sold, shall not be
included in the turnover;
14. Section 2(44) - Zero rate sales means a sale of any goods on
which no tax is chargeable but credit for the input tax related to that sale is
admissible.
Section 18 lists out various types of zero rated sales.
For the refund of tax paid on purchases relating to export sales, the
prescribed Form W is to be filed within 180 days of making zero rated sales
along with related documents. The related rules are stipulated in Rule 11(2).
The details of zero rate sales are to be reported in the Annexure IV of the
monthly returns in Form I.
44
II. Schedules and Rates of tax

There are seven schedules to the Act which are:
S. Schedule Tax rate
No.
1 I-A 1%
I-B 5%
I-C 14.5%
2 II Non VAT Goods - Various rates
3 III Compounding system of tax applicable to Hotels
4 IV A Exempted goods
IV B Exempted goods
5 V Zero Rate Sales to International Organisations
6 VI Transit Pass
7 VII Compounding rates to Brick Kiln
First Schedule has three parts viz., Part A, Part B and Part C
• Part A – Goods taxable @ 1% - includes bullion, precious stones,
gold, platinum and silver jewellery including articles thereof.
• Part B – Goods taxable @ 5% - lists out inputs, capital goods, drugs,
chemicals, packing materials, information technology products,
pollution control equipments, etc.
• Part C – Goods taxable @ 14.5% - mentions all goods not specified
in Part A or Part B of the first schedule or any of the other
schedules.
Dealers selling the goods covered under Part B and Part C will be entitled to
input tax credit as per the charging section. Part A goods (jewellery, precious
metals and stones, etc) are covered specifically under Section 9 of the Act.
Input tax credit is claimable as per that Section 9 in respect of Part A goods.
45
Second Schedule covers goods like liquor, petroleum products, sugarcane

etc., on which special rates of tax are applicable at the point of sale or
purchase specified in the schedule. These goods are not eligible for VAT
input credit, vide Section 3(5). In effect, the levy of sales tax continues on
these goods even now.
Third Schedule specifies compounded rate of tax payable by hotels,
restaurants and sweet stalls, where the total turnover does not exceed Rs.
50 lakhs. Total turnover means the aggregate of sales turnover and
purchases turnover assessable to tax, vide Section 8.
Fourth Schedule specifies list of tax exempted goods, vide Section 15, and it
contains two parts viz., Part A and Part B.
Fifth Schedule specifies the list of International Organisations, sales to whom
will be “zero-rated” – on sale to which output tax is at zero percent but input
tax credit will be allowed or refunded vide Section 18 and Rule 11 – The said
list includes WHO, World Bank, ILO, and a few UN organizations, etc.
Sixth Schedule lists out the goods in respect of which “transit pass”
provisions are applicable. Some of the goods listed includes raw rubber,
liquor, plastic granules, washing machines, air conditioners, etc., when such
listed goods enter and pass through the State of Tamil Nadu to another State
or commences its movement from this State of Tamil Nadu, transit pass is to
be obtained and surrendered. The transit pass obtained at the first check
post after entering the frontiers of this State or from the Assessing officer or
generated electronically, has to be surrendered by the goods carrier before
leaving the last check post of this State within the stipulated time vide
Section 70, Rule 15(17).
Seventh Schedule specifies compounded rate of tax payable on an option
exercised in this regard by brick kilns operators having various manufacturing
capacities instead of paying tax on their sale, vide Section 6.
III. Relevant Sections & Rules

1. Section 3, Rule 4 & 5 - Threshold limit of Turnover
for Registration
• A dealer who purchases goods within Tamil Nadu and sells goods
within Tamil Nadu whose total turnover in a year is not less than Rs.
10 Lakhs is required to register.
46
• Other than the above, every dealer with a total turnover of Rs. 5
Lakhs and above in a year has to apply for registration.
• Casual dealer, jewellery dealer, dealer availing concession under
CST (concessional rate against declaration forms) do not have any
threshold limit. They should register from the first transaction.
• Any other dealer/person intending to commence business may get
himself registered voluntarily even though his total turnover may be
below the threshold limit.
• The following table gives list of items that are to be included and
excluded to reckon “turnover”.
Turnover relating to To be to be
included excluded
Works contract, leasing or hire purchase and Yes --
other taxable transactions
Sale of agricultural products from own or -- Yes
leased farm
Sale of business as a whole -- Yes
Purchases from unregistered dealer, etc. Yes --
liable to pay tax u/s 12
Registration
TIN number can be obtained online by logging on to website of the
department or by applying to the registering authority having jurisdiction by
submitting the application Form A with enclosures and two photographs of
the person verifying the application along with registration fee of Rs. 500/-
and Rs. 50/- for each additional place(s) of business.
Certificate of registration in Form D is to be issued by registering authority
within 30 days from the date of receipt of the application.
Registered dealers opening new or additional branch(es) will have to apply to
the registering authority within 30 days of the date of opening with Rs. 50/-
as registration fees.
Every registered dealer will be required to exhibit a name board in Tamil at
the registered place of business with full address and the fact that the
business is registered under TNVAT Act, 2006. In case other languages are
to be used in the name board they shall be in the following order:
1. Tamil
47
2. English
3. Any other language(s)
Certificate of registration is to be conspicuously displayed in the principal
place of business and also at the additional places of business and godowns.
A certificate of registration under TNVAT Act, 2006 once issued is permanent
and there is no requirement of annual renewal.
When there is a change in the constitution the same is to be intimated to the
department within 30 days from change and in this case a new registration is
to be made, if the status of the entity undergoes change.
If there is no change in the constitution only the intimation is to be made
within 30 days from the date of change. No fresh registration is required.
e.g, A firm ‘ABCD’ is having four partners namely A, B, C and D. If C and D
retire at the same time, no registration is required. If B, C and D retire, then
the firm becomes a proprietary concern. Therefore, a new registration has to
be obtained.
Compulsory Registration
The registration is compulsory for the following types of dealers, irrespective
of their turnover
• A dealer residing outside the State and carrying on business in
Tamil Nadu
• An agent of a non resident dealer carrying on business inside Tamil
Nadu
• A dealer who obtains/brings goods from outside Tamil Nadu
• A dealer registered under the CST Act, 1956
• An exporter
• A commission agent, del credre agent, mercantile agent, broker
• An auctioneer
• A dealer in jewellery, bullion, etc.
• A casual trader to register within 24 hours of commencing
transaction
• A successor to a registered dealer either
o as a legal heir on the death of the dealer or
48
o as a successor on account of change in

ownership/acquisition of business (apply for registration
within 30 days of succession, unless he already holds a
certificate of registration)
o Where a minor commences/inherits a business, the
guardian, trustee or agent of such minor (apply for fresh
registration within 30 days of inheritance, etc.)
2. Section 5, Section 6 and Rule 8 - Works Contract

Following methods of tax payments are available to discharge works contract
tax:
1. Goods Identification Method - Section 5
2. Percentage Deduction Method - Rule 8(5)
3. Composition Scheme - Section 6
The details about each of the methods are narrated below:

Goods Identification Method - Section 5
Pay tax on goods identification basis and avail input credit. Tax is on the
deemed sale value of goods is to be paid at rates specified in the Schedule
to the Act. Deemed sale value is arrived on the landed cost of the goods at
the site and reasonable profit involved. Conversion charges are also added,
if the goods are used in some other form than the one purchased. The output
tax can be collected from the buyer (contractee).
Illustration:
Contract price 60000/- Transport Charges 3000/-
5% VAT goods purchased 20000/- Conversion Charges 5000/-
14.5% VAT goods 10000/- Estimated profit 15%
purchased
The deemed sale value is worked out as below, when there is conversion
and when there is no conversion, of goods purchased.
49
When the goods purchased are used as such

Particulars Value VAT Transport Landed Estimated Deemed Output
Charges Cost Profit at Sale VAT
10% Value
(1) (2) (3) (4) (5)= (6) (7)= (7) *
(2)+(4) (5)+(6) VAT
rate
5% goods 20000 1000 1000 21000 2100 23100 1155
14.5% 10000 1450 1000 11000 1100 12100 1755
goods
Total 30000 2450 2000 32000 3200 35200 2910
Less: 2450
Input Tax
Credit
VAT 460
payable
Total cost of goods involved Rs 32,000/-

When the goods purchased are converted before putting them into use at the
site place, the conversion charges incurred is also to be added to the total
cost and then the deemed sale value is to be arrived at by adding the
element of profit. Then the net VAT due and payable is worked out.
Considering above data,
Particulars Landed Conversio Total Profit Deemed Output
cost as n Charges @10% Sale VAT
above value
(1) (2) (3) (4)= (5) (6)= (7)=
(2)+(3) (4)+(5) (6)*Rate
of VAT
5% goods 21000 4000 25000 2500 27500 1375
14.5% goods 11000 4000 15000 1500 16500 2393
Total 32000 8000 40000 4000 44000 3768
Less: Input 2450
Tax Credit
VAT payable 1318
50
Total cost of goods involved Rs 40,000/-.

Percentage Deduction Method - Rule 8(5)
When the labour and other like charges are not available separately and the
same is not ascertainable from the books and records maintained by the
dealer, it has to be calculated at the following rates on contract price, vide
Rule 8(5).
Type of Contract % of Contract Price
Electrical contracts 15%
All structural contracts 15%
Sanitary contracts 25%
Watch and clock repair contracts 50%
Dyeing contracts 50%
All other contracts 30%
By deducting the above from the contract price, the deemed sale value of
goods involved is arrived at and tax is payable at 14.5% when the goods
involved are taxable at various rates and at 5% (or 1%) only when all the
goods involved are taxable at 5% (or 1%) only.
Composition Scheme - Section 6
• Tax is payable at @ 2% on civil works contract receipts or @ 5% on
non civil works contract receipts by exercising an option in writing to
pay tax under this method.
• VAT is payable on the total contract value.
• Option to be exercised by applying to the assessing authority along
with the first monthly return for the financial year or in the first
monthly return after the commencement of the works contract.
• Option once exercised shall be final for that financial year.
• Dealers having exercised this option are not entitled to input tax
credit.
• No input tax credit to contractee.
• The contractor shall not collect any tax on his work contract receipts.
• Dealer paying tax under this compounding method should not make
interstate purchases or imports from foreign countries.
51
• Whether goods received into this State of Tamil Nadu by stock

transfer or consignment transfer can be used or not by a works
contractor paying tax under the composition scheme is not known
and the Act is silent about this.
• Dealer opting to pay tax under this compounding system of tax
payment has to maintain a register with details of contracts and
payments received.
• No other account needs to be maintained by him.
• The restriction of inter-State purchases or imports is applicable to
capital goods also or not is not specifically stated in the Act.
• If at the end of the year the dealer decides to shift from composition
method of tax payment to regular method as per Section 5 of the
Act, then there is no need to file any option letter and the purchases
effected from the commencement of the next financial year is
eligible for input tax credit and for the stock on hand at the end of
the year, there is no input tax credit since there are no specific
provisions in this regard for this.
Responsibility to deduct tax (TDS)
The persons responsible for paying any sum to any dealer for execution of
works contract shall, at the time of payment of such sum, deduct an amount
calculated, at the following rate, namely:-
Civil works contracts 2% of the total contract value of the civil
works executed.
Civil maintenance works 2% of the total contract value of the
maintenance works executed.
All other works 5% of the total contract value of the
works executed.
The term “person” includes:
(i) the Central or a State Government;
(ii) a local authority;
(iii) a corporation or body established by or under a Central or State Act;
(iv) a company incorporated under the Companies Act, 1956 including a
Central or State Government undertaking;
(v) a society including a co-operative society;
52
(vi) an educational institution; or

(vii) a trust;
Duties of person liable to deduct tax: Rule 9
• Tax deducted has to be remitted before 20th of the succeeding
month to such authority in the prescribed manner.
• Form R has to be submitted to the assessing authority at the time of
remittance of the amount deducted.
• Any person who makes the deduction, must issue to the works
contractor, a certificate in Form T for each deduction separately
within fifteen days of remitting the tax. He must send a copy of the
certificate of deduction to the assessing authority, having jurisdiction
over the said dealer together with such documents, as may be
prescribed.
• In case of non-deduction of tax or non-remittance of tax deducted as
prescribed, the amount can be recovered by the authorities from the
person responsible to deduct with penalty and interest as if such
person is an assessee under the Act.
• Interest is payable at 1.25% per month for the entire period of
default.
No tax deduction is required in the following cases:
• If there is no transfer of property in goods.
• The dealer has to produce a certificate in Form S that he has no
liability to pay the tax u/s 5.
• Where the amount or the aggregate of the amount paid or credited
or likely to be paid during the year by such person to the dealer for
execution of the works contract including civil works contract does
not or is not likely to exceed Rs. 1 Lakh.
FORMS
Form R Statement to be furnished at the remittance of tax deducted
Form S Certificate of NIL tax liability based on which tax may not be
deducted
Form T Tax deduction certificate to be issued by deductor to deductee
53
3. Section 11: Levy of Tax on Sugar Cane

(1) Every dealer shall pay a tax on the last purchase of sugarcane,
excluding sugarcane setts, (Stem cuttings of sugar cane is called sugar cane
setts or seed pieces) in the State, at the rate specified in the Second
Schedule.
(2) The manufacturer of sugar shall not be entitled to input tax credit on
the last purchase of sugarcane.
4. Section 12: Levy of Purchase Tax

(1) Subject to the provisions of sub-section (1) of section 3, every
dealer, who in the course of his business purchases from a registered dealer
or from any other person, any goods (the sale or purchase of which is liable
to tax under this Act), in circumstances in which no tax is payable by that
registered dealer on the sale price of such goods under this Act, and either -
(a) consumes or uses such goods in or for the manufacture of
other goods for sale or otherwise; or
(b) disposes of such goods in any manner other than by way of
sale in the State; or
(c) despatches or carries them to a place outside the State
except as a direct result of sale or purchase in the course of
inter-State trade or commerce or in the course of export out
of the territory of India; or
(d) installs and uses such goods in the factory for the
manufacture of any goods, shall pay tax on the turnover
relating to the purchase aforesaid at the rate specified in
the Schedules to this Act.
(2) Notwithstanding anything contained in clause (24) of section 2, the
dealer who pays tax under sub-section (1) shall be entitled to input tax credit
on the goods specified in the First.
5. Section 19: Input Tax Credit

A registered dealer in Tami Nadu shall be entitled to avail credit of the VAT
charged in the invoice, on the purchase of First Schedule goods from another
registered dealer in Tamil Nadu. Purchase tax paid on first schedule goods is
also eligible for VAT credit claim. Tax credit is claimable in respect of goods
including capital goods and its spares, components, etc.
54
Input tax credit can be availed in respect of sales, taxable lease transactions
and works contract transactions, if tax is not paid or payable under the
composition scheme.
Input credit cannot be availed on purchase of second schedule goods such
as liquor, motor spirit (petrol), high speed diesel oil (diesel), imported sugar
and textile products, molasses and sugarcane.
Input credit cannot be availed on purchase of industrial inputs for use in
manufacture or in connection with manufacture of second schedule goods
and/or tax exempted goods.
Input Tax Credit Claim: Section 19(2)
Input Tax Credit shall be allowed for purchase of goods within the State from
a registered dealer and which are for the purpose of:
(i) re-sale by him within the State; or
(ii) use as input in manufacturing or processing of goods in the State; or
(iii) use as containers, labels and other materials for packing of goods in
the State; or
(iv) use as capital goods in the manufacture of taxable goods.
(v) sale in the course of inter-State trade or commerce falling under
sub-section (1) of section 8 of the Central Sales Tax Act, 1956.
(vi) agency transactions by the principal within the State in the manner
as may be.
Input tax credit is not eligible in respect of following: Section 19(5)
• Purchase of automobiles by persons other than a dealer in
automobiles.
• Purchase of air-conditioners by persons other than a dealer in air-
conditioners.
• Stock transfers into the State.
• Inter-State sale without C Form.
• Inter-State purchases (tax paid in other States).
• Capital Goods used for manufacture of tax exempted goods –
Section 19(6).
55
• If stock transfer or consignment of goods is effected to a place

situated outside the State input tax credit is not available to the
extent of 3%.
• Tax paid under composition scheme – Proviso to Section 3(4), etc.
• Invoice issued by a “bill trader”.
• Invoice which is not original or “tax invoice”.
Section 19(11) : In case any registered dealer fails to claim input tax credit
in respect of any transaction of taxable purchase in any month, he shall
make the claim before the end of the financial year or before ninety days
from the date of purchase, whichever is later.
The input credit claim is subject to receiving an original tax invoice duly filled,
signed and issued by a registered dealer from whom the goods are
purchased.
When to avail credit in respect of Capital Goods - Section 19(3)
• Input tax credit can be availed only after the commencement of
commercial production (commencement of commercial use of such
capital goods).
• 50% of the credit can be availed in the first financial year of
commencement of commercial production. The balance can be
availed at any time before the third financial year of commercial
production as shown below:
Particulars Eligible input tax credit claim relating to
capital goods
First financial year Maximum of 50% of input tax credit
Second or third year Balance of input tax credit
• It is, however, necessary that the capital goods are available when
any part of the credit is availed.
• After the said three years, the unavailed input credit, if any, shall
lapse in favour of the Government.
• In case of parts and components of existing capital goods, however,
the input tax credit can be availed wholly in the month of purchase
itself.
• The credit at 50% in the first year for capital goods or wholly for
parts, etc., as stated above, can be claimed at any time before the
56
end of the financial year or ninety days from the date of purchase,
whichever is later.
Conditions for claiming Input Tax Credit on Capital Goods - Section 19
Capital Goods (CG) have been included as item in the First Schedule of the
Act vide Section 2(11).
CG are eligible for input tax credit as per the conditions listed below:
• Purchased CG is for use in the business of taxable goods
The use of CG should be within the State.
The CG should be for the purpose of manufacture,
processing, packing, storing of goods in the course of
business.
• The CG should not be used for the negative list of
manufacture/activity notified by the Government notifications issued
in this regard till 31st October 2012.
• Where purchase tax is paid on the purchase of CG, it is also eligible
for CG credit.
• The date of commencement of production using the relevant CG
shall be intimated to the assessing officer within 30 days of such
date. No format is prescribed in the Act or the Rules for such
intimation and hence filing an appropriate written communication in
this regard may be considered as sufficient.
• The CG should be in the possession of the dealer during the period
of claiming and availing input tax credit. If the goods are not
available during such time, the input tax credit involved (entire input
tax credit claimed/availed relating to CG) would lapse.
6. Rule 6(3)(b) - Certificate for Purchase of Industrial
Inputs
• The purchaser of industrial input shall issue a certificate to the seller
comprising the following details:
TIN of the purchaser
Name and address and TIN of the seller
Description of goods purchased
Description of goods manufactured
57
• No time limit is specified for issuing the certificate by the purchaser.

Hence, the certificate may be issued by the purchaser within a
reasonable time. Such a certificate may be relied on by the seller at
the time of his assessment/audit or any inspection by authorized
officers. If the certificate prescribed is not available, the beneficial
rate of tax at 5% may not be applicable.
• As per the GO.Ms.No.145 dated 16.07.07, goods mentioned under
the entry 67A of part B which are industrial inputs is liable for
taxation at 5% even if it is sold through traders.
7. Section 18 - Zero Rated Sales
(1) The following shall be zero rate sale for the purpose of this Act, and
shall be eligible for input tax credit or refund of the amount of the tax paid on
the purchase of goods specified in the First Schedule including capital
goods, by a registered dealer in the State, subject to such restrictions and
conditions as may be prescribed:-
(i) A sale as specified under sub-section (1) or (3) of section 5 of the
Central Sales Tax Act, 1956;
(ii) Sale of goods to any registered dealer located in Special Economic
Zone in the State, if such registered dealer has been authorised to
establish such units by the authority specified by the Central
Government in this behalf; and
(iii) Sale of goods to International Organisations listed out in the Fifth
Schedule.
(2) The dealer, who makes zero rate sale, shall be entitled to refund of
input tax paid or payable by him on purchase of those goods, which are
exported as such or consumed or used in the manufacture of other goods
that are exported as specified in sub-section (1), subject to such restrictions
and conditions as may be prescribed.
(3) Where the dealer has not adjusted the input tax credit or has not
made a claim for refund within a period of one hundred and eighty days from
the date of accrual of such input tax credit, such credit shall lapse to
Government.
8. Section 14 – Reversal of Tax Credit
(1) Where a purchasing dealer has returned the goods to the seller for
any reason, the input tax credit claimed already on the purchase by the
58
dealer shall be liable to reversal of tax credit on such goods returned, in the
manner as may be prescribed.
(2) Where a selling dealer has received back the goods as a result of
sales return or unfructified sale, the output tax paid or payable thereon will
be reduced, adjusted or refunded in the manner as may be prescribed.
The various situations for input tax credit reversals or adjustment of output
tax are:
• If the goods purchased are used for making civil structure - Section
2(11).
• Purchase of automobiles, spare parts and accessories other than by
a dealer in automobiles – Section 19(7)(b).
• Purchase of air conditioners other than by a dealer in air
conditioners - Section 19(7)(c).
• Goods purchased for sale issued as free of cost, eg. samples –
Section 19(8).
• Goods are stolen, lost or destroyed, due to natural calamity, fire etc.,
or while in storage or in transit - Section 19(9).
• Unavailed credit on capital goods (time barred) - Section 19(3)(b),
Rule 10(4)(b).
• Purchase returns.
• Sale of exempted goods - IV Schedule - Section 15 [Section
19(5)(a)].
• Input tax credit availed and not sold at the time of stoppage of
business – Section 19(19).
• Stock transfer/consignment transfer (4/3%) – Section 19(4).
• Consignment Sales without ‘F' Form - Section 19(4).
• Stock transfer without ‘F' Form - Section 19(4).
• Purchases for production of exempted goods (Finished) - Section
19(5)(a).
• Inter-State sale without ‘C' Form - Section 19(5)(c).
• Input tax credit availed for finished goods subsequently exempt -
Section 19(12).
• Price variations.
59
• Input (goods) destroyed in fire or during process/manufacturing -

Section 19(9).
• Capital goods used for manufacturing of exempted goods - Rule
10(4)(d).
• Goods purchased for business activity, but subsequently used for
personal use or other activity not in the course of business - Section
19(7)(a).
• Bogus purchases (bill traders) - Section 19(13).
• Supplier’s registration cancelled – Section 19(15).
• Transfer/sale of business not as a whole - Section 19(14).
• Input tax credit not claimed in time (within financial year or 90 days
of purchase) - Section 19(11).
• Tax invoice lost/misplaced and carbon copy not given in time.
• Tax invoice lost/misplaced and if AO rejects claim.
• Input tax credit on capital goods claimed but capital goods sold
within 3 years - Section 19(4)(b)
• Arithmetic calculations and wrong workings and claims.
• When business is stopped or closed, the input credit availed to the
extent that it pertains to goods remaining unsold shall be reversed
on the date of such stoppage/closure.
The reversals for each of the above may be prepared in the following tabular
manner:
60
Annexure III to Monthly Returns in Form I

Details for reversal of Input tax credit during the month ………………………..
S. Nature of Section/ Commodity Value Rate TIN Reversal of
No. transactions Rule Code (Rs.) of Input tax
tax Credit (Rs.)
(1) (2) (3) (4) (5)
1 Goods used for Sec.2(11)
civil structures
2 Goods utilised Sec.19(7)(a)
for self use
3 Purchase of Sec.19(7)(b)
automobiles
and spare
parts other
than dealer in
automobiles
4 Purchase of Sec.19(7)(c)
air
conditioners
other than
dealer in air
conditioners
5 Goods Sec.19(8)
given as
gift, free
sample
6 Goods lost on Sec.19(9((i)
theft, loss etc.,
7 Inputs Sec.19(9)(ii)
destroyed in
fire or lost
8 Inputs Sec.19(9)(iii
damaged in )
transit or
destroyed
before
manufacture
61
9 Unavailed Sec.
credit on 19(3)(b)
capital goods
(time barred)
10 Consignment Sec. 19(4)(i)
Sales without & (ii)
'F' Form
11 Stock transfer Sec. 19(4)(i)
without 'F' & (ii)
Form
12 Purchases for Sec 19(5)(a)
production of
exempted
goods
(Finished)
13 Inter-State Sec.
sale without 19(5)(c)
'C' Form
14 Purchase Sec. 14(i)
return
15 Input tax credit Sec. 19(12)
availed for
Finished goods
subsequently
exempt
16 Others
(specify)
Total
Input Tax Credit and Common Inputs
• Inputs directly identifiable and relating to sale of taxable goods shall
be eligible for input tax credit in full, subject to other conditions as
applicable.
• Inputs directly identifiable and relating to sale of exempted goods
shall not be eligible for input tax credit.
• Inputs common to both taxable and exempted goods which cannot
be identified separately, the input tax credit reasonably attributable
62
to that portion of exempted sales has to be arrived at by

apportionment, based on acceptable workings, has to be reversed.
In TNVAT Act, 2006, no specific formula has been prescribed for the
apportionment.
The method of formula or any basis adopted by the dealer for each of the
above reversals or for the common inputs should be consistent between the
various months of an year and from year to year. If there is any change in the
method or the basis of the input tax credit reversal workings compared to the
earlier month/year the same needs to be reported with the impact of the VAT
reversal quantum involved.
Illustration
Where a dealer has taxable sales, sales of exempt goods and stock transfer
of taxable goods, the eligible input tax credit or reversal of the same may be
computed as below:
M/s. Tendulkar Ltd. (TL) is engaged in manufacture of taxable and exempted
goods using common inputs. The dealer effects stock transfer of taxable
goods to other States besides making sales of both taxable and exempt
goods. The eligible input tax for a tax period is illustrated below:
Since TL is using common inputs for sales of taxable goods, sales of
exempted goods and for exempt transactions, the eligible input tax credit for
each tax rate should be computed by applying the formula A x B/C, where;
A = Input tax paid for each tax rate
B = Taxable turnover
C = Total turnover (Taxable turnover + Sales of exempt
goods + Value of stock transfer)
Vat Purchases Input tax Sales Output tax

5% 4,00,000 20,000 4,50,000 25,000
14.5% 2,00,000 29,000 3,00,000 37,500
Exempted NIL NIL 1,50,000 NIL
Stock NIL NIL 1,00,000 NIL
Transfer
TOTAL 6,00,000 49,000 10,00,000 62,500
63
INPUT TAX CREDIT REVERSAL EXEMPTED SALES:

49000/1000000*150000 = 7350 1
INPUT TAX CREDIT REVERSAL STOCK TRANSFER
5% GOODS: Rs 20000/1000000*100000 = 2000
STOCK TRANSFER REVERSAL IS 3% = 2000/5%*3% = 1200 2
14.5% GOODS: Rs 2,00,000 INPUT TAX CREDIT 3%
PORTION 200000*3% = 6000
INPUT TAX CREDIT 11.5% PORTION 200000*11.5% = 23000
PROPORTIONATE REVERSAL OF 3% 6000*100000/1000000 = 600 3
Total reversal 7,350 + 1200 + 600 = 9150
TOTAL VAT PAYABLE: 62500 - (49000-9150) = 22650
9. Section 19(14) - Merger, Acquisition
Where the business of a registered dealer is transferred on account of
change in ownership or on account of sale, merger, amalgamation, lease or
transfer of the business to a joint venture with the specific provision for
transfer of liabilities of such business, then, the registered dealer shall be
entitled to transfer the input tax credit lying unutilized in his accounts to such
sold, merged, amalgamated, leased or transferred concern. The transfer of
input tax credit shall be allowed only if the stock of inputs, as such, or in
process, or the capital goods is also transferred to the new ownership on
which credit has been availed of are duly accounted for, subject to the
satisfaction of the assessing authority.
10. Section 29 - Price Variation
(a) if a dealer receives in any year any amount due to price variations,
which would have been included in his turnover for any previous
year if it had been received by him in that year, he shall, within thirty
days from the end of the year in which such amount is received,
submit a return in the prescribed form to the assessing authority and
thereupon the assessing authority shall proceed to assess the tax
payable on such amount.
(b) if a dealer returns in any year any amount due to price variations,
which would have been excluded in his turnover for any previous
year if it had been returned by him in that year, he shall, within thirty
days from the end of the year in which such amount is returned,
submit a return in the prescribed form to the assessing authority and
64
thereupon the assessing authority shall proceed to arrive at the

quantum of the tax refundable on the amount returned by the dealer;
For example, sale of empty cooking gas cylinders were effected to public
sector petroleum companies during the financial year 2007-08 and difference
in consideration received later with the following details:
S.No. Particulars Price
1 Provisional sale price per cylinder agreed in 250/-plus
the year 2007-08 VAT/CST
2 Final price decided in July 2012 277/-
3. Differential amount received in October 2012 27/-
The dealer has to report about the receipt of the receipt of Rs 27/- per
cylinder on or before 30 days from the end of the year 2012-13.
11. Rule 10(5) - Where the original invoice is lost, the
input tax credit can be claimed only if the following
conditions are fulfilled.
Every claim made under clause (b) of sub-section (10) of section 19 shall be
presented before the assessing authority within thirty days from the date on
which the original tax invoice is lost. It shall be accompanied by a duplicate
or carbon copy of the original invoice. The assessing authority shall verify
such claim and pass orders allowing input tax credit on the basis of duplicate
or carbon copy of the original invoice or its rejection. When the claim is
rejected, the assessing authority shall record his reasons for doing so and
communicate to the dealer.
Provided that no order prejudicial to the dealer shall be passed unless the
said dealer is given an opportunity of being heard.
12. Section 42(5), Rule 11: Refunds
Section 42(5): Where the tax paid under this Act is found to be in excess on
assessment or revision of assessment, or as a result of an order passed in
appeal, revision or review, the excess amount shall be refunded to the dealer
after adjustment of arrears of tax, if any, due from him. Where the excess
amount is not refunded to the dealer within a period of ninety days from the
date of the order of assessment or revision of assessment and in the case of
order passed in appeal, revision or review within a period of ninety days from
the date of order giving effect to such order passed in appeal, revision or
review, the Government shall pay by way of interest, where the amount
65
refundable is not less than one hundred rupees, a sum equal to a sum
calculated at the rate of half per cent or part thereof of such amount for each
month or part thereof after the expiry of the said period of ninety days.
Explanation.—For the purpose of this section, the expression “order passed
in appeal, revision or review” shall not include order passed in such appeal,
revision or review with direction to make fresh assessment order.
Rule 11: (1) The assessing authority shall issue refund of amount specified
in Form P within ninety days from the date of service of the said Form, failing
which the assessing authority shall also pay the interest at the rate
prescribed under the Act along with such refund amount.
(2) The dealer who claims refund due to sale effected by him under sub-
section (1) of section 18 shall file an application in Form W to the assessing
authority along with copies of invoices or bills of related purchases within one
hundred and eighty days from the date of accrual of such claim. The
assessing authority after verification of the correctness of the claim, shall
issue refund within ninety days from the date of the receipt of the application
in Form W.
13. Section 42(3) - Interest Payable
In respect of any amount not paid on or before the due date as per the Act,
the dealer shall pay in addition to the amount of taxes/penalty due, interest at
one and a quarter percent per month or part thereof of such amount for the
entire period of default.
14. Rule 6 - Maintenance of Accounts
Every registered dealer shall maintain true, correct and complete accounts in
ink or electronic records in any of the languages specified in the Eighth
Schedule to the Constitution of India or in English showing the goods
produced or manufactured, bought, sold, delivered or supplied.
Records to be maintained includes
• Purchase account
• Sales/stock transfer account
• Production cum stock account
• Stock register
• Input tax adjustment account showing opening balance, claim during
the period, output tax, adjustments, reversals, etc.
66
• Capital goods input tax adjustment account

• Record of sales through agents
• Record of purchases/goods received for sale from principal
• Invoices
• Certificate of industrial inputs
• Register of certificates issued
• Register of certificates received
• Register of delivery notes
• Cash book
• Bank book
• General ledger
It is compulsory to maintain accounts of purchases and sales showing the
following particulars.
Purchases
A register with the following format may be maintained
S. Name of Commodity Goods Invoice/ Value Rate VAT/ Catego
No Seller / Code * movement Challan of of CST ry*
Consign document No, goods VAT/ Paid
or and s like LR Date CST
TIN RR, DC
etc
*for these details refer the website of the Department

The above format should provide the under mentioned details and data
prescribed.
• Invoice no., date and seller’s TIN.
• Description of the goods purchased with commodity code.
• Quantity of goods.
• Value of goods purchased from registered dealers with rate of tax.
67
• Value of goods purchased from unregistered dealers with rate of tax.

• Inter-State purchases with C Form.
• Inter-State purchases without issue of C Form.
• Value of goods purchased in respect of second schedule goods.
• Value of inward stock transfer from outside the State.
• Value of stock transfer from prinicpal within the State.
• Value of goods imported.
• Value of goods returned.
• Total tax paid on purchases effected from registered dealers
situated within the State of Tamil Nadu.
The monthly returns may be prepared by using the above particulars.
Categories of purchases/receipts as per Annexure I to Form I - VAT return:
Particulars Category
Code
Capital Goods C
Exempted E
Import I
Inter-State Purchase O
Local Purchase Input First Schedule R
Stock Receipts from Head Office/Branches/Principals outside S
the State
Purchases effected through Agents/Branches A
Industrial Inputs B
The purchase orders, original tax invoices and goods received notes orders
and delivery notes, job books, annual accounts including trading accounts,
profit and loss accounts and balance sheet; bank statements and bank pay-in
slips are also to be maintained.
68
Stock Transfer / Sales

S. Name of Commo Goods Invoic Value Rate VAT/ Categ
No. Customer / dity movement e No of of CST ory*
Consignee Code * document Date goods VAT/ Paid
and TIN s like LR, CST
RR, DC,
etc.
*for these details refer the website of the Department

The above format should provide the under mentioned details and data
prescribed.
• Invoice no., date and buyer’s Taxpayer Identification Number (TIN).
• Description of the goods with quantity and value sold.
• Value of purchases of exempted goods.
• Value of goods purchased from registered dealers with rate of tax.
• Value of goods purchased from unregistered dealers with rate of tax.
• Inter-State purchases with C Form.
• Inter-State purchases without C Form.
• Value of goods covered under the second schedule purchased.
• Value of inward stock transfer from outside the State.
• Value of stock transfer from Prinicpal within the State.
• Value of goods imported.
• Value of goods returned.
• Total tax paid on local purchases.
69
Categories of Sales / Stock Transfer as per Annexure I to Form I - VAT

Return:
Particulars Category Code
Exempt E
Sales Return R
Inter-State Purchase O
First Schedule F
Stock Transfer outside the State S
Sales effected through Agents/Branches in the State A
Zero Rated Sales Z
15. Rule 6(4) - Bill of Sale or Invoice

• Bill or invoice shall be issued for each sale in triplicate.
• The invoice shall contain the following particulars:
o Name and Address of the Buyer & Seller
o Sequential Serial No. of Invoice
o Particulars of Goods
o Quantity Sold
o Value
o Rate and Tax Charged
o TIN of the Seller
o TIN of the Buyer, if the Buyer is a Registered Dealer.
• The original is meant for the buyer, duplicate is to be retained by the
seller and the third copy is to be kept for submission to the
assessing authorities, whenever required.
Records to be maintained in respect of agency transactions
• By the Principal
o Every registered dealer, who effects sales through agents
shall maintain the accounts of goods consigned on each
occasion, agent-wise showing the following particulars:
1. Name and full address of the agent
2. Nature and quantity of goods despatched
3. Mode of despatch and delivery note
70
o The following documents shall also be maintained:

1. Originals of the written contract, if any, entered into
between him and the agent,
2. Office copies of the authorisation letter,
consignment notes or despatch advices, as the
case may be, sent to the agent in respect of the
goods despatched on each occasion.
• By the Agent
o Every commission agent, broker, del credere agent,
auctioneer or other mercantile agent, by whatever name
called, shall maintain-
(ii) a register showing the particulars of goods
purchased or received for sale, on each occasion,
in respect of each principal, separately;
(iii) details of purchases or sales effected on behalf of
each principal, showing the names of commodities,
quantities and value of purchases or sales and the
tax due thereon;
(iv) the original or copy of the written contracts, if any,
entered into between the agent and the principal;
(v) copies of authorisations received by him to
purchase or sell goods on behalf of each principal
separately;
(vi) copies of pattials, i.e., accounts rendered by the
agent to the principal from time to time, showing
the gross amount of the purchases or sales,
deductions on account of commission and
incidental charges and the net amount payable to
the principal.
Statements to be filed by Agent
• Every agent shall furnish a statement in respect of each principal
showing the turnover of purchases or sales effected on behalf of
each principal in the previous month containing the following
particulars, namely:-
o Name and Address of the Principal with TIN and CST number.
71
o Goods taxable at 1%, 5%, 14.5%, name of goods sold, value

of each type of such goods.
o Amount of input tax paid or payable on purchases on behalf
of the principal.
o Amount of output tax due on the turnover.
• The statement shall be furnished to the assessing authority
concerned on or before the 20th of each month, relating to
transactions effected during the immediately preceding english
calendar month.
Production-cum-stock Account
Every registered dealer who manufactures or produces shall maintain a
production–cum-stock account in Form H.
RAW MATERIALS
S. Date Opening Purchase/ Total Issues Wastage Closing
No Stock Stock Stock (6) Stock
Transfer/ (3+4) (5-6)
Recycle,
For For For
etc.
Manufac Labour Sale
turing
(1) (2) (3) (4) (5) (a) (b) (c) (7) (8)
FINISHED GOODS
S. Date Opening Production Total Sales Stock Production Closing
No. Stock (3+4) Transfer Waste Stock
(5 – 6 –
7)
(1) (2) (3) (4) (5) (6) (7) (8) (9)
72
Input Tax Credit Adjustment Account

Every registered dealer, who claims input tax credit shall maintain an input
tax adjustment account with the following particulars, namely:-
• Month
• Input Tax Credit brought forward
• Input Tax Credit claimed during the month at the following rates
o 1%
o 5%
o 14.5%
• Purchase Tax Paid
• Reversal of Input Tax Credit
• Total Input Tax Credit
• Ineligible Input Tax Credit
• Net Input Tax Credit claimed
• Output tax
• Advance tax adjusted including entry tax, if any.
• Tax payable
Input Tax Credit on Capital Goods
Every registered dealer who claims input tax credit on capital goods shall
maintain input tax adjustment account for each capital good separately with
the following particulars, namely:-
• Month and Year
• Date of Commencement of Commercial Production
• Value of Capital Goods
• Rate of Tax
• Tax Paid
• Tax Credit Availed:
o First year not exceeding 50%
o Second year
o Third year
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• Tax Reversals
• Tax Lapsed
Details of Stock Transfers
• Stock Transfers (Inward)
o Stock Transfer Note/Consignment Note
o Goods Received Note
o Form F issued
o Register of Inward Stock Transfers
• Stock Transfers (Outward)
o Stock Transfer Note/Consignment Note
o Delivery Challan
o Form F received
o Register of Outward Stock Transfers
16. Rule 10(6) - Debit/Credit Notes
Adjustment for purchase/sales return will be allowed only if the goods are
returned within a period of six months from the date of purchase/sale
respectively.
However, any post sale credit notes issued for discounts or sales incentives
shall be without affecting the tax component in the original invoice so as to
retain the quantum of input tax credit already claimed by the buyer.
The following format of A4 prescribed under the TNGST Act, 1959 may be
used for the sales returns:
S. Name Sale Month in Goods Goods Reasons Amount Credit Whether Goods Stock
No. & TIN Invoice which Involved Returned for the of Tax Note Tax & Rebooking Book
of & Date Sale or & or Return Paid or Value LR date Page
Buyer Purchase Quantity Received of Debit Refunded and ref No.
Included back Goods note in full
in with and
Turnover
Quantity Date
and
Value
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17. Rule 6(7) - Jewellery Manufacturer

Jewellery manufacturer shall maintain an order book showing the following
details:
Sl Date Name Sequential Weight of Date of Details of Goods
no of and Job Order Bullion or Delivery of Bullion or Returned
Tob Addres No Old Jewels Finished Old Jewels and
Orde s of the Semi- Jewellery Semi- Accounting
r Custom precious precious of Wastage
er Stones Stones
added by
the dealer
18. Section 6(4) - Works Contractor

A dealer, exercising option under sub-section (1) shall, so long as the option
remains in force, not be required to maintain accounts of his business under
this Act or the rules made thereunder except the records in original of the
works contract, extent of their execution and payments received or
receivable in relation to such works contract, executed or under execution.
Documents relating to Export Transactions
• Copies of the invoices related to the exports.
• Copies of bill of lading/air/road/railway bill no. & date.
• Copy of the customs clearance certificate.
• Purchase orders/contracts from foreign customers.
• Copies of the invoices issued in respect of sale against Form H.
• Form H declarations received.
• Register of Form H sales.
• Evidence of payment for the goods such as a copy of the letter of
credit.
• High sale agreement, if the sale is in the course of export.
Documents in inter-State Sales
• Copies of the invoices related to the sales.
• Delivery challans.
• Evidence of transportation in the form of waybills/other evidence.
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• Declaration in Form C, if any.

• Register in Form 10.
Documents relating to sales in the course of import
• Purchase order with date from customer in India.
• Goods import order placed with the foreign suppliers with date.
• Goods import details - import invoice, date, bill of lading, packing
slip, etc.
• Local sale invoice after clearance by the dealer.
• Payment receipt details.
Documents relating to High Sea Sales
• Goods import order placed with the foreign suppliers with date.
• Goods import details - import invoice date, bill of lading, packing
slip, etc.
• High sea sale agreement, if any.
• Endorsed copy of bill of lading, if any.
• Copy of bill of entry filed by the high sea buyer.
• Payment receipt details.
19. Rule 8 - Deduction from the Total Turnover
Sale of tax exempt goods under Fourth Schedule or notification issued
u/s 30.
• Trade Discount shown in the invoice as a deduction from sale value.
• VAT charged separately.
• Consideration relating to sale of business as a whole.
• Interest or finance charges.
• Purchase returns within six months from the date of purchase
provided that the amount is refunded and the date of return and
refund date is shown in the accounts.
• Sales returns within six months from the date sale provided the
amount is refunded and the date of receipt of returned goods and
refund date is shown in the accounts.
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• Agricultural or horticultural produce, (from own or leased land) which

is not subjected to physical, chemical or other process for making it
fit for consumption, save mere cleaning, grading, sorting or drying,
shall be excluded from turnover.
• Amounts charged for anything done before or at the time of sale is
includible in turnover like freight charges, transit insurance, packing
charges, loading expenses, lot cooly, etc.,
• Certain amounts are not to be considered as assessable turnover
like freight charges incurred post sales and got reimbursed at
actuals, transit insurance at actuals when the terms of sale is ex
factory or FOB terms, etc.
20. Rule 7 - Filing of Returns
(1) (a) Every registered dealer liable to pay tax under the Act, other than a
dealer who opted to pay tax under sub-section (4) of section 3 or section 6 or
section 8 including agent of a non-resident dealer and casual trader, shall file
return for each month in Form I on or before 20th of the succeeding month,
to the assessing authority in whose jurisdiction his principal place of business
or head office is situated. Such return shall be accompanied by proof of
payment of tax.
(b) Every in Form J on or before 20th of the succeeding month to the
assessing authority in whose jurisdiction his principal place of business or
head office is situated. Such return shall be accompanied by proof of
payment of tax:
Provided that a registered dealer specified in clause (a) or (b), whose taxable
turnover in the preceding year is two hundred crores of rupees and above,
shall file the above returns on or before 12th of the succeeding month to the
assessing authority in whose jurisdiction his principal place of business or
head office is situated. Such return shall be accompanied by proof of
payment of tax:
(c) The option exercised under sub-section (4) of section 3 of the Act
shall be final for the financial year and such option shall be exercised within
thirty days from the date of commencement of the Act or commencement of
his business whichever is later.
(d) Every registered dealer who opts to pay tax under sub-section (4) of
section 3 shall file a return for each month in Form K on or before 20th of the
77
succeeding month to the assessing authority along with proof of payment of

tax.
(e) Every registered dealer who opts to pay tax under section 6 or
section 8 shall file a return for each month in Form L on or before 20th of the
succeeding month to the assessing authority along with proof of payment of
tax.
(2) Every principal or head office shall include the turnover relating to
the goods consigned to the agent and file a return in Form I for each month
on or before 20th of the succeeding month with the particulars of name and
full address of the agent, value of the goods sold or purchased, tax collected
on sale and tax paid on purchase by the agent along with proof of payment of
tax.
(3) Every branch or agent of a dealer shall file a return in Form I, on or
before the date on which the head office or his principal has to file return, for
the preceding month, to the assessing authority under whose jurisdiction he
carries on business.
(4) Every department of Government liable to pay tax under the Act
shall file a statement in Form M showing the total and taxable turnover for
each quarter on or before 20th of the month succeeding the quarter along
with proof of payment of tax.
(5) Every dealer liable to pay tax under the Act shall file return in
duplicate:
Provided that such category of dealers as may be directed by the
Commissioner shall file returns electronically or in ICR form supplied by the
Government.
(6) If a dealer receives or returns in any year any amount due to price
variation, he shall within thirty days from the end of the year submit a return
in Form N to the assessing authority.
Suggested Accounting Treatment
Vat Credit in case of Inputs/Supplies
The following is extracted from the Guidance Note on Accounting for State-
level Value Added Tax issued by the ICAI [GN (A) 19 (Issued 2005)]
Illustration
1. A dealer purchases the following goods in a State during the month
of March 2013:
78
Particulars Total Input Tax Net

Amount Paid Amount
(Rs.) (Rs.) (Rs.)
4% VAT Goods 10,40,000 40,000 10,00,000
12.5% VAT Goods 9,00,000 1,00,000 8,00,000
VAT Exempt Goods 2,00,000 - 2,00,000
Total 21,40,000 1,40,000 20,00,000
2. The input tax paid on purchases of goods is eligible for VAT credit.
3. Sales made by the dealer during the month are as below:
Particulars Gross Out put Tax Net Sales
Amount Collected Consideration
(Rs.) (Rs.) (Rs.)
4% VAT Goods 11,44,000 44,000 11,00,000
12.5% VAT Goods 10,12,500 1,12,500 9,00,000
VAT Exempt Goods 2,50,000 - 2,50,000
Total 24,06,500 1,56,500 22,50,000
1. The dealer passes the following entry to record the goods purchased
and input tax paid thereon:
4% VAT Goods Purchase A/c Dr. Rs. 10,00,000
12.5 % VAT Goods Purchase A/c Dr. Rs. 8,00,000
VAT Exempt Goods Purchase A/c Dr. Rs. 2,00,000
VAT Credit Receivable (Inputs) A/c Dr. Rs. 1,40,000
To Bank A/c Rs. 21,40,000
(Being the cost of goods purchased with VAT)
2. The dealer passes the following entry to record the goods sold and
VAT collected thereon:
Bank A/c Dr. Rs. 24,06,500
To 4 % VAT Goods Sales A/c Rs. 11,00,000
To 12.5% VAT Goods Sales A/c Rs. 9,00,000
To VAT Exempt Goods Sales A/c Rs. 2,50,000
To VAT Payable A/c Rs. 1,56,500
(Being the value of goods sold with VAT)
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3. The dealer passes the following entry to record the liability for VAT
payable met by using the balance in the VAT Credit Receivable (Inputs)
Account:
VAT Payable A/c Dr. Rs. 1,40,000
To VAT Credit Receivable (Inputs) A/c Rs. 1,40,000
(Being liability for VAT payable, met by using the balance in the VAT Credit
Receivable (Inputs) Accounts)
VAT Payable A/c is disclosed in the balance sheet as below:
Extracts from the Balance Sheet
Current Liabilities: Rs.
VAT Payable Account 16,500
4. Accounting Standing (AS) 2, ‘Valuation of Inventories’, does not
require disclosure of components of the cost of inventories as a part of
significant accounting policies. However, the dealer may, if he so desires,
include the following sentence in the accounting policy regarding valuation of
inventories to specify the treatment regarding VAT credit available on
purchases: the cost of inventory is exclusive of VAT credit.
5. The dealer may include the following sentence in the accounting
policy regarding revenue recognition to specify the treatment of output tax:
Sales are exclusive of VAT.
6. Suppose the dealer makes payment of outstanding VAT liability at
the beginning of the next month. To record the payment, the dealer passes
the following entry:
VAT Payable A/c Dr. Rs. 16,500
To Bank A/c Rs. 16,500
(Being payment made for VAT liability)
21. Section 40 - Collection of Tax
(1) No person, who is not a registered dealer, shall collect any amount
by way of tax or purporting to be by way of tax under this Act; and no
registered dealer shall make any such collection except in accordance with
the provisions of this Act and the rules made thereunder:
Explanation.- For the purposes of sub-section (1), any State Government or the
Central Government or any dealer shall be deemed to be a registered dealer.
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(2) If any person or registered dealer collects any amount by way of tax
or purporting to be by way of tax, in contravention of the provisions of sub-
section (1), whether or not any tax is due from such person or dealer under
this Act in respect of the transaction in which he collects such amount, the
assessing authority may, after giving such person or dealer a reasonable
opportunity of being heard, by order, in writing, impose upon him by way of
penalty a sum, which shall be:
(i) where the excess amount has been collected in the bona fide belief
that it had to be collected, one hundred per cent of the amount
collected;
(ii) where the excess amount has been collected wilfully and knowing
that it was not due to be collected, one hundred and fifty per cent of
the amount collected:
Provided that no proceedings under this sub-section shall be commenced
after a period of five years from the date of order of the assessment:
Provided further that no prosecution for an offence under sub-section (2) of
section 71 shall be instituted in respect of the same facts on which a penalty
has been imposed under this sub-section.
22. Sections 3(2), 3(6), 3(7) - Tax on Spares and
Accessories, Packing Materials
3(2) Subject to the provisions of sub-section (1), in the case of goods
specified in Part - B or Part - C of the First Schedule, the tax under this Act
shall be payable by a dealer on every sale made by him within the State at
the rate specified therein.
3(6) When goods are sold together with containers or packing materials,
the rate of tax applicable to such containers or packing materials, as the
case may be, shall, whether the price of the containers or packing materials
is charged separately or not, be the same as those applicable to the goods
contained or packed and the turnover in respect of containers and packing
materials shall be included in the turnover of such goods.
3(7) Where the sale of goods, packed in any container or packed in any
packing material, in which such goods are packed, is exempt from tax, then
the sale of such containers or packing materials shall also be exempt from
tax.
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Central Sales Tax Act, 1956

A. Categories of Sales
Sales can be broadly classified in three categories.
(1) Inter-State Sale, e.g.: Chennai (Tamil Nadu) to Trivandrum (Kerala)
(2) Sale during Import/Export- No tax is levied on sales during import
or export.
(3) Intra-State (i.e. within the State) sale – e.g. from Chennai to
Madurai, etc.
If a sale is Inter-State or during export or import, it cannot be ‘Sale within the
State’.
B. Charging Section of CST
Section 6(1) imposes the levy on sale of goods on Inter-State sale. The levy
is subject to other provisions and exemptions mentioned in the Act.
Section 8(1) prescribes concessional rate of taxes in certain cases.
Section 6(2) exempts subsequent sales by transfer of documents during
movement of goods etc. Proviso to section 6(1) exempts sale of goods in the
course of exports.
1. Meaning of ‘Inter-State Sale’
Section 3 of CST Act, 1956 defines Inter-State sale or purchase as follows:
A sale or purchase of goods shall be deemed to take place in the course of
inter-State trade or commerce if the sale or purchase
a) occasions the movement of goods from one State to another or
b) is effected by a transfer of documents of title to the goods during
their movement from one State to another.
2. Sale which occasions Movement of Goods
As per Section 3(a), ‘Inter State Sale’ takes place if the sale occasions
movement of goods from one State to another.
Hence, it can be said that a sale can be said to be in the course of inter-State
trade and commerce only, if the following two conditions exists viz.,
(i) Sale of goods
(ii) A transport of those goods from one State to another.
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3. Sale by Transfer of Documents (Section 6(2) of CST Act, 1956)

A sale or purchase of goods shall be deemed to take place in the course of
inter-State trade or commerce if the sale or purchase is effected by a transfer
of documents of title to the goods during their movement from one State to
another. This definition is important as all subsequent inter-state sales to
registered dealers by transfer of documents during movement of goods are
exempt from sales tax [E-I, E-II transaction].
For example, when customer A at Chennai gets an order for the supply of
goods to a customer B in Bangalore (Karnataka State) and despatches the
goods from Chennai to Bangalore and sends the sale invoice and related
Lorry receipt to B. The customer B in Bangalore instead of taking delivery of
goods sent, makes a further sale to customer C in Cochin (Kerala) or to
another customer M in Mysore (Karnataka) then the subsequent sale by B to
C or M is called transit sale and the such subsequent sale by B is exempt
from the levy of CST subject to the production of declaration
forms/certificate.
B has to issue Form C to A and will collect E1 Certificate from A.
B has to collect Form C Declaration from C or M.
By producing the Form C and E1 Certificate the CST exemption is to be
claimed.
Section 3(a) requires that sale should occasion movement of goods’.
There is no such requirement in Section 3(b). Hence, for purpose of Section
3(b), the movement of goods from one State to another need not be
occasioned by sale.
A statement for the sales in transit is to be prepared as per Annexure II of
monthly returns to be field by the dealer for the sales effected under this
category. A copy of the CST monthly return is attached to this. The VAT
auditor may verify the contents of this statement to satisfy about the
correctness of the claim to decide about the exemption from the levy of CST.
4. Stock Transfer / Branch Transfer
If a manufacturer sends goods to his branch situated in other State, it is not a
‘sale’ as one cannot sell to his own self. One of the basic and obvious
conditions of inter-State sale is that there should be a “sale”.
Similarly, if a dealer sends goods to his agent in other State who stocks
goods on behalf of the dealer, it is not a sale. Such agent is usually called
83
‘Consignment Agent’. Goods are despatched to another State on

consignment basis and the person despatching goods retains ownership of
goods. Since no sale is involved, there is no ‘Inter State Sale’.
Mere consignment of goods by a manufacturer to his own branches outside
the State does not amount to sale or disposal as such; the consignment of
goods is neither sale nor a purchase. This is called ‘stock transfer’ or ‘branch
transfer’. Here, movement of goods takes place from one State to another,
but it is not an inter-State sale.
Goods received/sold by the consignment agent are not his purchases and
sales. Therefore, the financial accounts may not reflect the details of goods
received and sold. There is a need to reconcile the goods received and sold
and this is to be considered while correlating the own sales (or purchases) of
agent and that of the sales (or purchases) made by him as agent.
5. Calculation of Sales Turnover
CST is payable on ‘turnover of a period’ and at the rate determined as per
Section 8.
Turnover - ‘Turnover’ [often called ‘taxable turnover’] is defined u/s 2(j) as
aggregate of the sale prices received and receivable by the dealer in respect
of sales of any goods in the course of inter-State trade or commerce made
during any prescribed period and determined in accordance with provisions
of rules made thereunder. CST Act, 1956 and rules made thereunder.
Section 8A (1) states that in determining turnover, deductions are to be made
from the aggregate of sale price. Such deductions are:
1. CST involved in the sale
2. Sales returns
Thus, total of ‘sale price’ of all inter-State sales effected during the
prescribed period (monthly in Tamil Nadu) less the Central Sales Tax
payable is the ‘turnover’ (taxable turnover) of dealer for that period.
The ‘aggregate sale price’ i.e. total sale price for the prescribed period is
assumed as inclusive of Central Sales Tax and backward calculation is
made. Thus, if aggregate of sale price is ‘S’ and rate of tax is ‘T’; ‘turnover’
and ‘tax payable’ will be calculated as follows :
100 x S
Turnover =
100 + T
84
SxT
Tax payable =
100 + T
6. Aggregate Sale Price
Gross Turnover is aggregate sale price of all sales effected during a given
period.
“sale price” means the amount payable to a dealer as consideration for the
sale of any goods, less any sum allowed as cash discount according to the
practice normally prevailing in the trade, but inclusive of any sum charged for
anything done by the dealer in respect of the goods at the time of or before
the delivery thereof other than the cost of freight or delivery or the cost of
installation in cases where such cost is separately charged;
Provided that in the case of a transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract,
the sale price of such goods shall be determined in the prescribed manner by
making such deduction from the total consideration for the works contract as
may be prescribed and such price shall be deemed to be the sale price for
the purposes of this clause.
Invoice can be prepared by showing tax separately. When tax is not shown
separately - in that case, it will be cum-tax price i.e. price inclusive of CST. In
either case, ‘Sale Price’ will be the total amount received by the seller i.e.
inclusive of tax.
Inclusions in Sale Price
Pre Sale Charges: Any sum charged for anything done by the dealer in
respect of goods at the time or before the delivery of goods.
Thus, ‘sale price’ will include –
1. Weighment charges for weighing of goods at the time of delivery.
2. Design charges in respect of goods.
3. Central sales tax - whether or not shown separately in the invoice.
4. Excise Duty.
5. Packing material as well as packing charges (i.e. like labour charges
for packing goods).
Freight and delivery charges allowable as deduction are only those which are
incidental to sale. Thus, in case of sale of goods from depot, transport
charges from factory to the depot cannot be allowed as deduction.
85
Exclusions from Sale Price

1. The cash discount for making timely payment. [Section 2(h)]
2. Transit Insurance charges incurred at the request of the buyer.
3. Freight Charges *
4. Sales Return
* Generally, CST is payable only on ex-works price and no CST is payable
on freight and transport charges. However, CST may be payable on freight
charges if
• Freight charges are not shown separately in invoice, or
• Contract is for FOR destination.
5. If goods are returned by the buyer within six months from the date of
sale, the value of goods returned will be deducted from ‘Aggregate Sale
Price”.
7. Sections 5(1), 5(2), 5(3), 6(2), 8(5) & 8(6) - Exemptions from CST
CST is leviable even if sale of goods inside a State is exempt from VAT
[Section 6(1A)]. However, this section is subject to:
• Section 6(2) - sales during movement of goods - (Transit sales or
E1 sales )
• Section 6(3) - Central Government can grant exemption to foreign
diplomatic missions Like UN, international organizations
etc.
• Section 8(1) - this provides for lower/nil tax rate when sale is to
registered dealer, when VAT is lower than 2% / Nil.
• Proviso to Section 6(1) - provides for exemption when sale is
penultimate to export as defined u/s 5(3). (Form H sales)
• Section 8(6) - sale to SEZ unit.
• Section 8(5) - notification by State Government.
8. Section 5 - Sale in Course of Export
Article 286(1)(b) prohibits imposition of tax on import/export by States.
Charging Section 6(1) of CST Act levies tax only on inter-State sale.
Article 286(2) authorises the Parliament to formulate principles for
determining when sale is in the course of import/export. Under these powers,
86
Section 5 of CST Act has been enacted.

Similarly, imports are subject to custom duty and hence these should not be
subject to sales tax.
‘Sale during export’ includes not only direct exports, but also
• Sale by transfer of documents after the goods cross the customs
frontiers.
• Penultimate sale for export (Form H).
• Export with the help of agent.
Section 5(1): A sale or purchase of goods is deemed to be in course of
export of the goods out of the territory of India, only if the sale or purchase
either occasion such export or is effected by a transfer of documents of title
to goods after the goods have crossed the customs frontiers of India.
Section 5(3) states that notwithstanding provisions of section 5(1), last sale
or purchase of goods preceding the sale or purchase occasioning the export
of those goods out of territory of India shall also be deemed to be in the
course of such export, if such last sale or purchase took place after, and was
for the purpose of complying with, the agreement or order for or in relation to
such export.
In view of all the above, export sales, sale in the course of export are not
taxable.
9. Section 5(3) - Penultimate Sale for Export
Penultimate sale, i.e. sale preceding the sale occasioning the export is also
deemed to be in the course of export under section 5(3) of the CST Act, 1956
and is exempt from tax.
Exemption to penultimate sale is subject to the condition that the penultimate
sale (i.e. last but one sale) is
• for the purpose of complying with agreement or order in relation to
export and
• such sale is made after the agreement or order in relation to export
and
• same goods which are sold in penultimate sale should be exported.
In other words, the actual exporter should be in possession of export order
from foreign buyer and should take delivery of the goods from the supplier
making penultimate sale, solely for the execution of such export order and
87
export the goods as such.

A statement containing the details as per annexure I of the CST monthly
return in form 1 is to be prepared by the dealer for the sales effected under
this category. A copy of the CST monthly return is attached to this. The VAT
auditor may verify the contents of this statement to satisfy about the
correctness of the claim to decide about the exemption from the levy of CST.
10. Section 14 & 15 - Declared Goods - Goods of Special
Importance
There are restrictions on imposition of tax on the sale of declared goods -
Article 286(3)(a).
‘Declared Goods’ are those, declared under Section 14 of CST Act, 1956 as
‘goods of special importance in inter-State trade or commerce’.
Section 14 of CST Act, 1956 gives a list of such goods and Section 15 specifies
restrictions on power of States to tax such goods. Additional excise duty is levied
on sugar, which is also a ‘Declared Good’ under the CST Act, 1956.
List of some of the declared goods are:
• Cereals i.e. paddy, rice, wheat, bajra, jowar, barley, etc.
• Coal and coke in all forms excluding charcoal.
• Cotton in un-manufactured form but not cotton waste.
• Cotton fabrics, cotton yarn.
• Crude oil.
• Hides and skins.
• Iron and Steel i.e. pig iron, sponge iron, iron scrap steel ingots,
billets, steel bars, etc.
• Jute.
• Oil-seeds i.e. groundnut, cotton seed, linseed, castor, coconut,
sunflower, mahua, kokum, sal, etc.
• Pulses i.e. gram, tur, moong, masur, urad, etc.
• Aviation Turbine Fuel sold to a turbo-prop aircraft.
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11. Section 17 - Other Provisions: Liability of Company in

Liquidation
If a liquidator or receiver is appointed for a Company, he should inform VAT
authorities within 30 days of the appointment. The appropriate VAT authority
will inform him within three months the amount of tax due from company
which is in liquidation. Liquidator cannot sell assets of company before
setting aside amount of due as informed by VAT authorities - unless such
transfer or sale is by order of Court, otherwise, liquidator is personally liable.
[Section 17].
12. Section 18 - Liability of Directors of Private Limited Company in
case of Liquidation
If a private limited company is being wound up, liability of directors of such
private limited company is personal if amount cannot be recovered in
liquidation i.e. the tax due can be recovered from his personal property. He
can save the liability only if he proves that non-payment of tax cannot be
attributed to any gross neglect, misfeasance or breach of duty on his part in
relation to affairs of the company.
13. Recovery of CST
Provisions of State VAT laws apply for recovery of CST also. Many of State
VAT laws provide that tax dues will have priority over any tax due and a
charge is created.
89
Chapter 7
Frequently Asked Questions on Audit
under Tamil Nadu VAT Act, 2006
(TNVAT Act, 2006)
1. How the turnover is calculated to ascertain the applicability of
Tamil Nadu VAT Audit?
Turnover for VAT audit includes Zero rated sales and Inter State
sales as per Section 3 of the CST Act, 1956. The term “turnover” is
aggregate of sales turnover plus the purchases turnover assessable
to tax under Section 12 of Tamil Nadu VAT Act, 2006.
2. When purchase turnover is to be included as turnover?
Section 12 mentions the circumstances where tax is leviable on
purchase turnover. In such cases, purchase turnover is included as
turnover.
3. Whether Tamil Nadu VAT audit is applicable by including all
business turnover of same assessee or single business
turnover alone to be considered?
The provision relating to Tamil Nadu VAT audit applies to every
registered dealer of all his businesses effecting aggregate of
turnover in excess of Rs.100 lakhs.
4. Whether Stock Transfer (both within the State & outside the
State) to be included in turnover or not?
Stock Transfer is to be included in turnover when the goods move
from Tamil Nadu to places situated outside the State of Tamil Nadu.
Total turnover = Taxable turnover + Sales of exempt goods + Value
of Stock Transfer + Purchases assessable to tax u/s 12 + Zero
Rated Sales
5. Whether the Consignment turnover or Agency turnover is to be
included in Agent's turnover or Principle's turnover?
Consignment turnover or Agency turnover is to be included in
Agent's turnover if he is an agent of a Non-resident Principal. If the
Frequently Asked Questions
Agent is an agent of a Resident Principal, it is the Principal who is

liable under this Act.
6. How the trade discount, cash discount and quantity discount
are dealt in arriving the sales turnover?
Discount allowed in the invoice itself is not liable for VAT and may
not be part of turnover assessable to VAT. In other situations, the
gross sale value is to be considered for working out the VAT liability
and other discounts may be part of turnover.
7. The assessee who opts the composition scheme, what is the
turnover to be reported?
(a) The dealers who opted to pay tax under the composition
scheme on his total turnover not exceeding Rs. 50 lakhs, to
report sales turnover and purchases turnover liable for
taxation as their taxable turnover.
(b) The dealers in hotels and restaurants, who opted to pay tax
under the composition scheme, are to report sales turnover
and purchases turnover liable for taxation as their turnover.
In respect of (a) and (b), there shall not be any Tamil Nadu
VAT audit as their turnover is less than the prescribed
Rs.100 lakhs.
(c) In case of works contractors who opted to pay tax under the
composition scheme is to pay tax on the whole contract
value.
Refer Section 6, 7 and 8 of TNVAT Act, 2006.
8. What is the time limit to take VAT Input Tax Credit?
The Input Tax Credit on purchases can be claimed during the month
of receipt of goods, if supported by original tax invoice containing
prescribed particulars. If input tax credit omitted to be claimed during
the month of purchase it can be claimed within 90 days from the
date of purchase or before the end of the financial year, whichever is
later.
9. Can the assessee can take input credit on items not related to
his business operations either as a manufacturer or as a trader.
eg: Stationary, Maintenance Spares, etc.
91
Input credit cannot be claimed on purchase of stationery,

maintenance spares, if the dealer is other than a dealer in such
goods.
10. What are the situations where input tax credit has to be
reversed and quantum of credit to be reversed?
Certain situations in respect of which input tax reversals to be made
are – sale of exempted goods, sales without C/F Forms, etc. Certain
other prescribed situations are:
• Input tax credit was availed but subsequently the related
goods have been stolen or damaged or destroyed.
• Input tax credit was claimed but subsequently it has been
detected that related purchases are from bogus traders (bill
traders).
• Input tax credit was availed but related goods have been
given as free sample or gift to others.
• Input tax credit availed but subsequently the related goods
are used to provide facility to the proprietor/partner/director
of the concern.
Refer Section 19, Rule 10 of the TNVAT Act, 2006 and the Rules
made there under.
11. Can assessee claim input tax credit when purchase tax is paid?
Input tax credit in respect of purchases tax paid can be claimed and
availed, if eligible.
12. How the input on capital goods can be availed and what records
are to be maintained for availment of the credit?
Every registered dealer who claims input tax credit on capital goods
shall maintain input tax adjustment account for each capital good
separately with the following particulars, namely:-
• Original invoice
• Month and Year of purchase
• Date of commencement of commercial production and its
intimation
• Value of capital goods
• Rate of tax
92
• Tax paid
• Tax credit availed:
First year not exceeding 50%
Second year
Third year
• Tax reversals
• Tax lapsed
Such details and data have to be maintained for a period of five
years.
13. Whether the person paying VAT as lease tax (right to use tax)
under Section 4 of TNVAT Act, 2006 can claim input credit?
The lessee is entitled to claim input credit on goods taken on lease
as per Section 4 and avail the same if otherwise eligible as per the
Act.
14. What is Industrial Input? How Industrial Inputs can be
purchased at a reduced rate?
• The Industrial Inputs are those goods which are notified by
Government and generally go into manufacture of other
goods and they are taxable at 5%.
• The purchaser of Industrial Input shall issue a certificate to
the seller containing the following details:
TIN of the purchaser
Name and address and TIN of the seller
Description of goods purchased
Description of goods manufactured
• No time limit is specified for issuing the certificate by the
purchaser. Hence, the certificate may be issued by the
purchaser within a reasonable time. If the certificate
prescribed is not available, the beneficial rate of tax at 5%
may not be applicable.
As per the GO 145 dated 16.07.07, goods mentioned under
the entry 67A of part B which are industrial inputs is liable
for taxation at 5% even if it is sold through traders.
93
15. If discount is allowed on purchases, whether VAT credit taken

has to be reversed or not?
Discount allowed in the invoice itself is not liable for VAT. In other
situations, the gross purchase value less discount is to be
considered for working out the effective VAT input claim.
16. What is the time limit of filing of revised return?
If there is any omission or error in the returns filed a revised return
can be filed rectifying the omission or error within a period of 6
months from the last day of the relevant period to which the returns
relates, before issue of any notice, detection by department.
17. What is the number of years the books & records are to be
preserved?
Accounts maintained by a registered dealer shall be preserved by
him for a period of six years from the date of assessment.
18. Can an assessee file an annual return after finalization his
books of accounts?
An assessee who is not liable to pay tax under this tax is alone
entitled to file Form I-1 Annual return, on or before the 20th day of
May of the succeeding year showing the total turnover in respect of
all goods dealt with by him.
19. Whether the Delivery Challan is a must for transporting the
goods?
When the good movement is accompanied by a bill of sale or
invoice, there is not requirement to use the prescribed Form JJ
Delivery Challans, for all other type of goods movement, the Form JJ
Delivery Challans is to be used.
20. What is meant by Zero Rated Sale?
Subsection (44) of Section 2, of the Act, defines the term.
“Zero rated sale” means a sale of any goods on which no tax is
chargeable but credit for the input tax related to that sale is
admissible. Section 18 lists out various types of Zero rated sales
which includes – sales to International Organizations like, UN
bodies, consulate offices, etc and includes direct exports falling
under Section 5(1) of CST Act and sales in the course of export
falling u/s 5(3) of the CST Act, 1956.
94
What is the time limit for sales return and how the tax paid on
sales can be adjusted?
Sales returns effected within six months from the date sale can be
claimed as deduction from the turnover, provided the sales return
value is refunded to the customer and the date of sale with tax
amount is separately shown in the credit note and such sales returns
is recorded in the books of accounts.
21. When tax on lease or tax on transfer of right to use goods is to
be levied?
Tax due on lease transactions is to be paid on or before 20th (12th for
dealers effecting turnover more than Rs. 200 crores) of every month
relating to the lease rentals receivable relating to the immediately
preceding month. Dealers who are effecting payment, electronically
are entitled to have additional two days time from the respective due
date.
22. Whether C-Form is applicable on the above right to use or lease
transaction?
Yes. C-Form is applicable on the above right to use or lease
transaction, if otherwise eligible.
23. When the option to be exercised for composition? If
composition is not opted how the works contract turnover is to
be reported?
Option to be exercised by applying to the assessing authority along
with the first monthly return for the financial year or in the first
monthly return after the commencement of the works contract.
Option once exercised shall be final for that financial year. If
composition is not opted, the Section 5 and Rule 8 of the TNVAT Act
and the Rules thereunder to be followed. The deemed sale value
involved is the basis to arrive at the output tax in respect of each
goods and the output tax is worked out at the applicable VAT rate
mentioned in the schedules to the Act, for the goods involved. If the
labour and other like charges are not ascertainable from the books
and records, refer Rule 8(5) arrive at the tax turnover.
95
24. Can the assessee purchase goods against C Form on works

contract?
Yes, if the works contractor is eligible to purchase against C Form
as per Section 8 of the Act.
25. Can the assessee file both Form I and Form L for trading and
works contract separately?
Yes, they can file both the Forms.
26. If TDS certificate is not received but TDS has been deducted by
the contractee how the claim can be established?
Without TDS certificate in original tax deduction cannot be claimed.
96

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Tamil Nadu VAT Audit

Professional Development Committee

All rights reserved. No part of this publication may be reproduced, stored in a

Edition : February, 2013

Committee/Department : Professional Development Committee

Price : Rs. 120/- (including CD)

Published by : The Publication Department on behalf of the

Printed by : Sahitya Bhawan Publications, Hospital Road,

Date: 6th February, 2013 CA. Jaydeep Narendra Shah

Date: 6th February, 2013 CA. Charanjot Singh Nanda

2. Audit under VAT Legislation

the course of inter-State trade or commerce as specified in Section 3 of the

Particulars Audit by Departmental Surprise Inspection

Form WW prescribes annexures containing certain prescribed particulars and

1.1 Statement of Objects and Reasons

1.2 Books of Accounts and VAT Audit

1.3 Audit Report

2.1 Members in Practice

(i) engages himself in the practice of accountancy; or

2.2 Certificate of Practice

2.3 Members in Part Time Practice

3. Joint Auditors and VAT Audit

4. Branch VAT Auditors

5. Relatives or Employees as VAT Auditor

6. Consultant as VAT Auditor

7. A member of the Institute in practice shall not accept the

service(s) or assignment(s) payable to the statutory auditor/s together with

8. Appointment of an Auditor when he is

11. Audit Fees

fee to be charged. Fees cannot be fixed, based on the percentage of trading

12. Removal and Filling up of Vacancy of VAT

13. Submission of the VAT Audit Report

(12) Filing of documents either in permanent file or working papers file;

1. Agreeing to the Terms of Engagement

2. Knowledge of the Business

3. Discussion with the Audit Team

4. Systems and Internal Control

5. Assessment of Audit Risk and Deployment

6. Audit Plan and Audit Program

7. Risk Appetite of an Entity

liabilities or income or expenditure or with reference to period of time. The

9. Periodical Meeting with the Audit Team

11. Management Representation Certificates

12. Audit Report

13. Audit Working Papers File

14. Master File

of names of Directors, Partners, etc. of the dealer during the year

2. Applicability of Accounting Standards

Government in consultation with the National Advisory Committee on

Explanation: A company shall qualify as a Small and Medium Sized

3. Harmonised Criteria for Classification of

does not exceed rupees fifty crore in the immediately preceding

4. Applicability of Accounting Standards to

Exemptions or Relaxations for Non-corporate Entities falling in Level II

the concerned regulators to present interim financial results, e.g., quarterly

5. Disclosure of Accounting Policies

6. Implication of Non-compliance with

“A distinguishing mark of the accountancy profession is its acceptance of the