CBEC issues guidelines for detailed manual scrutiny of ST-3 Returns w.e.f. August 1, 2015

CBEC issues guidelines for detailed manual scrutiny of ST-3 Returns w.e.f. August 1, 2015

CBEC issues guidelines for detailed manual scrutiny of ST-3 Returns w.e.f. August 1, 2015

Background:

The Central Board of Excise and Customs (“CBEC” or “the Board”) vide Circular No. 113/07/2009-ST dated April 23, 2009 had laid down the procedure for carrying out detailed scrutiny of Service Tax Returns (“ST-3 Returns”) and had circulated a Return Scrutiny Manual for Service tax. However, with the introduction of Point of Taxation Rules, 2011 which shifted the liability of payment of Service tax from receipt basis to accrual basis and advent of Negative List based comprehensive taxation of services in July, 2012, the CBEC has unveiled the revised guidelines for detailed scrutiny of ST-3 Returns to be followed by the Revenue with effect from August 1, 2015 vide Circular No. 185/4/2015-ST dated June 30, 2015 (“the Circular”).

In terms of the Circular, the detailed scrutiny programme typically supplements the audit programme. The two processes of audit and scrutiny are, in fact, complementary to each other. The Board has further clarified vide the Circular that, "Even after the introduction of GST, it may be appreciated that the basic principles of scrutiny of returns and reconciliation of records would remain the same."

Gist of the guidelines for detailed manual scrutiny:

We are summarising herewith the gist of the guidelines issued vide the Circular for ease of understanding:

a. Commencement of detailed manual scrutiny of ST-3 Returns from August 1, 2015 onwards;

b. Preliminary scrutiny to be done by range officers;

c. Main focus on small assessees whose total tax paid (Cash + Cenvat) during Financial Year 2014-15 is less than Rs. 50 Lakhs, though on the direction of Chief Commissioner, scrutiny of ST-3 Returns can be made for assessee whose monetary limit exceeds even Rs. 50 Lakhs;

d. The purpose of detailed manual scrutiny of returns is to ensure the correctness of the assessment made by the assessee which includes checking the taxability of the service, the correctness of the value of taxable services, effective rate of tax after taking into account the admissibility of an exemption notification, abatement, or exports, if any etc.;

e. In doing this, the proper officer must rely mainly on assessment-related documents like agreements/contracts and invoices. Detailed financial records should not be called for in a routine manner;

f. Reconciliation of information furnished in the ST-3 return with ITR Form Nos. 4, 5, 6 and 26AS and any third party information made available;

g. Scrutiny process of an assessee should be completed in a period not exceeding 3 months;

h. In no event should an assessee be subjected to both audit and detailed manual scrutiny;

To view the full Circular, please click on the link below:

http://www.servicetax.gov.in/…/st-circ…/st-circ-185-2015.pdf

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

 

New Depreciation applicable in india, Companies Act 2013 & The Practical Implication

Depreciation, Companies Act 2013 & The Practical Implication

As we all know companies bill is passed by both houses of parliaments and some of is section are applicable from 1-4-2014. i.e. out of 470, 283 sections are applicable and section 123 and schedule II is one of them

Before discussing the this, first of all let’s have a look on major changes in schedule II

1. Companies act 1956 does not deal with the amortization of intangible Assets but New Schedule by companies’ act 2014 provide the method to amortize them.

2. Instead of method and rates of Depreciation (whether WDV method or Straight line Method and Single shift or double shift or triple shift) new Act prescribed only assets’ useful life.

3. if a Company, being a class of company specifically prescribed by MCA, can adopt a different useful life longer than what is prescribed in Schedule II, however the same shall be disclosed, as Note on Accounts together with justification. For other companies, useful life cannot be longer than what is prescribed in Schedule II.

4. New act prescribed the residual value to be 5% of cost of asset, in older schedule there is no such prescription as but rates given by schedule are worked out by considering the 5% residual value.

5. New method for double shift and triple shift is prescribed under which addition depreciation of 50% or 100% will be allowed for double and triple shift respectively.

6. The concept of 100% depreciation of assets whose cost are less than Rs. 5000/- is deleted hence under new act it will be depreciated as per other normal provisions of schedule II.

7. Under act if any component of Asset have significant cost and has useful life other than the assets then is should be considered as separate asset for depreciation.

8. List of assets cover is more specific in new schedule.

The Practical Implication:

To apply the schedule II on the running companies schedule II has Note No. 7 which have 2 clauses we’ll discuss them sequentially

Note no. 7(a) from the date this Schedule comes into effect, the carrying amount of the asset as on that date shall be depreciated over the remaining useful life of the asset as per this Schedule II.

Let’s understand with the help if an example:

We taking a general purpose plant and machinery on WDV basis:-

Sr. No.	Particulars	Amount/Rate/ Remarks
1	Original cost	Rs. 1,00,000/-
2	Useful life and rate of depreciation as per old provisions	20 year and 13.91%
3	Useful life and rate of depreciation as per New provisions	15 years and 18.10%
4	Expired life	5 years
5	Accumulated depreciation for the expired life	Rs. 52,711/-

Now I am just pausing here to ask you some questions:-

1. What should be the carrying amount?

2. What should be the remaining useful life of Plant and machinery?

3. What should be the rate of depreciation?

4. What should be the amount for Depreciation?

Now Let’s find out the Answers:

Q.1. What should be the carrying amount?

Ans. Schedule II does not elaborate the meaning of carrying amount so we have to refer AS 28 which defines it as “Carrying amount means the amount at which an asset is recognised in the Balance Sheet after deducting any accumulated Depreciation/amortization and accumulated impairment losses thereon”. This AS does not talk about residual value so we do not deduct any residual value i.e. 5% of original cost of asset to arrive at the carrying amount.

Therefore carrying amount is: original cost less depreciation for the expired life

In given example Column 1 – column 5 i.e. 1,00,000-52,711= 47,289/-

Q2. What should be the remaining useful life of Plant and machinery?

Ans. The remaining useful life of the asset is: Revised life of assets as per schedule II less expired life of asset till 1.4.2014.

In given example: Revised life of Plant and machinery as per schedule II is 15 years and expired life is 5 years therefore remaining useful life is : 15-5= 10years

Q3. What should be the rate of depreciation?

1. Is it on the basis of revised useful life i.e. 15 years as mentioned in schedule II, which comes out 18.10% or,

2. On the basis of remaining useful life which is calculated in Q2. above i.e. 10 years and the rate comes out is 25.89%

Ans. In first instant rate 18.10% seems to be the correct answer, because we are takings about plant and machinery and its rate of depreciation on basis of its revised useful life as mentioned in schedule II is comes out 18.10%.

But as per note 7(a) the asset as on that date shall be depreciated over the remaining useful life of the asset as per this Schedule II.

So we take the rate on the basis of remaining useful life which is 10 years in given example and corresponding rate is 25.89%.

Q4. What should be the amount for depreciation?

Answer: The carrying amount @ rate corresponding to the remaining useful life of asset as at 1st April, 2014

Let's understand it:

If we reduce the residual value from carrying amount then that means we have taken residual value twice for calculating the depreciation because rates that we have derived are already worked out by setting apart 5% residual value. So we do not reduce residual value from carrying amount.

6	Remaining useful life as at 1st April, 2014 as per new provisions	10 years
7	Carrying amount (1-5)	47,289/-
8	Rate of depreciation on the basis of remaining useful life	25.89%

The result of above is as under:

Note 7 (b) From the date this Schedule comes into effect, the carrying amount of the asset as on that date After retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

Let's understand it with Example:

Sr. No.	Particulars	Amount/Rate/ Remarks
1	Original cost	Rs. 1,00,000/-
2	Useful life and rate of depreciation as per old provisions	20 year and 13.91%
3	Useful life and rate of depreciation as per New provisions	15 years and 18.10%
4	Expired life	16 years
5	Accumulated depreciation for the expired life	Rs. 90,896/-
6	Carrying amount	Rs. 9,104/-

Here clarification is needed for residual value that have to be retained, is on the basis of “carrying amount” which comes out as 9104*5%= 455 or on the basis of “cost of asset” which is 100000*5%= 5000

As per my personal views residual value is Rs. 5000/- on the basis of “cost of asset” because schedule II says the residual value should not be more than 5% of cost of the asset.

So the entry in the books of account at the beginning of the year i.e. on 1st April 2014 is

Retained earnings a/c Dr: 4104

To Asset a/c: 4104

 

Depreciation Methods

	GAAP
	Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets. Depreciation is a process of allocation. Cost to be allocated = acquisition cot - salvage value Allocated over the estimated useful life of assets. Allocation method should be systematic and rational.
	Depreciation Methods
	Depreciation methods based on time Straight line method Declining balance method Sum-of-the-years'-digits method Depreciation based on use (activity)
	Straight Line Depreciation Method
	Depreciation = (Cost - Residual value) / Useful life [Example, Straight line depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method. Depreciation for 2011 = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000 Depreciation for 2012 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000 Depreciation for 2013 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000
	Declining Balance Depreciation Method
	Depreciation = Book value x Depreciation rate Book value = Cost - Accumulated depreciation Depreciation rate for double declining balance method = Straight line depreciation rate x 200% Depreciation rate for 150% declining balance method = Straight line depreciation rate x 150% [Example, Double declining balance depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 200% = 20% x 2 = 40% per year Depreciation for 2011 = $140,000 x 40% x 9/12 = $42,000 Depreciation for 2012 = ($140,000 - $42,000) x 40% x 12/12 = $39,200 Depreciation for 2013 = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520 Double Declining Balance Depreciation Method Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 40% $42,000 (*1) $98,000 2012 $98,000 40% $39,200 (*2) $58,800 2013 $58,800 40% $23,520 (*3) $35,280 2014 $35,280 40% $14,112 (*4) $21,168 2015 $21,168 40% $1,168 (*5) $20,000 (*1) $140,000 x 40% x 9/12 = $42,000 (*2) $98,000 x 40% x 12/12 = $39,200 (*3) $58,800 x 40% x 12/12 = $23,520 (*4) $35,280 x 40% x 12/12 = $14,112 (*5) $21,168 x 40% x 12/12 = $8,467 --> Depreciation for 2015 is $1,168 to keep book value same as salvage value. --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)
	[Example, 150% declining balance depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 150% = 20% x 1.5 = 30% per year Depreciation for 2011 = $140,000 x 30% x 9/12 = $31,500 Depreciation for 2012 = ($140,000 - $31,500) x 30% x 12/12 = $32,550 Depreciation for 2013 = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785 150% Declining Balance Depreciation Method Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 30% $31,500 (*1) $108,500 2012 $108,500 30% $32,550 (*2) $75,950 2013 $75.950 30% $22,785 (*3) $53,165 2014 $53,165 30% $15,950 (*4) $37,216 2015 $37,216 30% $11,165 (*5) $26,051 2016 $26,051 30% $6,051 (*6) $20,000 (*1) $140,000 x 30% x 9/12 = $31,500 (*2) $108,500 x 30% x 12/12 = $32,550 (*3) $75,950 x 30% x 12/12 = $22,785 (*4) $53,165 x 30% x 12/12 = $15,950 (*5) $37,216 x 30% x 12/12 = $11,165 (*6) $26,051 x 30% x 12/12 = $7,815 --> Depreciation for 2016 is $6,051 to keep book value same as salvage value. --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)
	Sum-of-the-years'-digits method
	Depreciation expense = (Cost - Salvage value) x Fraction Fraction for the first year = n / (1+2+3+...+ n) Fraction for the second year = (n-1) / (1+2+3+...+ n) Fraction for the third year = (n-2) / (1+2+3+...+ n) ... Fraction for the last year = 1 / (1+2+3+...+ n) n represents the number of years for useful life.
	[Example, Sum-of-the-years-digits method] Company A purchased the following asset on January 1, 2011. What is the amount of depreciation expense for the year ended December 31, 2011? Acquisition cost of the asset --> $100,000 Useful life of the asset --> 5 years Residual value (or salvage value) at the end of useful life --> $10,000 Depreciation method --> sum-of-the-years'-digits method Calculation of depreciation expense Sum of the years' digits = 1+2+3+4+5 = 15 Depreciation for 2011 = ($100,000 - $10,000) x 5/15 = $30,000 Depreciation for 2012 = ($100,000 - $10,000) x 4/15 = $24,000 Depreciation for 2013 = ($100,000 - $10,000) x 3/15 = $18,000 Depreciation for 2014 = ($100,000 - $10,000) x 2/15 = $12,000 Depreciation for 2015 = ($100,000 - $10,000) x 1/15 = $6,000 Sum of the years' digits for n years = 1 + 2 + 3 + ...... + (n-1) + n = (n+1) x (n / 2) Sum of the years' digits for 500 years = 1 + 2 + 3 + ...... + 499 + 500 = (500 + 1) x (500 / 2) = (501 x 500) / 2 = 125,250