Chapter II

Value Added Tax, Central Sales Tax and

Goods & Services Tax

Pages 17 - 29
 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

Tax Administration
Commercial Taxes Department is one of the key revenue earning departments in the
Government of Andhra Pradesh. The Department administers and collects revenue on
goods and services under Andhra Pradesh Value Added Tax Act, 2005 (VAT Act),
Central Sales Tax Act, 1956 (CST Act), Andhra Pradesh Entertainments Tax Act,1939,
The Andhra Pradesh Tax on Professions, Trades, Callings and Employment Act, 1987
apart from other minor Acts. The Department has been administering and collecting
revenue on goods and services under the Andhra Pradesh Goods and Services Tax Act,
2017.
The Department is headed by the Special Chief Secretary of Revenue Department at
Government level. The organisational set-up is depicted in the organogram given
below:
Figure-2.1: Organogram

Special Chief Secretary

Chief Commissioner of State Taxes

Commissioner of State Taxes

Headquaraters Field

Additional Joint commissioners

Commissioners It includes 13 Lager
Taxpayer Units(LTUs)

Joint Commissioners
Deputy Commissioners

Deputy Commissioners
Assistant
Commissioners
Assistant
Commissioners

Sales Tax revenue (VAT and State GST) forms the largest source of revenue for the
State and accounts for 37.08 per cent of the total revenue of the State. It has been
increasing year-on-year since 2016-17, although, the actual receipts did not match
budgetary projections in any of the years during 2015-16 to 2018-19. Revenue from
sales tax and SGST increased from ₹10,820 crore during 2017-18 to ₹20,611 crore in
2018-19 at a growth rate of 90.49 per cent primarily due to increase in SGST receipts.
There was a wide variation in SGST receipts across the months during 2018-19 with
November accounting for highest receipts mainly on account of IGST transfer to
SGST, as can be seen from Chart 2.1:

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 Audit Report on ‘Revenue Sector’ for the year ended March 2019

Chart 2.1: Taxes on Sales, Trades etc. and SGST realised during the
Financial Year 2018-19
6,500 5,955.37
6,000
5,500
5,000
₹ in crore

4,500 4,219.55
4,058.26
4,000 3,649.12 3,678.58
3,432.70 3,428.69 3,336.71
3,500 2,626.54 2,667.43
2,742.51
3,000 2,730.27
2,500
2,000
Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Feb/19 Mar/19

Results of Audit
Audit of Commercial Taxes Department was conducted through a test check of the
assessment files, refund records and other related records in 37 out of 117 offices
(31.62 per cent) of the Department during 2018-19, to gain assurance that the taxes
were assessed, levied, collected and accounted for in accordance with the relevant Acts,
Codes and Manuals, and the interests of the Government are safeguarded. These offices
were selected on the basis of quantum of revenue collected. Audit brought out instances
of deviations/non-compliance with the relevant Acts/ Codes/ Manuals leading to under
assessment of VAT in 448 cases involving an amount of ₹84.11 crore, due to various
reasons, as detailed in Table 2.1.
Table 2.1: Results of Audit
(₹ in crore)
Sl. No. Categories No. of Amount
cases
1 Non-levy/Short levy of VAT 180 65.29
2 Non-levy/Short levy of Interest and Penalty 66 6.68
3 Non-levy/Short levy of tax on works contracts 4 0.73
4 Excess/Incorrect claim of Input Tax Credit 51 5.00
5 Non-levy/Short levy of tax under CST Act 67 4.00
6 Non-collection of Turn Over Tax 29 1.65
7 Other irregularities 51 0.76
Total 448 84.11
During the year, the Department accepted underassessment and other deviations in 175
cases involving ₹8.89 crore, including ₹1.60 crore pertaining to the previous years. An
amount of ₹1.81 crore relating to 141 cases was realised during the year 2018-19.
Significant audit findings involving ₹10.05 crore are discussed in the succeeding
paragraphs. These cases are illustrative and are based on a test check carried out by
Audit. Such omissions are pointed out in audit every year, but not only do the
irregularities persist; these also remain undetected until an audit is conducted again.
There is a need for improvement of internal controls so that repetition of such
omissions can be avoided or detected and rectified in a timely manner.

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

Levy of Penalty
2.3.1 Non-levy/ short levy of Penalty for under declaration of tax
Assessing Authorities have not levied/ short levied penalties amounting to
₹3.18 crore on dealers, who had under declared tax
As per Section 53 (1) of APVAT Act, 2005 (VAT Act), where any dealer has under
declared tax and where it has not been established that fraud or wilful neglect has been
committed and where the under declared tax is less than 10 per cent of the tax, a
penalty shall be imposed at 10 per cent of such under declared tax. If the under
declared tax is more than 10 per cent of the tax due, penalty shall be imposed at 25 per
cent of such under declared tax.
Under Section 53 (3) of VAT Act, any dealer who has under declared tax and where it
is established that fraud or wilful neglect has been committed, such dealer shall be
liable to pay penalty equal to the tax under declared. As per Rule 25 (8) (a) and (b) of
VAT Rules, the tax under declared means the excess of Input Tax Credit (ITC) claimed
over and above the amount entitled to be claimed or the difference between output tax
actually chargeable and the output tax declared in the returns.
Under Section 13(3) (a) of the Act, ITC is allowed on the date, the goods were received
by the dealer and was in possession of a tax invoice. In terms of Section 21(3) of the
Act, read with Rule 25(5) of VAT Rules, where a VAT return filed by the dealer
appears to be incorrect, AA (Assessing Authority) is empowered to assess the tax to the
best of his judgment, along with interest and penalty as per the provisions mentioned
above.
During the test check of records of five Circles1, Audit observed2 from the VAT
assessment files of seven dealers3 that the AAs identified cases of under declaration of
output tax and excess claim of ITC as per the assessment order. In six out of the seven
cases, there was under declaration of output tax either due to fraud or wilful negligence.
In one case pertaining to Eluru Bazar Circle where under declaration was not wilful and
tax due was more than 10 per cent, penalty was proposed at 10 per cent instead of at 25
per cent in the assessment order. However, no penalty was levied by the AA. Of the
seven cases AAs have short levied penalty in three cases4 and did not levy any penalty
in the remaining four cases. This had resulted in non-levy/ short levy of penalty of
₹3.18 crore over the under declared tax of ₹3.81 crore.
In response, AAs accepted (between August and November 2019) the audit observation
in six cases pertaining to five offices5 and issued penalty orders/ notices. In the
remaining one case pertaining to Ibrahimpatnam, AA stated (March 2019) that the
matter would be examined and report would be submitted in due course.

1 Chilakaluripeta, Elurubazar, Ibrahimpatnam, Indrakeeladri and Kakinada.

2 between May 2018 and April 2019 for the period from 2011-12 to 2016-17.
3 Chilakaluripeta (1), Elurubazar (1), Ibrahimpatnam (2), Indrakeeladri (2) and Kakinada (1).
4
Ibrahimpatnam (two cases) and Indrakeeladari (one case).
5 Chilakaluripeta, Elurubazar, Ibrahimpatnam (1), Indrakeeladri (2) and Kakinada.

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 Audit Report on ‘Revenue Sector’ for the year ended March 2019

The matter was referred to the Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).
2.3.2 Non-levy of interest and penalty for belated payment of tax
Assessing Authorities did not levy interest and penalty of ₹1.59 crore on belated
payment of tax

As per Section 22 (2) of VAT Act, if any dealer fails to pay the tax due within the time
prescribed, interest at the rate of 1.25 per cent per month for the period of delay was
liable to be paid in addition to such tax or penalty. Under Section 51(1) of the Act, if a
dealer fails to pay tax due, by the last day of the month in which it was due, penalty at
the rate of 10 per cent of the amount of tax due is to be paid, in addition to such tax.
During the test check of VAT returns and payment records of Guntur division and 14
circles,6 it was observed7 that in 38 cases, dealers paid tax after the due dates with
delays ranging from 1 to 586 days. Assessing Authorities, however, did not levy any
interest and penalty for belated payment of tax. This had resulted in non-levy of
interest of ₹0.44 crore and penalty of ₹1.15 crore totalling to ₹1.59 crore.
In response, AAs accepted (between August 2018 and September 2019) the audit
observation in 26 cases pertaining to 108 offices. Of 26 cases, part amount of penalty
of ₹1.77 lakh and interest of ₹0.56 lakh was collected in two offices9. In the remaining
12 cases pertaining to five offices10 it was replied (between August 2018 and March
2019) that the matter would be examined and reply would be furnished to Audit in due
course.
The matter was referred to Department (August 2019) and to the Government
(March 2020). Their reply has not been received (December 2020).

Short levy of VAT due to incorrect determination of taxable

turnover
Sales turnover of dealers reported in annual accounts was more than the turnover
declared in VAT returns. Incorrect determination of taxable turnover by
Assessing Authorities resulted in short levy of tax of ₹18.88 lakh

As per Section 21(3) of VAT Act, read with Rule 25 (5) of VAT Rules, if the AA
considers the return filed by a VAT dealer as incorrect or incomplete or not
satisfactory, the AA shall assess the tax payable to the best of his judgment on form
VAT 305 within four years from the due date or date of filing of the return, whichever

6 Guntur division (2 cases), Circles:- Adoni-I, Eluru Bazar (3), Guntakal, Ibrahimpatnam (5), Indrakeeladri (4),
Kadapa-I (5), Kurnool-III, Narasaraopet (2), Nidadavolu (2), Ongole-II, Palkol, Patamata (7), Samarangam
Chowk (2) and Vinukonda.
7 between February 2015 and March 2018 for the period from 2012-13 to 2016-17.
8 Adoni-I (1 case), Eluru Bazar (3 cases), Indrakeeladri (4 cases), Kadapa-I (5 cases), Kurnool-III (1 case),
Nidadavolu (2 cases), Ongole-II (1 case), Palkol (1 case), Patamata (7 cases) and Vinukonda (1 case).
9 Adoni –I (1 case) and Ongole II (1 case).
10 Guntur Division (2), Assitant Commissioners – Guntakal, Ibrahimpatnam (5), Narsaraopet (2), Samarangam
chowk (2).

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

is later. As per Section 21(4) of the Act, the competent authority may conduct a
detailed scrutiny of the accounts of any VAT dealer based on the available information
and where any assessment becomes necessary after such scrutiny, such assessment
shall be made within a period of four years from the end of the period for which the
assessment is to be made. As per Rule 25(10) of the VAT Rules, all the VAT dealers
have to furnish the statements of manufacturing/ trading, Profit and Loss (P&L)
accounts, balance sheet and Annual Report for every financial year, duly certified by a
Chartered Accountant, on or before 31 day of December of succeeding financial year.
As per Para 5.12 of VAT Audit Manual 2012, the audit officer is required to verify the
details declared by the dealer in VAT returns and to reconcile with those reported in
certified Annual Accounts for that period.
During the test check of the VAT audit records, it was noticed11 in six cases in six
Circles12, that sales made by six dealers as per their annual accounts were more than
those declared in VAT returns. The incorrect determination of taxable turnover by the
AAs resulted in short levy of tax of ₹18.88 lakh.
In response, AAs replied that the matter would be examined and reply would be
submitted to Audit in due course.
The matter was referred to Department (August 2019) and to the Government
(March 2020). Their reply has not been received (December 2020).

Works Contracts
2.5.1 Short levy of tax on Works Contracts where detailed accounts
were not maintained
Taxable turnover was incorrectly determined on account of inadmissible
deductions such as pressing charges and other state works, although detailed
accounts were not maintained. Incorrect determination of taxable turnover
resulted in short levy of tax of ₹82.68 lakh

As per Section 4 (7) (a) of VAT Act, tax on works contract receipts is to be paid on the
value of goods at the time of their incorporation in the work, at the rates applicable
under the Act. To determine the value of goods incorporated, the deduction prescribed
under Rule 17 (1) (e) of VAT Rules are to be allowed from the total consideration and
remaining turnover is to be taxed in proportion to goods purchased at the rates
applicable to them. As per Rule 17 (1) (g) of VAT Rules, if any works contractor did
not maintain the detailed accounts to determine the correct value of the goods at the
time of their incorporation, tax shall be levied at the rate of 14.5 per cent on the total
consideration received, after allowing permissible deductions on percentage basis on
the category of work executed. Percentage of the total value eligible for deduction for
all other contracts other than specifically categorized in the Rules is 30 per cent. In
such cases, the works contractor shall not be eligible to claim ITC.

11 between April 2018 and May 2019 for the period from 2011-12 to 2016-17.
12 Adoni- I, Chittoor-II, Markapur, Patnam Bazar, Tuni and Vinukonda.

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 Audit Report on ‘Revenue Sector’ for the year ended March 2019

During a test check of records of two Circles13, Audit observed14 in two cases, that AAs
allowed exemptions on pressing charges, other state works and sub-contract works,
although work-wise detailed accounts were not maintained. In the absence of separate
detailed accounts, the turnover should have been assessed under Rule 17 (1) (g).
Incorrect assessment of taxable turnover and allowing exemption had resulted in short
levy of tax of ₹82.68 lakh on the works contract turnover of ₹5.98 crore.
In response, the AC, Kakinada stated (May 2019) that notice was issued to the dealer
and VAT audit file was submitted to Joint Commissioner for revision. AC, Sattenapalli
stated (June 2018) that the matter would be examined and report would be submitted to
Audit in due course.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).
2.5.2 Non/ short levy of tax due to incorrect determination of taxable
turnover in Works Contracts

Taxable turnover was incorrectly determined on account of inadmissible

deductions such as ‘transport charges’ under ‘establishment cost’, and incorrect
computation of profit relatable to labour, resulting in non/ short levy of tax of
₹45.84 lakh

As per Section 4 (7) (a) of the VAT Act, tax on works contract receipts is to be paid on
the value of goods at the time of their incorporation in the work, at the rates applicable
under the Act. To arrive at the value of goods at the time of incorporation, the
deduction prescribed under Rule 17 (1) (e) of APVAT Rules, 2005 (VAT Rules) such
as expenditure toward labour charges, hire charges etc., incurred by the contractor are
to be allowed from the total consideration and on the balance turnover, tax is to be
levied at the same rate at which purchase of goods were made and in the same
proportion. As per Rule 17 (1) (d) of VAT Rules, the value of the goods at the time of
incorporation, as arrived at, shall not be less than their purchase value and shall include
seigniorage charges, transportation charges etc.
During a test check of the VAT assessment files of the office of CTO, Kadapa-I, it was
observed (October 2018) that, in one case, the AA, while finalising the assessment15,
had incorrectly determined the taxable turnover due to allowing certain inadmissible
deductions such as ‘transport charges’, under ‘establishment cost’ from the gross
turnover. Besides this, taxable turnover of material under different tax categories (5
per cent/ 14.5 per cent) was incorrectly adopted. This led to incorrect determination of
taxable turnover resulting in non-levy/ short levy of tax of ₹45.84 lakh on the works
contract receipts of ₹104.65 crore.

13 Kakinada and Sattenapalli.

14 between June 2018 and May 2019 for the period from 2013-14 to 2016-17.
15 for the period 2015-16 and 2016-17.

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

In response, AC Kadapa-I replied (December 2019) that revised assessment orders

were passed (November 2019) and a total amount of ₹3.61 lakh16 was taken to Debt
Management Unit (DMU)17. Based on the explanation given in the revisional orders
(November 2019) Audit recomputed short levy as ₹45.84 lakh instead of ₹68.10 lakh
and intimated to department.
The matter was referred to Department (February 2020) and to the Government
(February 2020). Their reply has not been received (December 2020).
2.5.3 Non-levy of tax on Works Contracts
Works contract receipts were split into service component and material
component to avoid tax. This had resulted in non-levy of tax of ₹16.63 lakh

Section 4 (7) (b) of the Act read with Rule 17 (2) (b) of VAT Rules permits the dealers
to opt to pay tax at the rate of four per cent18 on the gross receipts by way of
composition on filing Form VAT-250 before commencing the work.
During a test check of records of AC Kakinada, it was observed 19 that works contract
receipts were split into sales turnover and service turnover even though the dealer
received the entire amount from a composite contract under ‘composition scheme’ by
way of raising a single invoice for two elements i.e., material and service. Since the
dealer opted for composition, VAT is liable to be paid on gross receipts. However, the
AA allowed exemptions relating to service component and arrived at tax liability
contrary to the provisions of the Act. This had resulted in short levy of tax of
₹16.63 lakh on the works contract turnover of ₹3.33 crore.
In response, JC, Kakinada stated (October 2020) that revised show cause notice was
issued to the dealer and would submit further rectification report.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).

Short levy of tax due to application of incorrect rate of tax

under CST Act
Incorrect allowance of concessional/ incorrect rates of tax on inter-State sales
resulted in short levy of tax of ₹1.37 crore

As per Section 8 (2) of the Central Sales Tax Act 1956 (CST Act), read with Rule 12
(1) of CST Registration and Turnover (R&T) Rules, 1957, inter-State sales not
supported by ‘C’ declaration forms are liable to tax at the rate applicable to sale of such
goods inside the appropriate State; otherwise tax shall be at the rates applicable to the
sale or purchases of such goods inside the appropriate state under the sales tax law of
that State. Tax on interstate sales supported by ‘C’ declaration forms are liable to tax at

16
2015-16 ₹0.39 lakh, 2016-17 ₹3.22 lakh = ₹3.61 lakh.
17
2015-16 ₹2.85 lakh, 2016-17 ₹65.25 lakh = ₹68.10 lakh.
18 Five per cent from 14 September 2011.
19 In May 2019 for the period from 2012-13 to 2016-17.

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 Audit Report on ‘Revenue Sector’ for the year ended March 2019

the rate of two per cent as per Section 8(1) of the Act. Under Section 4 (3) of the VAT
Act, every VAT dealer shall pay tax on sale of taxable goods at the rates specified in
the Schedules to the VAT Act.
Section 5(4) of CST Act read with Rule 12(10) of CST(R&T) Rules prescribe that form
‘H’ is to be enclosed for claiming exemption on export sales. In the absence of
declaration form, State rate of tax is to be applied.
‘Photo Frames’, ‘Electronic Appliances’, ‘Lubricants’ and ‘Air Conditioners’, are not
specified in any of the Schedules to the VAT Act and therefore classifiable under
Schedule-V to Act and liable for tax at the rate of 14.5 per cent. ‘Chillies’, ‘Cotton’,
and ‘Mobile Phones’ are classifiable under Schedule IV to VAT Act and are liable for
tax at the rate of five per cent.
During a test check of CST records of three Circles20, Audit observed21 that in ten
cases, AAs either exempted or levied tax at the incorrect rate of two/ five per cent
instead of at 5/ 14.5 per cent on the inter-State sales turnover of ₹16.93 crore not
supported by ‘C’ forms. The application of incorrect rate of tax/incorrect exemption
resulted in short levy of tax of ₹1.37 crore.
In response, AC, Eluru Bazar replied (August 2019) that show cause notices were
issued (August 2019) in two cases. In another case in the same Circle, where the tax
was incorrectly exempted due to acceptance of invalid ‘H’ form, AA stated (August
2019) that original ‘H’ declaration form was available in Assessment record. Extract of
the original declaration form has been called for further examination. In another case in
the same circle, AA stated (August 2019) that authorites of Tamilnadu would be
addressed to verify genuineness of ‘C’ form. In the remaining six cases, AAs22 replied
(May and August 2019) that the matter would be examined and report submitted to
Audit in due course.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).

Input Tax Credit (ITC)

2.7.1 Excess/ Incorrect allowance of Input Tax Credit
Allowance of excess ITC on purchase of materials resulted in excess allowance of
ITC of ₹6.96 lakh

Under Section 13 (1) of the VAT Act, ITC shall be allowed to the VAT dealer for the
tax charged in respect of all purchases of taxable goods, made by that dealer during the
tax period, if such goods are for use in the business of the VAT dealer. ITC is
admissible only on purchases made from the VAT dealers within the State. As per
Section 13 (7) of the VAT Act, read with Rule 17(1) (b) of VAT Rules, the dealer who

20 Eluru Bazar, Patamata and Indrakeeladri.

21 In May 2019 for the period from 2013-14 to 2016-17.
22 Indrakeeladri (1) and Patamata (5).

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

pays input tax at the rate of 14.5 per cent is eligible to claim ITC at the rate of 75 per
cent with effect from 15 September 2011.
During a test check of VAT records of Morrispet Circle, Audit noticed23 that in one
case, the AA allowed 100 per cent ITC on purchase of materials used in works contract
instead of restricting it to 75 per cent. This had resulted in excess claim of ITC of
₹6.96 lakh.
In response, AC Morrispet stated (April 2018) that the matter would be examined and
report would be submitted in due course.
The matter was referred to Department (August 2019) and to the Government (March
2020). Their reply has not been received (December 2020).
2.7.2 Excess claim of Input Tax Credit due to non/ incorrect
restriction
ITC was not restricted/ restricted incorrectly by the Assessing Authorities on sale
of exempt goods and exempt transactions resulting in excess allowance of ITC of
₹38.80 lakh

As per Section 13 (5) of the VAT Act, no ITC shall be allowed to any VAT dealer on
sale of exempted goods (except in the course of export) and exempt sales. As per
Section 13 (6) of VAT Act, ITC for transfer of taxable goods outside the State
(otherwise than by way of sale) shall be allowed for the amount of tax in excess of
four/ five24 per cent. Further, as per sub rules (7) and (8) of Rule 20 of VAT Rules, a
VAT dealer making taxable sales, exempt sales and exempt transactions of taxable
goods shall restrict ITC as per the prescribed formula25. As per Rule 20 (10) of VAT
Rules, where a dealer also makes sale of exempt goods, (9.5 per cent/ 10.5 per cent
portion of 14.5 per cent) ITC of which was fully claimed initially, shall be restricted at
the end of March by applying prescribed formula. Exempt transactions shall be
included in taxable turnover during such restriction.
During a test check of records of six26 Circles, Audit observed (between June 2018 and
May 2019) from the VAT assessment files of six dealers (for the assessment period
from 2011-12 to 2017-18), that the dealers had effected exempt sales/exempt
transactions of taxable goods along with sale of taxable goods by utilising common
inputs. However, the ITC was not restricted/restricted incorrectly by the AAs contrary
to the relevant provisions, resulting in excess claim of ITC of ₹38.80 lakh.
In response, AC, Tuni replied (September 2019 in one case) that the VAT Audit file
was submitted to JC for revision. AC Kakinada replied (September 2019 in one case)
that notice was issued to the dealer. In the remaining four cases 27 the AAs stated

23 In April 2018 for the assessment period 2014-15.

24 four per cent up to 13 September 2011 and five per cent from 14 September 2011.
25 A x B/C, where A is the ITC for common inputs for each tax rate, B is the taxable turnover and C is the total
turnover.
26 Bhavanipuram, Chittoor-II, Eluru bazaar, Ibrahimpatnam, Kakinada and Tuni.
27 Bhavanipuram, Chittoor-II, Eluru bazaar and Ibrahimpatnam.

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 Audit Report on ‘Revenue Sector’ for the year ended March 2019

(between June 2018 and April 2019) that the matter would be examined and report
would be submitted in due course.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).
2.7.3 Incorrect claim of Input Tax Credit by eating establishments

Dealers running hotels are not eligible to claim ITC. Four dealers running hotels
claimed ITC on their purchase turnover resulting in incorrect claim of ITC of
₹14.89 lakh

Under Section 4 (9) (d) of the VAT Act, any VAT dealer running an eating
establishment, whose annual total turnover is more than rupees seven lakhs and fifty
thousands and less than rupees one crore and fifty lakhs shall pay tax at the rate of five
per cent of the taxable turnover of the sale or supply of goods, being food or any other
article for human consumption or drink, served in restaurants attached to such hotels or
anywhere whether indoor or outdoor. As per Section 13(5)(h) of the Act, such dealers
are not entitled to claim ITC.
During a test check of VAT records of three Circles28, it was observed29 that four
dealers running hotels and paying tax under Section 4(9) (d) of the Act claimed ITC on
their purchases in contravention to the provisions resulting in incorrect claim of ITC of
₹14.89 lakh.
In response, AC Nandyal-I replied (August 2019) that a notice was issued to the dealer
for production of books of accounts. AC Vinukonda replied (September 2019 in two
cases) that VAT Audit was taken up and result would be intimated. AC Samarangam
Chowk stated (September 2018) that the matter would be examined and report would
be submitted in due course.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).

Short levy of VAT due to application of incorrect rate of tax

Dealers declared tax at the rate of four/ five per cent on the commodities taxable at
the rate of 4/14.5 per cent resulting in under declaration of tax leading to short
levy of VAT of ₹70.35 lakh

As per Section 4 (1) of VAT Act, VAT is leviable at the rates prescribed in Schedules
II to IV and VI to the Act. The rate of tax for goods falling under Schedule-IV to the
Act, was enhanced from four to five per cent30 from 14 September 2011. Commodities
not specified in any of the Schedules fall under Schedule V and are liable to VAT at
14.5 per cent from 15 January 2010. In terms of Section 20 (3) (a) of VAT Act, every
monthly return submitted by dealer shall be subject to scrutiny to verify the correctness

28 Nandyal-I (1), Samarangamchowk (1) and Vinukonda (2).

29 between September and November 2018 for the period from 2013-14 to 2017-18.
30 G.O.MS. No. 1718 Revenue (CT II) Department dated 13 September 2011.

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

of calculation, rate of tax, ITC claimed and full payment of tax payable for such tax
period.
The commodities, food products, kurkure, and Explosives, are not specified in any of
the Schedules to the Act and are therefore taxable at the rate of 14.5 per cent under
Schedule V to the Act.
During a test check of VAT records of two Circles31 it was observed32 that two dealers,
dealing in food products, kurkure, and Explosives had declared tax at the rate of
four/ five per cent instead of at 14.5 per cent. This had resulted in short levy of tax of
₹70.35 lakh.
Assessing Authorities replied (August and September 2019) that notices were issued to
the dealers.
The matter was referred to Department (May 2019) and to the Government
(January and February 2020). Their reply has not been received (December 2020).

Short payment of tax and non-levy of penalty due to non-

conversion of Turnover Tax (TOT) dealer as VAT dealer
Failure of Assessing Authorities to register the TOT dealers as VAT dealers after
crossing the threshold limit resulted in short payment of tax of ₹50.65 lakh and
penalty of ₹5.97 lakh

As per Section 17(3) of the VAT Act, every dealer, whose taxable turnover in the
twelve preceding months exceeds ₹50 lakh, shall be registered as VAT dealer and pay
tax at applicable VAT rates from thereon as prescribed in Schedules to VAT Act. As
per Section 17(5)(h) of the Act, every dealer engaged in sale of food items including
sweets etc., whose total annual turnover was more than ₹7.50 lakh, was liable for VAT
registration and has to pay tax at the rate of five per cent under the provisions of
Section 4 (9)(d) of the Act. As per Rule 11(1) of the VAT Rules, the prescribed
authority may suo-motu register a dealer, who is liable to apply for registration as VAT
dealer but has failed to do so. As per Section 49 (2) of the VAT Act, any dealer who
fails to apply for registration, as required under Section 17, shall be liable to pay a
penalty of 25 per cent of the tax due prior to the date of registration as VAT dealer.
During a test check of TOT records of 12 Circles33, Audit observed (between April and
November 2018) that in 20 out of 25 cases the taxable turnover of the dealers during
the period between September 2014 and March 2017 had crossed the threshold limit.
In remaining five cases of Adoni Circle, the total annual turnover of food sales of
dealers have crossed threshold limit of ₹7.50 lakh during the period between June 2014
and March 2015 making them liable for VAT registration. The subsequent turnover
liable for levy of VAT after the dealers had crossed the threshold limit, amounted to
₹6.53 crore, on which VAT of ₹56.81 lakh was to be levied had they been registered as
31 Patnam Bazar (1) and Tuni (1).
32 between April 2018 and April 2019 for the assessment period from 2016-17 to 2017-18 (up to June 2017).
33 Adoni, Bhavanipuram, Kurnool-III, Machilipatnam, Morrispet, Nandyal, Narasaraopet, Nellore-II, Nidadavolu,
Palkol, Proddutur-I and Sattenapalli Circles.

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VAT dealers but they had paid tax of only ₹6.16 lakh. These TOT dealers had neither
applied for VAT registration nor were they registered by the respective AAs. This had
resulted in short payment of tax of ₹50.65 lakh and non-levy of penalty of ₹5.97 lakh.
In response, Department accepted the audit observations in 13 cases pertaining to four
offices34. Of 13 cases accepted, partial amount of ₹1.50 lakh was collected (between
February and July 2019) in two cases (AC, Adoni-I). In six cases pertaining to three
offices35 show cause notices were issued. AC Machilipatnam replied (September 2019
in two cases) that in one case clerical error in turnover for the quarter ended March
2017 was rectified and there was no tax liability after rectification. As verified from
ledger, discrepancy was noticed in the turnover rectified by the AA for the relevant
month. With respect to another case it was reported that tax had been remitted. As
verified from remittance details, the period objected by Audit and the amount indicated
in the challan did not match. Hence AC’s reply needs re-examination. In remaining
four cases from three offices36 AAs replied (June and November 2018) that the matter
would be examined and reply would be furnished to Audit in due course.
The matter was referred to Department (July and August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).

Incorrect exemption
2.10.1 Non-levy of tax due to incorrect exemption of textile turnover
Assessing Authorities had incorrectly exempted sale turnover of ‘textiles and
fabrics’, instead of levying tax at the rate of five per cent, resulting in short levy of
tax of ₹30.75 lakh

Under Section 4 (3) of the VAT Act, every VAT dealer shall pay tax on sale of taxable
goods at the rates specified in the Schedules to the Act. As per the Government order37
dated 08 July, 2011, the commodity ‘textiles and fabrics’ was added to Schedule-IV
and made taxable at five per cent38. Government issued orders in Memo39 dated 14
November, 2012 waiving the VAT dues of textile and fabric dealers, as they had not
collected the same from their customers during the period from 11 July 2011 to 31
March 2012. As per Ordinance No. 9 of 2012 dated 05 November 2012, with effect
from 1 April 2012, the dealers of ‘textiles and fabrics’ may opt to pay tax at the rate of
one per cent under composition40. Later, Government by another order41 included the
said commodity in Schedule-I from 07 June 2013 and exempted sales thereof. Hence,
the commodity was liable to be taxed at the rate of five per cent from 01 April 2012 to
06 June 2013, if the dealers had not opted for composition.

34 Adoni-I (5 cases), Narasaraopet (1 case), Palakol (3 cases) and Proddatur-I (4 cases).

35 Morrispet (3 cases), Nandyal-I (1 case) and Nidadavolu (2 cases).
36 Bhavanipuram (1 case), Kurnool-III (2 cases) and Sattenapalli (1 case).
37 G.O.Ms.No.932, Revenue (CT-II) Department dated 08 July 2011.
38 four per cent up to 13 September 2011.
39 Government Memo No.16460/CT-II(1)/2012-5 dated 14 November 2012.
40 option form in VAT 250 to be filed by the dealer for paying tax at one per cent instead of at five per cent.
41 G.O.Ms.No.308, Revenue (CT-II) Department dated 07 June 2013.

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 Chapter II – Value Added Tax, Central Sales Tax and Goods & Services Tax

During a test check of records of four Circles42, it was observed43 from VAT audit files
of seven cases dealers did not pay any tax by incorrectly declaring the sale of textiles
and fabrics as exempt. The AAs, however allowed exemption instead of levying tax at
five per cent. In the office of AC Tanuku-I, Audit observed (November 2015 in one
case) that though the dealer did not opt to pay tax under composition, paid tax at the
rate of one per cent for the part of turnover during the year 2012-13. The exempted
turnover was liable for tax at the rate five per cent as none of the dealers had opted for
composition. Incorrect exemption had resulted in non-levy of tax of ₹30.75 lakh.
In response, Department accepted audit observations in five cases pertaining to three
offices44. In remaining three cases AAs45 replied (November 2015 and September
2018) that the matter would be examined and reply would be furnished to Audit in due
course.
The matter was referred to Department (July and August 2019) and to the Government
(January 2020). Their reply has not been received (December 2020).
2.10.2 Non levy of tax on fertiliser sale turnover
Assessing Authorities did not levy tax at five per cent on sale of Fertilisers
classifiable under Schedule IV to VAT Act, resulting in non -levy of tax of
₹9.01 lakh

Goods listed under Schedule-I to VAT Act are exempt from tax. Government of
Andhra Pradesh in their order46 dated 09 October 2012 exempted (Serial No. 64 of
Schedule I to VAT Act) direct sales of “Fertilisers” by Primary Agriculture Co-
operative Societies (PACS) to Farmers. The commodity ‘Fertiliser’ is classifiable under
Schedule- IV to VAT Act and liable to tax at the rate of five per cent.
During the course of Audit of Nidadavolu Circle, it was noticed (September 2015) from
VAT assessment file of a dealer that (for the period from April to July 2012), the sale
turnover of ₹1.80 crore of fertilisers to co-operative society liable to tax under
Schedule-IV of Act at the rate of five per cent was not subjected to tax. This had
resulted in non-levy of tax of ₹9.01 lakh on the turnover of ₹1.80 crore.
In response, AC, Nidadavolu stated (September 2015) that the matter would be
examined and report would be submitted in due course.
The matter was referred to Department (August 2019) and to the Government
(February 2020). Their reply has not been received (December 2020).

42 Chittoor-II, Indrakeeladri, Machilipatnam, and Samarangam chowk.

43 between April 2018 and May 2019 for the period from April 2015 to June 2017.
44 Chittoor-II (1 case), Indrakeeladri (1 case) and Machilipatnam (3 cases).
45 Tanuku-I (1 case) and Samarangamchowk (2 cases).
46 GO MS Rev (CT II) Department No. 605 dated 09 October 2012.

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