Risk Based Audits (RBA)
Maharashtra Sales Tax Department

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
The VAT system was introduced all over India with effect from 1st April 2005. For implementation of VAT systems, various functions of Maharashtra Sales Tax department (MSTD) were re-organized. Now there are specialized functional divisions processing different functions such as Registration, Return, Refund, Audit, Investigation etc. The information needs of these functional divisions are supplied by the central automated system which is called MAHAVIKAS (Maharashtra Vikrikar Automation System). The electronically validated data in MAHAVIKAS is captured from dealers through various e-services such as e-Registration, e-Return, e-Audit Form, e-Refund application etc. The department is also getting electronic data from other external agencies such as Income Tax, Customs, and Central Excise etc. The major conceptual change is the adoption of trust based Compliance system in which the emphasis is on voluntary tax compliance. Under this new system, every dealer files returns by self-assessing his tax liability and only in exceptional circumstances, such as audit or investigation where findings are not acceptable to dealer, the dealer is assessed by the department. The major problem before the department was how to select the cases for Audits or assessments which will result in detection of tax revenue not complied by the dealers. Thus a need of data analysis was felt necessary a) To analyze the data for determining risk involved in tax compliance and b) To provide relevant analytical information timely for decision making Therefore to manage and meet these requirements, a specialized branch within the department i.e. Economic Intelligence Unit (EIU) is established on 1st January 2012. MSTD has embraced the concept of Compliance Risk Management (CRM) for dealing with the tax evasion. All available data are used for risk analyses, and particular risks are selected for treatment after policy makers define strategies and prioritize goals. For enhancing tax revenue, it is necessary for the department to catch hold of fraudulent and tax evading dealers, the department has implemented Risk Based audit (RBA) system by standardizing the Risk parameters and also used Data Mining concept for prediction of Non-genuine dealers with effect from 1st February 2013. Therefore all the electronic data of taxpayers is processed in EIU. The compliance risk management is done by risk rating based on the output of risk analysis of electronic data. Every dealer is categorized based on the risk rating. The EIU is expected to prepare dealer profiling on the basis of this risk rating. For actionable risk parameters the risk ratings are nothing but the actual additional taxes payable by the risky dealers. The other pointers or verifiable risk parameters are converted into ratings to determine the relative risk of each dealer.

B. Strategic Approach

 2. What was the solution?
The Risk Based Audit approach systematizes the audit process using automation and increases the transparency in the working of a tax department by clearly providing the actionable risk parameters. The scope of RBA approach to create a risk profile by using Data Analytics for all the dealers operating in the State of Maharashtra. The risk rating is used for all major functions of the department such as Registration, Return, Audit, Investigation of tax evaders etc. Based on the concept of Data Mining, MSTD has also predicted the suspected non-genuine dealers where the strike rate was more than 70%. MSTD has also generated risk rating of newly registered dealers. It was possible to define risk for various functions like registration (Advisory Risk Rating), return (Non-filer revenue risk), Refund (Bogus refund identification), Wrong tax credits etc. The risk based audit cases 14 actionable parameters were distributed first time on 20th February 2013 for the period 2008-09 and then on 5th July 2013 the risk based audit cases were distributed for 2009-10 and 2010-11 based on 12 audit parameters. The workload of regular assessments is now replaced by simpler risk based audit cases. MSTD has used Business Intelligence and Data Warehouse tools such as SAS Enterprise Miner, SAS Enterprise Guide etc. for generation of various risk parameters pertaining to various functions. Thus compulsory assessments were replaced by risk based audits of limited cases. The return follow-up was limited to risky cases. Advisory cases for new registrations were visited only in risky cases. MSTD started generating ‘Risk Based Audit’ cases using computerized systems from 01-02-2013 and these cases were distributed to MSTD Officers for verifications. All such RBA has resulted in revenue realization of more than Rs. 5000 Crore. MSTD has innovatively integrated the Computerized Desk Audit (CDA) output of SAS Enterprise BI Tools, which generates Risk Based cases, with direct Mahavat Web-site compliance and created a win-win situation for MSTD as well as dealers by saving administrative cost as well as cost of compliance for dealers. Using Business Intelligence and Data warehouse (BIDW) Solution, MSTD has generated CDA reports for 2011-12 showing tax liability which dealers can pay and comply directly on web-site. These audit issues are informed to dealers by e-mails and also they are informed through SMSs. The dealers can also download the CDA report in HTML format along with a legal notice in Form 604(A) from Mahavat portal through their log in IDs. Once the dealer downloads the CDA report he is given an acknowledgment for successful delivery of intimation of CDA findings. The audit issues selected are such that the taxes are clear and recoverable. If the dealer pays additional tax with applicable interests and files revised return then he has to directly submit the compliance through Compliance Web Form on Mahavat portal. The submission of compliance Web Form within 30 days of intimation is treated as full compliance in relation to admitted audit parameters’ additional tax liability. The dealer also gets acknowledgment for successful submission of Web Compliance Form and thereafter BIDW system analyses the Payment responses from dealers and generates the closure reports in Form 605 which are again made available to dealers on Mahavat portal. Using Risk Based Audit approach MSTD has recovered more than Rs. 5000 Crore in past two years including Rs. 800 Crore from buyers of bogus dealers. In one month of operation of CDA, MSTD recovered more than Rs. 100 Crore in the months of September and October 2014.

 3. How did the initiative solve the problem and improve people’s lives?
MSTD has made use of computerized systems to generate audit parameters for the periods 2008-09 onwards and thus reduced workload of full assessments. From period 2011-12, a new technology of Business Intelligence and Data Warehouse (BIDW) system was used to integrate the generation and closure of audit issues. The audit issues are supported by buyers or sellers aggregated annual transactions. Thus dealers are in a position to take decisions whether to accept or deny the additional tax liability by going through the supported transactions. Once the dealer has made up his mind of paying additional tax he has to just admit said liability by e-payment along with annual revised return. In CAD, there is no need for the dealer to visit the MSTD office for period 2011-12 onwards. CDA direct web-site compliance system envisages the transparency in the working a Tax Department. Give the dealers who are willing to pay tax on undisputed discrepancy an opportunity of tax payment along with interest directly on website.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
MSTD was getting validated electronic data in the form of e-services. Therefore MSTD decided to standardize the audit process by identifying the clear audit parameters which results in additional tax liability. Thus instead of full assessment or comprehensive audits, MSTD implemented the concept of Risk based audits or Issue based audits so as pinpoint the issues resulting in additional tax. From the audit periods 2011-12 onwards, MSTD has innovatively integrated the CDA output of SAS Enterprise BI Tools with direct Mahavat Web-site compliance and created a win-win situation for MSTD and dealers by saving administrative cost for MSTD as well as cost of compliance for dealers. Thus for providing an opportunity to dealers willing to pay tax on undisputed discrepancy, CDA has been implemented on recently in relation to closures of audit issues. Now for most of the audit issues dealers will not be required to visit MSTD office and this has increased the transparency in the working of MSTD. Using Business Intelligence and Data warehouse (BIDW) Solution, MSTD has generated CDA reports (along with legal intimation in recently notified Form 604A) for selected dealers highlighting their tax liability against 11 audit parameters. MSTD has identified these 11 audit issues as actionable for the period 2011-2012 which dealers can comply directly on web-site. The audit issues selected are such that the taxes are clear and recoverable. By necessary amendment, MSTD has also created an incentive for dealers to accept the tax liability found in CDA such that if the admitted tax liability is less that 10 % of taxes already paid before intimation for the said year, then no interest u/s. 30(4) is payable by dealers. These audit issues are informed to dealers by e-mails and also they are informed through SMSs. The dealers can also download the CDA report in HTML format along with the legal notice in Form 604(A) from Mahavat portal through their log in IDs. Once the dealer downloads the CDA report he is given an acknowledgment for successful delivery of intimation of CDA findings. The Compliance Web Form is accessible only after download or view of CDA report on web-site by dealer to ensure the proper service of intimation in Form 604A. If the dealer pays additional tax with applicable interests and files a revised return for the complete year, then he has to directly submit the compliance, by entering details of tax and interest paid chalans and revised returns in ‘Compliance Web Form’, on Mahavat portal. The submission of compliance Web Form within 30 days of intimation is treated as full compliance in relation to admitted audit parameters’ additional tax liability.The dealer also gets acknowledgment for successful submission of Web Compliance Form and thereafter BIDW system analyses the Payment responses from dealers and generates the closure reports in Form 605 which will be again made available to dealers on Mahavat portal for download. Thus audit parameters are getting closed without the visit of taxpayer to MSTD Office in cases where parameters are acceptable to dealers. The CDA audit issues in full assessment cases are informed to respective assessing officers and such cases are not selected for direct web-site compliance by dealers under CDA scheme because once the online compliance is made by dealers on web-site we are ensuring them the closure of audit for that financial year.

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
1. Taxpayers and Tax practitioners - Taxpayers can directly comply on website where the tax liability is acceptable to them and they want to pay the tax without Audit scrutiny and it reduces their cost of compliance. The audit parameters are clear and compliance is transparent. 2. Maharashtra Sales Tax Department (MSTD)- Reduces manual workload of audit verification by MSTD and thus resources can be utilized for other purposes. 3. Government of Maharashtra - Government gets revenue without any manual intervention. The cases are directly closed using BI Tools without any manual intervention. Thus entire audit and recovery of additional tax liability is automated. Leadership: most importantly, role and details of involvement of the nominee(s) in the initiative 1. Dr. Nitin Kareer, IAS – Overall guidance and decision support to the Risk based audit approach 2. Mr. Vinay Kargaonkar, IPS – Monitoring the progress of Risk based audit system 3. Mr. Govind Bilolikar, Heading the EIU and implementation the Risk parameters 4. Mr. Nitin Shaligram – Coordinating with all the stakeholders in the MSTD and A change agent 5. Mr. Pramod Dumre – Actual research, generation and integration of the Risk parameters
 6. How was the strategy implemented and what resources were mobilized?
MSTD automation project is part of the Mission Mode Project for computerization of the Commercial Taxes administrations of States and Union territories launched by Department of Revenue, Ministry of Finance, Govt. of India. The current IT Ecosystem established at Department of Sales Tax, Government of Maharashtra entails use of core intranet application: Mahavikas and citizen facing application: MahaVAT. MahaVAT is a web based solution which uses Oracle 10g as a database. The Primary Data Center (PDC) is fully operational and houses the application servers, database servers, mail server, web server, antivirus server, reporting server, management servers and the storage solution. The Disaster recovery site, also called as Secondary Data Center (SDC), is operational and is located at the ECIL HQ in Hyderabad. All Tax Administration Offices geographically located across the state are connected on MPLS leased line network. The regional Tax Administration Offices are connected to primary data center at Mumbai using the bandwidth that is felt appropriate for the data traffic generated by the said office. Wireless Radio Frequency (RF) medium is used as fallback connectivity to MPLS Link. Department of Sales Tax, Maharashtra owns the IT infrastructure to run the department portal and the BIDW system. Also department has dedicated manpower to maintain the IT infrastructure and services. EMAIL and SMS OUTREACH Department uses SMS and EMAIL facility to communicate to approx. 1.5 lakh dealers - 1. CDA Intimation notice in Form 604A 2. CDA Closure Intimation in Form 605 For generation of CDA Reports - MSTD has used SAS 9.3 (for red hat linux) comprising of tools like SAS Enterprise Business Intelligence, SAS Enterprise Guide and SAS Enterprise Miner, etc., to generate and manage CDA reports. The database storage system is Sybase IQ.MSTD has integrated data from internal and external sources using SAS Enterprise Data Integration Server. SAS Enterprise Business Intelligence is being used for generating cases eligible for issue based audits i.e. CDA Cases in HTML formats. The summary of such Audit Parameters is made available to Power User of EIU. The Power User selects cases by first selecting actionable parameters and by putting filters to appropriate tax values. The cases selected for full assessments, based on more than 40 standard reports in SAS Web Reports Studio, are excluded from CDA Cases. Other full audit categories, excluded from CDA compliances, are identified as cases from Large Tax payers Units, Refund Audits, Package Scheme of Incentives etc., from the Data Marts made available through the SAS Enterprise guide. The functionality of Data Mining techniques such as Classification tree analysis and Logistic regression available in SAS Enterprise Miner is used for prediction of fraudulent dealers. The cases predicted by the Tool SAS Enterprise Miner as fraudulent are also excluded as these cases are being forwarded to Investigation / Full Audit department. After the above mentioned steps, the rest of the cases are selected for CDA.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
1. All parameters related to tax evasion or under-reporting are grouped into audit risk parameters. The standard audit parameters selected for the periods 2008-09 onwards are listed in the Annexure A. The revenue recovery in Issue Based Audit parameters is more than Rs. 1000 Crore in past two years. The actionable Risk Based Audit parameters were selected for the periods 2008-09 onwards. Based on feedback the parameters were evaluated and accordingly the parameters were changed in subsequent years. The parameters selected for each year are shown in following tables and the total revenue risk is shown year-wise as under. Year Number of Risk based Cases Revenue Risk (Rs. Cr) Recovery (Rs. Cr) Assessment year 2008-09 149612 6033.73 1924.85 2012-13 2009-10 107698 3356.81 2358.03 2013-14 2010-11 110581 3931.95 2011-12 132955 4518.10 1007.72 2014-15 (up to Sept. 2014 The tax recovered from hawala beneficiaries is more than Rs. 800 Crore. For the period 2011-12 under CDA project, MSTD was able to reach 64549 dealers through online communication and till 24-09-2014, 41698 CDA compliances were submitted by dealers along with tax payments. Out of these submissions, 22429 cases were fully closed directly as all parameters in these cases were admitted by dealers with a recovery of more than Rs. 100 Crore in one month. Output of CDA – In the first phase of CDA implementation up to 24-09-2014, department is able to close more than 23500 cases with recovery of more than Rs. 100 Crore revenue. The success rate in CDA compliance is 61.47 % in terms of audit issue closures. In some of the parameters the dealers have not accepted the liability as their suppliers have now filed the revised returns along with payment of taxes. In some cases their suppliers have also filed supplementary annexure J1. Thus we are able to reduce the work load of the MSTD officers in the cases where we were able to communicate the additional tax liability to dealers.

 8. What were the most successful outputs and why was the initiative effective?
For supervising authorities the BI System generates Dashboards and summary reports for showing performance of these audit parameters for different locations of Maharashtra. In case of non-acceptance of tax liability due to error in uploading of data by dealers or otherwise, the dealers are given chance to put forward their submissions to designated officers in Issue based assessments. 1. Because of clarity and Standardization of audit parameters based on transactions, audit issues were resulting in revenue realization in RBAs. 2. RBAs Improve dealers experience by facilitating transparent compliance. 3. It enhances taxpayer services through self-compliance in CDA. 4. Increase awareness about tax compliance so as to reduce tax evasion 5. It leverages integration of BIDW advance analytics with the Web Portal application. 6. It enabling direct website compliance for dealers using the Compliance Web Form and leveraging existing facilities of Mahavat portal such as e-payment and e-returns. 7. Clearly defined risk based audit parameters for dealers 8. Anywhere Anytime Services - Website Compliance. 9. Improved satisfaction of the dealers as the information is easily available. 10. Bringing services of the Government closer to the door steps of the citizens. 11. RBA / CDA compliance will avoid the hardship to dealer of attending before an audit officer. 12. Involving dealers in the audit process upfront via CDA gives them an opportunity to respond to their tax liabilities. 13. Geographically spread-across the State of Maharashtra for all registered dealers through internet. 14. Decreased cost of compliance. The cost of hiring a consultant or professionals has been reduced as they have in-house capable accounting officials and staff to make use of user friendly e-service of CDA web form. 15. Reduced Response and Resolution time. Reduction in time to submit details to MSTD. CDA e-service makes it easy to manage compliance by reducing the dependency on consultants.Effective VAT implementation and increase in revenue collection. Earlier, complete year was required to hear and close cases manually. Now only, 30 days are required to close cases for one financial year. 16. Due to use of advanced technology and integration with dealer facing e-service there is reduction in tedious and manual effort. Hence, employees will be able to spend time on more value-adding core work which will improve departmental efficiency and also boost employee morale. 17. Improved Decision Making Cycle due to availability of reliable data for informed and intelligent decision making such as evaluation of audit parameters based on RBA / CDA payment response. Inflated revenue risk can be corrected based on valid data uploaded by dealers in form of CDA compliance. 18. Automatic consolidation and generation of reports for better monitoring purposes. 19. Exchange and collating of data within MSTD in-turn increasing the authenticity of decisions taken. 20. Reduction in effort and time spent on compiling, endorsing and validating official documents across various levels of the department due to focused number of cases. 21. Increase in transparency and accountability. 22. To bring in higher revenues resulting from user friendly Risk based and web based tax compliance initiative and reduced administrative costs. 23. Human resources are free for 11 months from the work of IBA. 24. No extra cost to MSTD as entire RBA / CDA project is implemented under existing BIDW and Mahavikas projects. 25. CDA initiative has increased public outreach and customer service which increases the number of taxpayer’s compliance

 9. What were the main obstacles encountered and how were they overcome?
Before implementation of the CDA project the cases involving audit issues were distributed to MSTD Officers. As MSTD started taking electronic annexure of sales and purchases from all dealers, the number of cases of Issue Based Audits (IBA) had increased substantially. The administrative cost of conducting such audits has also gone up due to scarcity of resources. Due to heavy workload the cases were converting into ex-parte assessments and thus the workload of appellate authorities has also increased substantially. The change in the working of the audit departments was not so smooth. Earlier the cases were audited comprehensively by verifying all the books of accounts and documents. Now the officer has to verify only the specific issues and for dealers also smaller amount the tax liability was easily acceptable to dealers. The shift was from full assessment to transaction-wise scrutiny. The tax risk was now pre-determined and the audits were now objective. The issues were supported by party-wise transaction details. For all the stakeholders, training sessions were conducted. The audit parameters were explained to them and also the expected responses were discussed. With the growth in the electronic data, dealing with the enormous amount of information became increasingly difficult for EIU. Therefore the Business Intelligence and Data Warehouse (BIDW) project was launched by MSTD in early 2012 with the aim of creating a robust and scalable technology foundation and environment for data integration, advanced business analysis and reporting to cater to the compliance and strategic initiatives of MSTD. Now the BIDW system has become fully operational and the Risk parameters are now being generated from the Computerized Desk Audit (CDA) System.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
Because of the Risk based audit system following activities have become possible for the MSTD. 1. It has become possible the weed out the pendency by dropping of assessment cases where there was no significant risk involved. 2. The department was able to find out 2162 non genuine dealers where the fraudulent tax credits passed on were more than Rs. 2200 Crore out of which more than Rs. 800 Crore were recovered. 3. The department has started Issue Based Audit divisions to audit dealers on specific issues only so that large number of cases can be covered under audits. 4. It was possible to find out buffer cases supplying wrong tax credits to bogus refund claimants. Such refunds were withheld. 5. Earlier Advisory visits for each new registration was compulsory. But now because of risk analysis for advisory cases, MSTD could target the potential fraudulent dealers only. 6. Earlier there was no priority follow up of return non-filers but now as we know the tax credits claimed by buyers we can prioritize the cases of non-filers where there is more tax credits claimed by buyers. 7. It was possible the department to identify the non-filers of e-Audit report in form 704 which is a statutory VAT Audit report to be certified by the practicing Chartered or Cost Accountant. 8. The analysis of annexure resulted in finding of sales and purchases mismatches which were helpful for departmental auditors while auditing the cases. The mismatches were either because of suppression of sales by sellers or excess claim of Tax credits by buyers or may be because of year end transactions. This type of cross matching of ITC resulted in the creating discipline among the dealers for correctly filing tax returns. 9. CDA Compliance Web Form directly provides dealers the opportunity to pay tax on undisputed discrepancy. The dealers make the payments using the existing e-payment facility on Mahavat portal. The outcome of CDA project for 2011-12 is shown in following diagrams. 10. For the period 2011-12 MSTD was able to reach 64549 dealers through online communication and till 24-09-2014 41698 CDA compliances were submitted by dealers along with tax payments. Out of these submissions, 22429 cases were fully closed directly as all parameters in these cases were admitted by dealers and the revenue recovery was more than Rs. 100 Crore in one month.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
The use of SAS BIDW system by Capgemini to generate computerized audit parameters and arrangements with Amazon Cloud Services by ECIL to enhance the Web Servers capacity to handle large volumes of data makes the project scalable. This is a first of its kind initiative in the Commercial Taxation domain in India at this stage. MAHAVAT portal is by and large technology and platform independent. It is compatible with J2EE open standards and IBM DB2 UDB 8.2 database. Sales Tax dealers can pay all the Taxes which come under the Department of Sales Tax, Maharashtra on the portal. The Portal is designed in such manner to do data encryption which will help to secure the online payment transactions. Presently we have provided CDA findings in HTML format but the existing BIDW system is capable of generating PDF reports which can be made available to dealers on Mahavat portal with Digital signature. In fact the closure report in Form 605 will be digitally signed as proposed. Use of internet by masses, Access and reach of web based services, e-governance policies of Government of India and Government of Maharashtra are the drivers of modern web enabled compliance system. Growth of e-commerce in India would favour the quick settlement of audit disputes with MSTD. Transparency in the working of a Tax department will increase the faith and trust in the taxation system. Generation of audit parameters using Computer assisted audit techniques (CAAT) is an evolving area in technology. The automation of audit process and automated recovery of tax is perhaps the first initiative by any taxation department across the world.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
The main lesson learned is that when we capture dealers’ all transactions in an electronic system, it becomes possible to audit dealers’ cases efficiently using technique like Computer Aided Audit techniques using Business Intelligence Tools. In an electronic environment to reduce manual verification of audit issues for each and every case is difficult as the number of dealers are increasing day by day and also it will become unmanageable when we embark on Goods and Services Tax as now the services will also become taxable. Computerized audit and online closure of issues will be further evolved when we go to transactions level closures. Some of the challenges in the existing system are mentioned below. During the implementation of CDA for the period 2011-12, it is observed that the e-mail IDs of the dealers are not updated and in more than 50000 cases and in such cases we are not able to communicate the tax liability to the dealers. We are still in a position to close more than 25000 cases through CDA Web compliance if we are able to properly communicate the tax liability to dealers. To counter this challenge the department has also used the facility of SMSs by customizing the message informing the dealer, on his all available mobile numbers, the tax liability along with TIN and financial year. It is also noticed that the small dealers are not comfortable with the electronic notice; hence we have also decided to issue printed intimations in form 604A to dealers who have not viewed the CDA on Mahavat website. Being the first year of implementation and to encourage online compliance, the CDA Compliance window for the period 2011-12 is kept open till the dealers receive notices for verification in non-compliance cases. In more than 3000 cases it is also noticed that the dealers have admitted and paid the taxes but they have not submitted the CDA compliance due to non-payment of interest portions. In some of the cases, where dealers have incorrectly submitted their annexure J2, the audit parameters were not accepted as there is no provision for revision of annexures. In few cases dealers have not accepted the parameters as they had reduced retention amount before claiming ITC in returns like in works contract cases. It is also noticed that the dealers are reluctant to accept CST Asked to pay parameter as they expect to receive CST declarations. All such cases will have to be verified in Issue Based assessments. All these challenges would be addressed when we implement invoice-wise annexure next year.

Contact Information

Institution Name:   Maharashtra Sales Tax Department
Institution Type:   Government Agency  
Contact Person:   Dr. Nitin Kareer
Title:   Commissioner  
Telephone/ Fax:   912223760866
Institution's / Project's Website:  
E-mail:   pramoddumre@gmail.com  
Address:   8th Floor, Vikrikar Bhavan, Mazgaon, Mumbai.
Postal Code:   400010
City:   Mumbai
State/Province:   Maharashtra
Country:  

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