Issuu

OVERVIEW OF CUSTOMS AUDITS & KEY ASPECTS

SESSION – II: CUSTOMS AUDITS November 11, 2022

CUSTOMS AUDIT OVERVIEW

OVERVIEW OF CUSTOMS AUDIT

Checks conducted at the point of clearance causes delays in clearance process resulting in an economic cost to the traders and the economy as a whole

It is an effective tool to measure and improve compliance through a structured examination of the business environment

Customs Post Clearance Audit (PCA)

is an initiative based on global best practices

3 2 1

PCA allows the Department to apply a risk-based selection of the Auditees and allow the Department to channel its efforts towards high risk areas

Importance

4 5 6

PCA promotes a culture of voluntary compliance

Section 99A of the Customs Act 1962

provides statutory framework for the procedure for conducting PCA

INTERNATIONAL PERSPECTIVE

India is a signatory/ party to the International Conventions which have laid down the need for controlbased audit and has thus, systematically implemented PCA with the proper authority of the law

World Trade Organisation

• Post-clearance Audit: Article 7 of the WTO Trade Facilitation Agreement

• Member states under obligation to adopt post clearance audit to ensure seamless and expedite release of goods

• Selection of auditee or consignment in a risk-based manner following appropriate selectivity criteria

World Customs Organization

In the parallel, representation needs to be drawn and filed for fixation of lucrative RoDTEP rates qua goods classifiable under said Chapters

• WCO has issued further guidelines for PCA by the name “Guidelines for Post Clearance Audit Volume-I” and “Guidelines for Post Clearance Audit Volume-II”

• The Guidelines prescribes for Theme based, Premise based and Transaction based Audit

POST CLEARANCE AUDIT INDIAN CONTEXT 7

• Post clearance audit was first introduced in 2005 and has replaced the conventional system of concurrent audit, which formed a part of the assessment process

• It separates audit function from assessment function, thereby facilitating expeditious clearance of goods

• The scope and coverage of audit under the PCA regime is not restricted to transaction level but more importantly evaluates the trader’s commercial systems

• The entire gamut of persons/companies directly or indirectly involved in the transactions of export and/or import of goods can be audited and Explanation to this effect has been added in Section 99A

• Presently, Customs Audit Regulations, 2018 govern rights and obligations of the auditees and manner of conducting audit

INDIA CONTEXT 8

PROVISIONS OF AUDIT UNDER THE CUSTOMS ACT, 1962

Audit

99A. The proper officer may carry out the audit of assessment of imported goods or export goods or of an auditee under this Act either in his office or in the premises of the auditee in such manner as may be prescribed.

Explanation. For the purposes of this section, “auditee” means a person who is subject to an audit under this section and includes an importer or exporter or custodian approved under section 45 or licensee of a warehouse and any other person concerned directly or indirectly in clearing, forwarding, stocking, carrying, selling or purchasing of imported goods or export goods or dutiable goods.

IMPORTANT ASPECTS OF AUDIT UNDER CUSTOMS AUDIT REGULATIONS, 2018

Scope of Term ‘Audit’ includes examination or verification of declaration, record, entry, document, import or export licence, authorisation, scrip, certificate, permission etc., books of account, test or analysis reports, and any other document relating to imported goods or export goods or dutiable goods, and may include inspection of sample and goods

Scope of Term ‘Auditee’ includes an importer or exporter or custodian under section 45 or licensee of a warehouse and any other person concerned directly or indirectly in clearing, forwarding, stocking, carrying, selling or purchasing of imported goods or export goods or dutiable goods

Scope of Term ‘Premises’ includes the registered office, branch office, warehouse, factory, or any other premises at which, imported goods or export goods or dutiable goods or books of account or records of transaction or other related documents, in relation to the said goods are ordinarily kept

Duration for maintenance of records: Records in relation to imported goods or export goods or dutiable goods to be maintained for a minimum period of five years

Selection of auditee or import declarations or export declarations shall primarily be based on risk evaluation through appropriate selectivity criteria

Penalty of INR 50,000 to be applied on who contravenes any provision under Audit Regulations

POST CLEARANCE AUDIT TYPES 11

TYPES OF POST CLEARANCE AUDIT

ALIGNED WITH THE WCO NORMS, INDIAN CUSTOMS ADMINISTRATION HAVE INTRODUCED FOLLWONG TYPES OF POST CLEARANCE AUDIT

TRANSACTION BASED

PREMISE BASED

THEME BASED

Linked with particular transaction Audit is conducted even after goods are released from Customs Control Non-levied, short-levied duty burden or even compliance under any other law can be scrutinised

Comprehensive checks on Auditee’s internal control system and procedures followed This Audit allows inspection of goods, verification of all transactions and documents that are deemed necessary to give holistic picture of Auditee’s business

“Theme focused audit” instead of a “comprehensive audit”

The results obtained are meant for the policy makers to keep compliance levels of a particular industry/trade under check

TRANSACTION BASED AUDIT

Does not normally require the auditor to visit the premises of the exporter/importer and the audit can be conducted at the Customs office

TRANSACTION BASED AUDIT

Transaction Based Audit (TBA) is different from Onsite Post Clearance Audit (OSPCA) and is conducted on the basis of the transactions identified by Risk Management System (RMS)

TBA, which is done in the Customs Houses, continued side by side with OSPCA, the latter being done at the premises of the importers / exporters

SALIENT FEATURES

TBA is not as thorough as a field audit on site, it uses fewer resources and acts as a reminder to business/trade that Customs are monitoring their activities

PREMISE

BASED AUDIT • Violation of Rules stipulated under FTP 2015 20 • Availment of inadmissible Customs duty benefit against Advance Authorization License • Misclassification of Test Tools for development of Software and other Electronic items under specific HSN • Inappropriate availment of benefit of Customs Duty by way of misclassification in Bills of Entry filed against Procurement Certificate/Annexure • Misclassification of products such as clamps, cushions, seats, etc • Short payment of IGST due to application of incorrect tax rate • Non-payment of Anti-Dumping Duties Major Observations during Premise Based Audit in past: Premise Based Audit (PBA) is conducted by the Customs at the premises of importers, exporters and other related entities to ensure compliance and correct assessment of Customs Duties

MANNER OF PREMISE BASED AUDIT

1The proper officer may require the auditee to furnish documents, information or record including electronic record

An opportunity to offer clarifications with supporting documents against the objections shall be granted before preparing the audit report

The proper officer may inspect the imported goods or export goods or dutiable goods at the premises of the auditee or ask auditee to produce samples

The Auditee may make voluntary payments of duty, interest or other sums in part or in full and the proper officer shall record the same in the audit report

At least fifteen days advance notice to be served to the auditee to conduct audit at the premises

It shall be mandatory for the proper officer to inform outcome of the audit to the auditee. Audit conducted at the premises of the auditee to be completed within thirty days from the date of starting of the audit

THEME BASED AUDIT

Theme Based Audit (ThBA) involves review of data relating to the entire business activity for a particular commodity, industry or issue. It provides a systematic approach to data collection and an analysis of data to determine the likelihood of non-compliance

Themes for conducting ThBA in past:

• Duty Drawback Scheme during the period of transition to GST regime w.e.f. July 1, 2017, to September 30, 2017

• Duty Drawback Scheme during the period of transition to GST regime w.e.f. July 1, 2017 to September 30, 2017

• Import of Telecom Equipment, Mobile/Cellular Phone Parts and Aircraft Parts

• Anti-Dumping Duty on Auto/Vehicle Parts-Radiators, Axle for trailers, Alloy Wheel etc. (Notification No. 20/2017-Cus. dated May 12, 2017)

• Anti Dumping Duty on Auto/Vehicle Parts Radiators, Axle for trailers, Alloy Wheel etc. (Notification No. 20/2017-Cus. dated May 12, 2017)

• Misclassification of Radiators & parts of automobiles with a view to avoiding Anti-Dumping Duty:

• Misclassification of Radiators & parts of automobiles with a view to avoiding Anti-Dumping Duty

• Undue benefit of BCD under Sr. No. 530A of the Notification No. 50/2017-Cus dated June 30,

• Undue benefit of BCD under Sr. No. 530A of the Notification No. 50/2017-Cus dated June 30, 2017

2017:

• Related party transaction value cases handled by SVB Cells at major Customs Houses

POST CLEARANCE AUDIT FREQUENCY 17

FREQUENCY OF POST CLEARANCE AUDIT

Onsite PCA will be conducted once in two years / three years / five years for AEOs T-1, T-2 & T3 respectively

• No specified frequency for other than AEO

• PCA will be conducted under mainly ThBA and PBA as may be necessary

• Onsite audit is typically conducted basis observations of TBA, ThBA

OF AUDITEE 19

OBLIGATION AND RIGHTS

OBLIGATIONS

AND RIGHTS OF THE AUDITEE Rights of Auditee: • Right to receive an outcome of audit points from the Auditor • Right to submit explanation and to be granted an opportunity of being heard • Right to appeal • Right to expect confidential treatment of business documentation

of Auditee: • Maintain the information, documentation and records in specified format for the period of minimum 5 years • Make available required documentation, information and records in a timely manner • Extend required support to the officers to conduct audit

Obligations

PREPAREDNESS

TRAINING AND MOCK AUDITS Training for relevant employees 01 Conducting Mock Audits, Internal Audits, Health Checks 02 Formulating SOPs to ensure best industry practices are followed 03 Designing Checklist to ensure compliance with the Customs Laws and Regulations 04 22 In order to be ready for the Audits it is completely necessary for the Companies to be Audit Ready by conducting

CHECKLIST

Description

While formulating Customs Checklist following Aspects to be considered:

Rate of duty/ Cess Valuation (also, approach under Customs vs. Transfer Pricing)

Whether antidumping duty or safeguard duty is applicable?

Whether Exemption notification benefit availed or not?

Is Exemption notification conditional or otherwise?

Whether duty benefit is available under a Free Trade Agreement?

Whether duty benefit is available under Export Promotion schemes?

Documentation

of Goods Unit of Measurement & Quantity

Classification Nature of the goods

LEGISLATIONS 01 02 03 04 05 06 07 08 Foreign Exchange Management Act, 1999 The Bureau of Indian Standards Act, 1986 and Rules, 1987 Foreign Trade (Development and Regulation) Act, 1992 – SCOMET Copyright Act,1957 and Copyright Rules, 1958 Food Safety and Standards Act, 2006 Legal Metrology Act, 2009 Reserve Bank Circulars Central/Integrated/State Goods and Services Tax Act, 2017 It is important to ensure compliance requirements under Allied Acts are also taken into consideration: 09 E-waste (Management) Rules, 2016

ALLIED

ACTION POINTS

ACTION POINTS

Information Uniformity: Following information as recorded in system (ERP, accounting software, etc), Invoice and BoE must be uniformly mentioned

• Description of product

• Quantity

• Unit of measurement

Docketing in support of classification

• Scientific/Technical literature

• Expert opinion

Importance

Reconciliation: of data recorded on ICEGATE vis-à-vis system, specially ITC related data.

Docketing in support of tax rate: Brief note justifying

• Availability of exemption notification, FTA/PTA,

• Expert opinion – Technical/Legal

• Fulfilment of condition for concessional rate/exemption

• Re-affirmation of tariff rate

FTP Compliance:

• AA: Comprehensive documentation

• AA: Identification of stock

• EPCG: Tracking: EODC

• EPCG: seeking extension if necessary

• Release of Bond

Allied Laws: Verification of applicable allied laws and due compliance with these

5 6

2 1

NCR Tower B-1, 1060, Spaze Itech Park, Sector 49, Sohna Road, Gurugram, Haryana 122018

PUNE

MUMBAI

3rd Floor, Spacierge, Sai Heritage, Baner, Pune Maharashtra 411045

M: +91 98185 06469

M: +91 97647 04000

204, Antariksh Building, Marol Makwana Road, Andheri East, Mumbai Maharashtra 400079

M: +91 90119 03015

DUBAI 36th Floor, Aspin Commercial Towers, Sheikh Zayed Road, Dubai M: +971 58586 3015