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Author's profile photo Sri P

Service Tax liability on Reverse Charge Mechanism – An SAP Solution

Standard SAP Solution

SAP has provided 2 solution approaches for the reverse charge mechanism on Service tax.  The standard SAP Note 1736781 – Service tax Legal changes for Abatements and Negative list handles 2 cases –

Case 1: Abatements with Service tax credit

Case 2: Abatements without service tax credit.


A Tweak in the standard approach

In an organization, where most of the works are done as contract, the whole of service tax would be preferred to get added up with the actual expenses (service).  However, when an invoice is raised against the vendor, the split of the service tax between the provider and the recipient is made.

Also, the actual TDS (Withholding Tax) against the vendor should include only the vendor’s share of the service tax liability.

The service tax liability borne by the company is configured on similar lines as a withholding tax would be configured, as the amount of company’s liability should be reduced from the vendor liability during invoicing.

Related configurations and the actual process to be followed are explained in the subsequent sections.

Please note that complete steps of withholding tax configurations or tax procedures are not mentioned in this document.

Solution

Configuration will be better understood with an example illustrated below –

Step A:

Service tax liability on the company is first computed on the net amount (1000 INR) using the WHT code GT with 4% rate

Step B:

  Normal TDS is computed at 10% at the gross amount, but with reduced value of the Service tax (1120 – 30 = 1090 INR). Note the configuration of the TDS Tax type – FI, where the ‘Base amount reduced’ option is checked.  This configuration will also ensure that vendor’s liability on the ST is included in the total liability.

Example:

Value of PO

1000

INR

Service Tax

12%

% borne by Vendor

75%

% borne by recipient

25%

TDS

10%

Gross Value of invoice

1120

INR

LESS: Service Tax (12% of 1000)

120

INR

Net value of invoice

1000

INR

Recipient Share (25% of 12% = 3%)

30

INR

Provider’s share (75% of 12% = 9%)

90

INR

Gross value of invoice

1120

INR

LESS: Recipient Share

30

INR

Gross Vendor liability (includes PO price + Vendor liability of ST)

1090

INR

LESS: TDS @10%

109

INR

Net Vendor liability

981

INR

Configuration

Step 1: Tax procedure TAXINN is modified to include the Service tax component

Inclusion of Step JST1 in TAXINN:

Screen Shot 2013-06-20 at 1.20.27 PM.png

Condition type:

Screen Shot 2013-06-20 at 1.22.22 PM.png

Account Key configuration (OBCN):

Screen Shot 2013-06-20 at 1.23.17 PM.png

Step 2:  Configuration of WTH key for capturing Service Recipient liability of the service tax

Withholding Tax key – GT:

Screen Shot 2013-06-20 at 1.25.18 PM.png

Withholding Tax Code: GT:

Screen Shot 2013-06-20 at 1.26.34 PM.png


Account Determination for GT:

Screen Shot 2013-06-20 at 1.27.22 PM.png

Assigning the new code –‘GT’ to the company code:

Screen Shot 2013-06-20 at 1.28.01 PM.png

Step 3:  Actual TDS configuration

Withholding Tax key: FI

Screen Shot 2013-06-20 at 1.28.44 PM.png

Withholding Tax code – JI

Screen Shot 2013-06-20 at 1.29.20 PM.png

Step 4: Portray dependencies between ST and TDS 

The recipient’s ST liability should be first computed and then based on the reduced value of this tax code, the TDS should be computed.

If you look into Step 2, the Withholding Tax number of ‘GT’ is 110.  This is maintained, as the Dependent on type No. Field for the TDS tax code.

Screen Shot 2013-06-20 at 1.30.04 PM.png

Process Flow

Step 1: Maintenance of WHT created of Reverse charge mechanism in the vendor master

GT is the new WHT created for reverse charge mechanism

FI/JI is the existing TDS created against the vendor.  The rate of tax is 10%

Screen Shot 2013-06-20 at 1.30.50 PM.png

Step 2: Creation of PO with tax code S2. 

Note that a condition record is created for the Plant/Vendor/Material in FV11 for the rate of 12%.  This will ensure that GR is created with PO value + full service tax liability

Screen Shot 2013-06-20 at 1.31.45 PM.png

Step 3: Goods receipt

Goods receipt will get posted as PO Price + full service Tax

1000 + 120 = 1120 INR

Screen Shot 2013-06-20 at 1.32.54 PM.png

Step 4: Invoice Receipt

Screen Shot 2013-06-20 at 1.33.39 PM.png

Explanation of the posting above:

Debit

GR/IR

1120

PO Price + Full ST

Credit

Vendor

981

1090 – TDS; 1090 – 109 = 981 INR

Credit

TDS(10%)

109

10% on Vendor liability; 10% of 1090

Credit

Service Tax payable

30

ST % borne by recipient; 1000 * 3%

Once the Service tax liability on the company is posted during IR, a manual JV can then be posted to discharge the liability by way of remittance to Exchequer.

Author: Sridevi Pattabiraman

Date: 20-Jun-2013












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      Author's profile photo Former Member
      Former Member

      Good Work...

      Author's profile photo S SIVAKUMAR
      S SIVAKUMAR

      Well done,  easy to understand.

      Thanks.

      S.Sivakumar

      Author's profile photo S SIVAKUMAR
      S SIVAKUMAR

      Well done,  easy to understand.

      Thanks.

      S.Sivakumar

      Author's profile photo Former Member
      Former Member

      Very Useful Resource.

      Thanks & Regards,

      Naresh K.

      Author's profile photo ManiKumar Yandrapu
      ManiKumar Yandrapu

      Hi Maa'm,

      Very much useful for Indian clients & Awesome notes.

      Regards

      Mani Kumar

      Author's profile photo Muthukumareshan vijayan
      Muthukumareshan vijayan

      Hi Madam,

      Good work and easy to understand..

      BR

      Muthu

      Author's profile photo Santhanakrishnan Arumugam
      Santhanakrishnan Arumugam

      Hi Sridevi,

      Hats off , really helping tendency  

      Thanks a lot

      Regarding

      Krishnan

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Thanks for sharing....

      Regards

      Bhushan Dhande

      Author's profile photo Subhadeep Das
      Subhadeep Das

      Hello,

      Nice document. With RCM , what i understand is that the actual is configured in FTXP while the liability part is configured in WTT. But how do we integrate the two tax codes so that at the time of creating the invoice, i select one tax code only and not have to go to the Withholding tax tab. This is where i am getting confused. If you can kindly explain.

      best regds

      Subha

      Author's profile photo Sri P
      Sri P
      Blog Post Author

      Hi Subhadeep Das,

      Thanks for the comments.  The tax code for the actual is entered during PO (Step 2 in 'Invoice' tab at item level), which gets flown to the invoice.  The withholding is entered in the vendor master (Step 1), which gets determined during invoice.  Though technically both are tax codes, maintenance and usage are different,  Please let me know if it answered your query or need more explanations.

      Regards,

      Sridevi

      Author's profile photo Erwin Leitner
      Erwin Leitner

      Hello,

      Thank you very much.

      Your document is helpful for me, I have acquired knowledge for me. πŸ™‚ ➕

      all the best

      Erwin

      Author's profile photo Sri P
      Sri P
      Blog Post Author

      Hi Erwin,

      Thanks for the comments and the rating! 

      Regards,

      Sridevi

      Author's profile photo Former Member
      Former Member

      Hi Sridevi P

      Great job!

      Thank you for share your knowledge with us.

      Best Regards.

      Jandoval Nascimento.

      Author's profile photo Sri P
      Sri P
      Blog Post Author

      Thank you so much Jandoval!

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Thank you for inputs.

      I have one query.

      Since the Service tax collection GL code (27140001) comes via With Holding Tax (TDS) configuration, how we can Reverse the Service tax amount 30 Cr.

      In the transaction code J1INMIS (With Holding Tax  Information System) both the values are coming.

      1. Regular TDS Amount i.e. 109 credit amount  (GL Code 27140001)

      2. Service tax amount  i. e. 30 credit amount (GL code 27130001)

      How we can reverse the Service tax amount 30 Credit.

      Ravi Polampalli

      Author's profile photo Sri P
      Sri P
      Blog Post Author

      Hi Ravi,

      If you look into the last line of the document - 'Once the Service tax liability on the company is posted during IR, a manual JV can then be posted to discharge the liability by way of remittance to Exchequer.'.  So when you pay to the government, the liability gets reversed.  Hope it helps.

      Thanks.

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Thank you for valuable inputs.

      Through creation of Remittance Challan we can make the Bank Payment with below entries.

      Service Tax Collection Account   Dr  30

                To Outgoing Bank Account      30

      If we pass the JV we can reverse the entries like below.

      Outgoing Bank Account    Dr    30

      To  Service Tax Collection Account   30

               

      Finally both GL values are zero.

      whereas these 30 rupees can be showed in Certificate, how we can reverse those.

      Regards

      Ravi Polampalli

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Please simplify my query.

      Thanks.

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Please suggest any alternative to reverse the Service tax value.

      Thanks.

      Author's profile photo Former Member
      Former Member

      Hi Sridevi,

      Is there any alternative solution for that query.

      Thanks.

      Author's profile photo Godavari SAP
      Godavari SAP

      Good work.

      Author's profile photo Srinu S
      Srinu S

      Thank you Sridevi for sharing useful document. Thanks for sharing πŸ™‚

      Author's profile photo Gaurav Malhotra
      Gaurav Malhotra

      This is an old mechanism of doing the Service tax Configuration for reverse charge and the user would go mad creating new tax codes and maintaining Vendor Master. Please use Input and Output Tax Codes where in the user would be required to create only 6 condition types i.e. 3 positive for basic, edu cess and SHE Cess and in the other 3 make the Basic Condition type as - and let the rest 2 positive now you may create as many tax codes as you wish and whenever changes are being made you can make setting for that too in FV11.

      Author's profile photo Former Member
      Former Member

      Could you expain this a bit more. Please.

      Author's profile photo Former Member
      Former Member

      Hi Sunil,

      Please check out my prior queries.

      Are you not facing above problems!!!

      Regards

      Ravi Polampalli

      Author's profile photo Lakshmi Sama
      Lakshmi Sama

      Hello Sridevi,

      Good work and nice explanation. Thanks for sharing your knowledge.

      Regards,

      Lakshmi S

      Author's profile photo Karthikeya Piratla
      Karthikeya Piratla

      Hi Sridevi,

      It's really amazing, I really thank you a lot for the wonderful and needy configuration on service tax calculation. Hoping for the continued support.

      Thanks a lot

      Regards : Karthikeya

      Author's profile photo Former Member
      Former Member

      Hi,

      The problem with Service on advance is that , at the time of final invoice you have to adjust the service tax already paid under RCM.

      How to do the reversal of the same.

      Regard

      Kanwaljit Singh

      Author's profile photo Manikanthan Venkateswaran
      Manikanthan Venkateswaran

      Hi Sridevi

      Great Share.. including all screenshots of configurations.. Wonderful mam..

      I have a doubt..

      As per RCM rules, Service tax paid under reverse charge mechanism is available for cenvat credit if the service received is included in definition of Β input service. Service receiver should keep GAR 7 challan β€˜ as proof of payment.

      Then, in Step 3 (GR), why is the entire 1120 getting debited to the Cost Account in the PO.. Am i missing something?