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What is service tax reverse charge


Service Tax is a type of Indirect Tax. Under service tax, a service provider is liable to pay service tax applicable on the gross amount of service charge billed to the customer in a particular period.

In a development in July 2011, central govt. brought an amendment in Service Tax rules whereby some portion of service tax payable in the listed services is to be paid by the service receiver to the govt.

Journal Entries

A service receiver organisation used to pass following entry before the amendment:

  • If CENVAT credit is available on the input service tax paid:
Expense Dr. 100.00
CENVAT Credit receivable on input service tax Dr. 14.50
Vendor Cr. 103.05
TDS Payable Cr. 11.45
  • If CENVAT credit is not available on the input service tax paid:
Expense Dr. 114.50
Vendor Cr. 103.05
TDS Payable Cr. 11.45

After amendment, following entry is required to be posted:

  • If CENVAT credit is available on the input service tax paid:

(Given a scenario wherein service receiver has to pay 75% of the tax and rest 25% is payable by the vendor)

Expense Dr. 100.00
CENVAT Credit receivable on input service tax Dr. 3.63
CENVAT Credit receivable on input service tax (Rev Charge) Dr. 10.87
Vendor Cr. 93.27
Service tax payable (Reverse Charge) Cr. 10.87
TDS Payable Cr. 10.36
  • If CENVAT credit is not available on the input service tax paid:

(Given a scenario wherein service receiver has to pay 75% of the tax and rest 25% is payable by the vendor)

Expense Dr. 114.50
Vendor Cr. 93.27
Service tax payable (Reverse Charge) Cr. 10.87
TDS Payable Cr. 10.36

When exploded into different components, first journal entry should look like this in SAP:

Expense Dr. 100.00
CENVAT Credit receivable on input service tax Dr. 3.50
CENVAT Credit receivable on input service tax – SBC Dr. 0.13
CENVAT Credit receivable on input service tax (Rev Charge) Dr. 10.50
CENVAT Credit receivable on input service tax -SBC (Rev Charge) Dr. 0.37
Vendor Cr. 93.27
Service tax payable (Reverse Charge) Cr. 10.50
Service tax -SBC payable (Reverse Charge) Cr. 0.37
TDS Payable Cr. 10.36

Configuration:


T-codes to be used in the entire configuration are as follows:

T-code

Description

OBQ1

Create Condition Type

FTXP

Create Tax Codes

FV11

Create Condition Records

OBCN

Create Account Key

OBQ3

Update Tax Procedure

FS00

Create GL

OB40

Maintain Account Assignment

Step 1.

Create Condition Types

Tcode: OBQ1

We have to create one condition type for each line item of service tax in the journal entry. So, going by the first scenario, maximum 6 condition types will be defined as there are 3 line items for service tax (2 components each):

CENVAT Credit receivable on input service tax                            Dr.   

CENVAT Credit receivable on input service tax (Rev Charge)        Dr.   

Service tax payable (Reverse Charge)                                         Cr.                               

We would need a set of 2 condition types for one line item each for Service Tax, Education Cess and Swachh Bharat Cess.

Also, in cases where no credit will be available, 2 more condition types will be required:

So for all the permutations and combinations applicable, we need a total of 8 condition types.

Condition Type Code

Description

Explanation

JSER

IN: Service tax

Normal: For CENVAT credit available on input service tax paid

JSBC

A/P SH Ecess For ST

Normal: For CENVAT credit available on input SBC paid

JSA1

IN: Serv.tax Rev.ch

Reverse Charge: For CENVAT credit available on service tax payable under reverse charge mechanism

JSB1

IN: ST HEces Rev.ch

Reverse Charge: For CENVAT credit available on SBC payable under reverse charge mechanism

JSA2

Service Tax Abt2

Reverse Charge: For service tax payable under reverse charge mechanism

JSB2

IN:ST SHEces Offset

Reverse Charge: For SBC payable under reverse charge mechanism

ZSER

IN: ST Non DEd

Reverse Charge, No Credit: For service tax payable under reverse charge mechanism for which no credit is available

ZSBC

IN: I/P SHECess ST

Reverse Charge, No Credit: For SBC payable under reverse charge mechanism for which no credit is available

All these condition types will be created with following specifications:

Condition.png

Note: Only condition type JSA2 will be created with a minus sign so as to create a credit line item for service tax payable under reverse charge mechanism. A positive sign creates a positive line item and a minus sign will make a credit line item.

JAS2 condition type will be created with positive sign only. This is because in the tax procedure, the base for condition type JAS2 will be condition type JSA2 (Negative condition type) and any value calculated on a negative base will result in a negative value only.

Step 2.

Create Tax Codes

Tcode: FTXP

For each unique combination of rates applicable, we will create one tax code (input tax type):

Tax codes Description
S0 (ST @ 14.5%_Input @ 14%)   
SA (ST @ 14.5%_SR-75_V-25_Input @ 14%)
SB (ST @ 14.5%_SR-100_V-0_Input @ 14%)
SC (ST @ 14.5%_SR-40_V-0_Input @ 14%)
SD (ST @ 14.5%_SR-20_V-20_Input @ 14%)
SE (ST @ 14.5%_SR-35_V-35_Input @ 14%)
ZA (ST @14.5%_SR-100_V-0(NC))
ZB (ST @14.5%_SR-40_V-0(NC))
ZC (ST @14.5%_SR-40_V-60(NC))
ZD (ST @14.5%_SR-20_V-20(NC))
ZE (ST @14.5%_SR-35_V-35(NC))
ZF (ST @14.5%_SR-50_V-50(NC))

Note: Tax Code SA: A/P ST@14.5% _SR_75_V_25 stands for 75% of 14.5% payable by service receiver and 25% of 14.5% payable by vendor. Codes with a description ending (NC) are meant for the scenarios where no credit will be available. Rates will be maintained in these tax codes against condition types JSA2 and JAS2 only (for service tax payable portion).

Step 3.

Create condition records.

Tcode – FV11

For each combination of tax code and condition type, we will maintain the rate of tax to be applied on the base amount (base amount will be picked up as per tax procedure)

Following table explains the rate to be maintained for each tax code vis-à-vis condition types:

CONDITIONS JSER JSBC JSA1 JSB1 JSA2 JSB2 ZSER ZSBC
NORMAL RC RC RC RC RC RC NC RC NC
KEY VS7 SBC ps1 SB1 ps2 SB2 NVV NVV
Tax codes GL Code 1060400 1060405 1060500 1060505 2060500 2060505
S0 (ST @ 14.5%_Input @ 14%)      14 0.5
SA (ST @ 14.5%_SR-50_V-50_Input @ 14%) 3.5 0.125 10.5 0.375 10.5 0.375
SB (ST @ 14.5%_SR-100_V-0_Input @ 14%) 14 0.5 14 0.5
SC (ST @ 14.5%_SR-40_V-0_Input @ 14%) 5.6 0.2 5.6 0.2
SD (ST @ 14.5%_SR-20_V-20_Input @ 14%) 2.8 0.1 11.2 0.4 11.2 0.4
SE (ST @ 14.5%_SR-35_V-35_Input @ 14%) 4.9 0.175 4.9 0.175 4.9 0.175
ZA (ST @14.5%_SR-100_V-0(NC)) 14 0.5 14 0.5
ZB (ST @14.5%_SR-40_V-0(NC)) 5.6 0.2 5.6 0.2
ZC (ST @14.5%_SR-40_V-60(NC)) 5.6 0.2 14 0.5
ZD (ST @14.5%_SR-20_V-20(NC)) 2.8 0.1 5.6 0.2
ZE (ST @14.5%_SR-35_V-35(NC)) 4.9 0.175 9.8 0.35
ZF (ST @14.5%_SR-50_V-50(NC)) 7 0.25 14 0.5


Step 4.

Create Account Key

Tcode: OBCN

Total 7 account keys are to be maintained. 6 for mapping 6 different GLs for 6 line items and 1 for those scenarios wherein no posting to service tax GL will be done i.e. where no input credit is available and tax is to be added in the expense line item.

Following account keys will be created:

VS7
SBC
ps1
SB1
ps2
SB2
NVV

Step 5.

Update tax procedure:

Tcode: OBQ3

Tax procedure will be updated to map the condition types and account keys together and to define which condition type takes which value as base to calculate the amount to be debited (positive condition type)/credited (negative condition type)

Step 6.

Create GL

Tcode: FS00

Total 6 GLs will be created as follows:

GL Code

Description

Account Group

AG Description

2060500

Service Tax Payable (Reverse Charge)

206

Statutory liabilities

2060505

Service Tax Swachh Bharat Cess Payable (Reverse Charge)

206

Statutory liabilities

1060400

Service tax – Cenvat Account ( Receivable)

106

Long term loans and advances

1060405

Swachh Bharat cess  – Cenvat Account ( Receivable)

106

Long term loans and advances

1060500

Service tax receivable (RC)

106

Long term loans and advances

1060505

Swachh Bharat cess  receivable (RC)

106

Long term loans and advances


Step 7.

Maintain Account Assignment

Tcode: OB40

Maintain GL account to be posted to in case of each account key as follows:

VS7 1060400
SBC 1060405
ps1 1060500
SB1 1060505
ps2 2060500
SB2 2060505

Thanks

Sheli

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