Service tax reverse charge configuration

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:

• If CENVAT credit is not available on the input service tax paid:

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)

• 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)

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

Configuration:

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

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.

All these condition types will be created with following specifications:

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):

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:

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:

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:

Step 7.

Maintain Account Assignment

Tcode: OB40

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

Thanks

Sheli