Service Tax Liability on Reverse Charge

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Service Tax liability on Reverse ChargeMechanism 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 listhandles 2 cases

Case 1: Abatements with Service tax creditCase 2: Abatements without service tax credit.

A Tweak in the standard approachIn an organization, where most of the works are done as contract, the whole of service tax would be preferredto 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 vendors shareof the service tax liability.

The service tax liability borne by the company is configured on similar lines as a withholding taxwould be configured, as the amount of companys liability should be reduced from the vendorliability 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 thisdocument.

SolutionConfiguration 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 GTwith 4% rate

Service Tax liability on Reverse Charge Mechanism An SAP Solution


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 amountreduced option is checked. This configuration will also ensure that vendors liability on the ST isincluded 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 INRNet 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 POprice + 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 theService tax component

Inclusion of Step JST1 in TAXINN:

Condition type:



Account Key configuration (OBCN):



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

Withholding Tax key GT:



Withholding Tax Code: GT:

Account Determination for GT:

Assigning the new code GT to the company code:



Step 3: Actual TDS configuration

Withholding Tax key: FI



Withholding Tax code - JI



Step 4: Portray dependencies between ST and TDS

The recipients ST liability should be first computed and then based on the reduced value of thistax code, the TDS should be computed.

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



Process Flow

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

GT is the new WHT created for reverse charge mechanismFI/JI is the existing TDS created against the vendor. The rate of tax is 10%

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 willensure that GR is created with PO value + full service tax liability



Step 3: Goods receipt

Goods receipt will get posted as PO Price + full service Tax1000 + 120 = 1120 INR

Step 4: Invoice Receipt

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 Vendorliability; 10% of1090

Credit Service Tax payable 30 ST % borne byrecipient; 1000 * 3%

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

Author: Sridevi PattabiramanDate: 20-Jun-2013

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Service Tax Liability on Reverse Charge