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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 vendors 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 companys 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
Service Tax liability on Reverse Charge Mechanism An SAP Solution
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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 vendors 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

Service Tax liability on Reverse Charge Mechanism An SAP Solution
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Step 1: Tax procedure TAXINN is modified to include the
Service tax component

Inclusion of Step JST1 in TAXINN:

Condition type:

Service Tax liability on Reverse Charge Mechanism An SAP Solution
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Account Key configuration (OBCN):

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

Withholding Tax key GT:

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Withholding Tax Code: GT:
Account Determination for GT:

Assigning the new code GT to the company code:

Service Tax liability on Reverse Charge Mechanism An SAP Solution
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Step 3: Actual TDS configuration

Withholding Tax key: FI

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Withholding Tax code - JI

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Step 4: Portray dependencies between ST and TDS

The recipients 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.

Service Tax liability on Reverse Charge Mechanism An SAP Solution
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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%


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

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Step 3: Goods receipt

Goods receipt will get posted as PO Price + full service Tax
1000 + 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
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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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