Service Tax liability on Reverse Charge Mechanism – An SAP Solution

[sridevi_p]

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:

Condition type:

Account Key configuration (OBCN):

Step 2:  Configuration of WTH key for capturing Service Recipient 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 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.

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

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
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