reverse_charge.pdf

8/13/2019 Reverse_Charge.pdf

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Government of India, Ministry of Finance VideNotification No. 15/2012Service Tax dated 17th March

2012 had notified the list of taxable services and the extent of service tax payable thereon by the person

liable to pay service tax on such specified services. Based on the above notification, the person who is

receiving the service is liable for paying the service tax for specified services where as for listed services,

the service tax liability need to be paid both by service provider and the person receiving the service. The

percentages in which the service tax liability needs to be shared are specified in the above notification.

Subsequently on 20thJuneNotification Number 30 /2012Service Tax has been released by the Ministry

of Finance mentioning the effective date of the changes for reverse charge as 1stJuly 2012.

To meet the above requirements Oracle Financials for India has released this solution and this will

support the same.

For implementing the above requirements the following additional configurations are to be made in the

following setup UI

1. Tax Code

2. Regime Registration

Tax Code Setup

To classify the taxes as Reverse Charge, a check box Reverse Charge Flag is introduced in the flags

block of the Tax Definition India Localization UI.

Once the tax code is flagged as Reverse charge tax, the tax code will be classified, as Reverse Charge

Tax Code. The check box is only applicable for Service tax types. Also, the checkbox is not applicable for

Inclusive taxes.
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How to use this tax Code:-

Say is the applicable service tax rate is 10% and in that 40% is to be paid by the service provider and

60% by service receiver.

The user has to create two service tax codes

1. 4% normal service tax code

2. 6% service tax code with flag checked as Reverse Charge

When reverse charge service tax code is used on the Receivables Transactions (order to Cash,

Receivable transactions) the same will not be considered for updating the repository for liability and also

not shown as amount recovered from the customer to this extent.

When reverse charge service tax code is used on the Payables transaction, the same will not be available

for recovery on accounting of the invoice and it is available in the subsequent month on payment of

supplier invoice and the tax authority invoice.

Regime Setup Changes

To capture the reverse charge accounting, a new tax type has been introduced for Service Tax regime.

The tax account has to be defined for each type of service tax and the tax account will be defined at the

regime level and can be modified at the organization level.

Accounting will be done in the payables side only and there is no impact on the receivable side.


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A new tax category has to be created with the normal service type of taxes and service tax codes

classified as reverse charge. The precedence for the reverse charge will be 0 and the cess taxes will

have the precedence of the basic reverse charge service tax. The tax category has to be defined in the

following way

Payables flow

The amount of service tax to be paid by the service receiver occurs when the invoice payment is made to

the service provider. That is, in the period the amount paid to the service provider, the same has to be

considered at the time of settlement.

Once the amount is paid to the tax authority, the challan through which the payment made to the tax

authority is sufficient to take the credit of the service tax. That is the service tax credit is taken in the

subsequent month of the payment of the invoice amount to service provider.

Considering the process, the Payables flow has three main components: -

Invoice Creation and Accounting

Invoice Payment: The receiver needs to pay the supplier and also, pay the service tax portion of

receiver to Service Tax Authorities

Settlement and Payment to Service tax Authority: The receiver will adjust settlement with authority

and then, he can claim the credit of service tax payment made.

Reverse Charge accounting will happen only at the time of Invoice accounting and there will be no impact

at the time of PO Match or Receipt Match or ERS Invoice creation.

When the Payables invoice is accounted and the document has Reverse Charges classified tax codes

the following accounting entry will be inserted for interim liability and for reducing the balance of the

supplier liability for equivalent portion of service tax to be paid directly to the service tax authority.

The same is explained in the screen shot given in the next page


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Invoice Creation and Accounting

The Line amount is Rs. 35,789 and in the taxes we see the total as Rs. 3,686 of this Rs 2,211 relates to

the tax amount to be paid to the service tax authority and the same need not be paid to the supplier. For

this reason only we see the supplier invoice values as Rs 37, 264 (35,789 + 1,475).


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The above screen shot shows the accounting in red box for the interim liability lines and the boxes in

green shows the lines for the reverse charge.

For Po/Receipt matched invoices and Standalone AP Invoices, taxes will convert to AP lines /distributions

as follows: -

4% tax (normal Service tax) will flow as per existing functionality. The AP distribution will be createdwith Service tax Interim Recovery account.

For 6% Tax (Reverse Charge Service tax), two lines will be created in Payables.

o The first one will have positive amount for tax (6% tax) and distribution account for

distribution for this line will be Service Tax Reverse Charge account from Regime Register

setup;

o The second line will have negative amount of tax (6% tax) and distribution account for

distribution for this line will be Interim Liability account from Regime Register setup.

Accounting entry at time of Invoice Accounting

At the time of accounting of AP invoice, the following accounting entry will be generated

(For 4% tax, existing entry)

Service tax recovery interim Dr

Service tax cess recovery interim Dr

Service tax SHE cess recovery interim Dr

Supplier Liability Cr

For 6% tax (negative tax distribution)

Supplier Liability A/c Dr

Service Tax Interim Liability A/c Cr

Service Tax Education cess Interim Liability A/c Cr

Service Tax SH Education Cess Interim Liability A/c Cr

For 6% tax (positive tax distribution)

Supplier Liability A/c Cr

Service Tax Reverse Charge A/c Dr

Service Tax Cess Reverse Charge A/c Dr

Service Tax SHE Cess Reverse Charge A/c Dr

Invoice Payment

Credit on the reverse charge on service tax is available on the subsequent month of payment of supplier

invoice.

During the month when the supplier payment is made, at the time of submission of India Service Tax

Processing concurrent, the related reverse charge lines will be considered and then liability will be

updated to the repository.


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The accounting entry passed at the time of updating the repository is

Service Tax Interim Liability A/c Dr

Service Tax Education cess Interim Liability A/c Dr

Service Tax SH Education Cess Interim Liability A/c Dr

Service Tax Liability A/c Cr

Service Tax Education cess Liability A/c CrService Tax SH Education Cess Liability A/c Cr

At the time of settlement these liability entries will be considered and tax authority invoice will be created

along with other liability entries. The payment for the tax authority invoice is to be like normal settlement

invoice.

Settlement and Payment to Service tax AuthorityAfter the payment of the tax authority invoice, navigate back to the India Localization, click on the process

payment button in Settlement Payment Details and this will generate the recovery entries for the service

tax reverse charge taxes with the system date. The accounting generated is

Service Tax Recovery A/c Dr

Service Tax Education cess Recovery A/c Dr

Service Tax SH Education Cess Recovery A/c Dr

Service Tax Reverse Charge A/c Cr

Service Tax Education cess Reverse Charge A/c Cr

Service Tax SH Education Cess Reverse Charge A/c Cr

On submission of the Service Tax Credit Register there will be two lines for the invoice which has reverse

charge i.e one for the credit availed at the time of accounting under POT basis and second line for the

credit availed on payment of tax authority invoice.

In the Service Tax Repository Review UI, there will be three records shown for the same invoice if it isqueried with Include Settled Transactions.


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In the above screen shot in the red box first line for credit taken on accrual basis, second line for liability

and third line for credit availed.

Receivables Flow

The amount of service tax paid by the service provider is eligible for credit at the time of booking of the invoice in

the receivers books immediately. This credit can be availed like any other service purchases.

When supplier generates the Service Invoice, if Reverse charge is applicable, the supplier invoice should

show the total amount of service tax payable with distinction of the service tax payable by the buyer. This

has to be shown only on the tax invoice and not to be updated to revenue or to customers account.

The same is clearly shown in the screen shot in red boxes.

The reverse charge lines will not be shown in the distributions.


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On submision of India Service Tax Processing concurent, the revese charge lines will not be considred

at the time of updating the repository and also these will not be shown in any of the servcie tax reports.

For the 6% reverse Charge tax, following behavior will be there: -

Receivables should not be updated

No liability entry should be should be generated for

The service tax processing concurrent should not pick up this tax code and update the service tax

repository.

This tax code should not be shown in any of the service tax reports

This tax code line should not be shown in the Repository review UI

Accounting entryThere will be no accounting entry in the Receivables. It will be shown only on the

IL UI.

reverse_charge.pdf

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