It is one of the emerging challenges for the Entities availing service through import of services to calculate actual amount of Service Tax under reverse charge mechanism of Finance Act and also to calculate the amount of TDS to be deposited under section 195 of Income tax Act, 1961. Due to involvement of  both Direct and Indirect tax laws professionales are facing hardship in calculation of above.
As per Service Tax rules it is expedient to include TDS deposited by the Service Receiver along with the amount payable to Service provider for the calculation of Service tax, whereas as per Income Tax Act it is expedient to include Service tax along with amount actual payable to the Service provider and TDS deducted thereon.
For Example if amount payable to the Service Provider is Rs. 100 and TDS deducted on the same is Rs. 20 then Service Tax to be deducted on Rs. 120 (i.e 100+20). In such case amount of Service Tax payable becomes Rs. 14.83 (Say 12.36%), whereas as per Income Tax Act, TDS should be deducted on Rs. 134.83(i.e 120+14.83). Hence for the compliance of the both laws and rules, we shall make the following calculation:-
Let us assume,
Amount Payable to the Service provider is Rs. 100
and Amount of TDS deductible is Rs. X,
Then if rate of service tax is 12.36%, Service Tax payable should be ,   (100+X)*12.36%
And if we go through Income Tax Act, amount of TDS should be { (100+X)+(100+X)*12.36%}  * 20% (Say rate of TDS is 20%),
Then as per our assume we can say that,
 { (100+X)+(100+X)*12.36%}  * 20% = X
Now if we solve this equation then, Value of X should be calculated which was Rs. 28.98,
Let us go through both tax laws,
Total amount payable including TDS = 100+28.98=  Rs. 128.98
Then as per Service Tax Rule , Service Tax should be calculated on the amount including TDS i.e on Rs. 128.98 = Rs. 128.98*12.36%= Rs. 15.94
Now as per Income Tax Act, TDS should be calculated on the amount including Service Tax i.e on Rs.128.98+15.94= Rs.144.92
If we take rate of TDS as 20% then TDS will be Rs. 28.98. Hence we shall made on complaince with provisions of both Direct and Indirect Tax Laws.
——————–
Author-
CA Prachand Dhoj Karki,

Email:- [email protected]

More Under Service Tax

8 Comments

  1. Shailendra Mittal says:

    Please let us know of Reverse Charge Mechanism for Service Tax applies for Pvt. Ltd. Company?
    Reverse Charge Notification No. 30/2012-ST Dated 20-6-2012
    [TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (i)]
    Government of India
    Ministry of Finance
    (Department of Revenue)
    Notification No. 30/2012-Service Tax
    New Delhi, the 20th June, 2012
    As per the Notification,100% service tax liability is of Recipient of Services, Not the Service Provider.

  2. KV says:

    Unnecessary confusion created by this article.

    Request taxguru to remove this as there is no requirement for deducting tds on service tax under reverse charge as the said sum is not paid to the service provider.

    The author looks to be reading service tax provisions too much and in the process complicating simple issues.

  3. Naveen Garg says:

    Dear Mr. Karki
    In my view, service tax under reverse charge is a tax on service receipt. Its not a payment to service provider. As per I. Tax provision TDS is deductable on ‘any sum to be paid’. So, there are no requirement to deduct TDS on service tax paid under reverse charge mechanism.

  4. Prachand Dhoj Karki says:

    Dear Mr. Ramasamy,

    I am afraid to make u know that this type of problem arises only if the burden of TDS lies on Professional Service Receiver i.e. when exporter of service fixed their receiveable and TDS should be deposited by the service Receiver.

    Any comments are appreciatable.

  5. ramasamy says:

    Hi

    As per Section 195, TDS has to be deducted only on taxable amount payable to Non Resident India. Service tax payable under reverse charge machanism not payable to Non Resident. I am not sure why should we consider ST payable against Non resident payment for TDS deduction purpose.

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