CA Gaurav Arora

As we are witnessing the major changes in the Service Tax Rules/Acts recently. Under Reverse Charge Mechanism the service recipient is liable to pay the service tax instead of service provider. However in certain cases both service provider and service recipient has been made liable to pay service tax. The service receiver has to register himself under service tax and service receiver cannot claim general exemption limit of 10 Lakh rupees.

In this Article there are suggested Accounting Treatment in the books of service recipient in case of Reverse Charge of Service Tax with relevant extracts from the Service Tax Act.

1.   Service Tax Liability: –

The foremost point is when the liability for the payment of Service Tax will arise in case of Reverse Charge. The relevant extract of Rule 7 regarding this is as follows: –

Rule 7: – Determination of point of taxation in case of specified services or persons: –

Notwithstanding anything contained in these rules, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made:

Provided that, where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist:

Provided further that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

As this is clear from the above Rule 7 of Point of Taxation is that in case of Reverse Charge the Point of Taxation is when the payment is made.

Example: – we have received the Taxable Service under Reverse Charge in the month of say August 2012, however the payment made to the party in the month of September 2012.

In this case the Service Tax liability will arise in the month of September 2012 and the due date for the payment of Service Tax will be the 5th/6th of the succeeding month.

Accounting Treatment in the Month of August 2012: –

  • At the time of booking the Expense for the service received we don’t need to book the Service Tax liability i.e.

Expense Account………………………………..Dr

To Party

To TDS Payable

Note: –

TDS will be deducted on the payment made to the party i.e. Service Tax need not be considered.

 Accounting Treatment in the Month of September 2012: –

  • At the time of making payment i.e. September 2012: –

Party Account………………………………..Dr XXX

Service Tax Input but Not Due…………….Dr (Discussed later) YYY

To Bank XXX

To Service Tax Payable YYY

2.   Cenvat Credit of Service Tax: –

The second important is when the Input Credit of the service tax paid above will be taken. The relevant extract of Rule 9 regarding this is as follows: –

Rule 9 (1)(e), a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994;

As from the above extract is clear that the Input Credit for the Service Tax payable is available only after the payment of Service Tax on the basis of Challan evidencing the payment of Service Tax.

Now the above discussed later portion will be discussed here:  –

Party Account………………………………..Dr

Service Tax Input but Not Due…………….Dr

To Bank

To Service Tax Payable

As we have made the payment to the concerned party, the liability for the payment of Service Tax has arised and since we have not paid the payment of Service Tax yet, so we are not eligible for the Input tax Credit of Service Tax.  The new ledger created with the name “Service Tax Input but not due”.

Note: –

As already mentioned in the Act, that we cannot utilize the Input Credit for payment of Service Tax under reverse charge.

3.   Payment of Service Tax: –

Now the next step is the payment of Service Tax payable to the credit of Central government.

As already explained above, the input credit available to the service tax payer under reverse charge is only after the payment of service tax to the credit of central government. The Payer is eligible for the credit in the month of September 2012.

Accounting Treatment

Service Tax Payable Account …………………….Dr

Service Tax Input Account………………………..Dr

To Bank

To Service Tax Input but not due

Since the service receiver has to register himself for filing of service tax return in case of payment of service tax under reverse charge, so it will be very harsh for service receiver, where he has received services which falls under reverse charge for even small amount but due to it he has to register himself in service tax and have to file service tax return on prescribed interval, as under service tax act nil return is also mandatory and every registered person has to file half yearly return.

(Author can be reached at [email protected])

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  1. Chandra Sekhar says:

    Ours is Private Ltd Company . We want to construct Building. Excavation work to be carried for Building Foundations. If we give contract to Some person for excavation by Hitachi, what would be the service tax liability.

    If we get Hitachi on hire basis whether tax liability will reduce .
    please advice.

  2. TANYA says:

    Legal charges paid to lawyer is 3700 on 1.7.2012
    what will be the service tax liability
    and whether we should pay interest on service tax or not
    please reply

  3. madhukar says:

    1) what if Service provided is already registed under Service tax and charging 12.36% service tax in his invoices do service receiver needs to pay service tax on reverse charge basis.

    2)what if we are pvt ltd company?

  4. M.Ramanathan says:

    Dear Sir,
    I am having properties at Trichy and leasing it for various persons.As service provider,I have to collect Service Tax and remit.
    Some of the tenents are not accepting to pay Service Tax.If I tell them to vacate then they would not even pay the rent.If I go to court I could not vacate them for next twenty years as Rent Control Act is very bad and favours the tenents to the maximum,and they will not pay rent also.None of the tenents abide by the agreed clauses.The Land Lord is at the mercy of the tenents because of our Law and legal system.
    When collection of rent itself is difficult,is it fair to impose the burden of collecting Service Tax on Rent on the head of Land Lord.Will our Finance Minister change the burden of payment of Service Tax on renting to the head of Tenent and help us.

  5. KN.Muthiah says:

    Dear Sir,
    Iam an individual.I have leased out my commercial property for rent. It is being occuppied by Limited Companies. Presently,Iam charging Service Tax and remit them.
    DOES REVERSE CHARGE MECHANISM is applicable in my case. i.e Is reverse charge mechanism is applicable for Renting of Commercial Properties.
    Kindly clarify.

  6. Azharuddin says:

    Dear Nitin Singhal why u r worry about TDS deduction after considering/adding service tax amount?

    There is no question of Service TX including deduction of TDS.

    Coz we are not paying the service tax to the Service provider at all.

  7. Reena says:

    ST liability and input credit is available in the month of September 2012 itself.
    That means on the Due Date i.e. 6th Oct, credit can taken in front of liabilty??????
    Kindly clarify.

  8. RAJU SHIVTARE says:

    We have paid on renting passenger vehicle cab car.etc.service tax under reverse charge mechanism method (w.e.f 1/07/12) can we avail cenvat credit on the same?

  9. ARUNKUMAR says:

    Please note that the reverse charge mechanism is not harsh as stated in the above article. The reverse charge is applicable only if the Service Provider is an individual or a proprietor/partnership firm and the receiver is a Limited Company.

    In all other cases, reverse charge is not applicable and whole ST is paid by provider of service.

  10. sunil says:

    Hi Nitin,
    I agree with you that TDS should be deducted both on Service value as well as Service Tax (or Bill Value) charged by the Service Provider. It doesn’t matter who makes the payment of Service Tax to Govt Kitty.

    Moreover, your point regarding Leasing of Commercial property is also valid.

    Above all, we should deduct TDS on Bill Value to safeguard ourselves from paying Intt. on short deduction of TDS.

  11. Rajesh Bansal says:

    Such entries are confusing where different persons are employed for different jobs e.g. entry, vendor payment, cashier,taxation are handled by different professionals

  12. Nitin Singhal says:

    You have mentioned in the article:
    “Note: –
    TDS will be deducted on the payment made to the party i.e. Service Tax need not be considered.”

    But as far as I know TDS is to be deducted including Service Tax except when deducted for Rent for Land & Building. Please Clarify…

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June 2021