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: –
To TDS Payable
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: –
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: –
Service Tax Input but Not Due…………….Dr
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”.
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.
Service Tax Payable Account …………………….Dr
Service Tax Input Account………………………..Dr
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.
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