Reverse Charge of Service Tax
In India, transactions related to services are taxable. As a general rule, the service tax is reported and paid by the provider of the service. But in certain scenarios, the service tax must be paid by the service receiver, or must be reported by both provider and receiver. Microsoft Dynamics NAV supports scenarios in which the service receiver must pay service tax as a reverse charge against an invoice from a service provider. In addition, Microsoft Dynamics NAV also supports split service charges.
When you as the service receiver pay the service tax amount to the service tax department, it will be reversed, and you will have a service tax credit. You can use the available service tax credit to offset all or part of your service tax liability. If the available service tax credit amount is not sufficient or cannot be used, you can pay the remaining service tax balance by using cash or check.
Depending on the scenario, service tax must be paid by the service provider or the service receiver. As a result, when a reverse charge is made, this impacts the service tax liability of both provider and receiver. The following table describes the impact of the reverse charge mechanism in the required scenarios, as defined in the official notification.
| No. | Description of a service | Percentage of service tax payable by the person providing service | Percentage of service tax payable by the person receiving the service |
|---|---|---|---|
1 |
in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business |
Nil |
100% |
2 |
in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road |
Nil |
100% |
3 |
in respect of services provided or agreed to be provided by way of sponsorship |
Nil |
100% |
4 |
in respect of services provided or agreed to be provided by an arbitral tribunal |
Nil |
100% |
5 |
in respect of services provided or agreed to be provided by individual advocate |
Nil |
100% |
6 |
in respect of services provided or agreed to be provided by way of support service by Government or local authority |
Nil |
100% |
7 |
Rent a Cab Services (a) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value. (b) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on non-abated value. |
Nil 60% |
100% 40% |
8 |
in respect of services provided or agreed to be provided by way of supply of manpower for any purpose |
25% |
75% |
9 |
in respect of services provided or agreed to be provided by way of works contract |
50% |
50% |
10 |
in respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory |
Nil |
100% |
For more information, see the following page at the Government of India Central Board of Excise and Customs website: http://www.cbec.gov.in/ub1213/st15-2012.htm.
How service tax must be reported depends on the nature of the service, and on the type of the provider of the service and the receiver of the service. For example, if the service is advocate services, the service provider is an individual advocate, and the service receiver is a business entity, then the service tax must be paid by the service receiver. In other cases, the service tax must be paid by the service provider, or the payment of the service tax must be shared between the service provider and the service receiver. You must set up codes for the various types of service providers and service receivers. You must then specify a service entity type for your own company, and for those customers, vendors, and locations for which you post transactions for services.
For example, suppose Cronus India Ltd. purchases a service from the vendor Delhi Postmaster. The service can be a delivery by a goods transportation agency (GTA) or advocate service, both of which are taxable for the service receiver. In Microsoft Dynamics NAV, on the vendor card for Delhi Postmaster, a service entity type has been specified to identify the entity type of the vendor. On the purchase invoice, a location is specified where the service tax group requires that the service receiver pays the service tax. When Cronus India Ltd. posts the invoice, entries are generated so that the next time it pays service tax, this transaction is included as a taxable event for the company.
Then, if Cronus India Ltd. creates a credit memo that is applied to the invoice from Delhi Postmaster, the calculation of service tax might be impacted. Similarly, Cronus India Ltd. can pay Delhi Postmaster in advance before receiving the invoice, in which case the final invoice may impact the calculation of service tax. In those cases, reverse charge payment of service tax may apply. For example, in the first transaction, Cronus India Ltd. paid the service tax amount. But for the second transaction involving the credit memo, the invoiced amounts and accordingly also the service tax amounts are changed. As a result, the service provider may need to pay back the service receiver for the paid service tax through the reverse charge mechanism.
Service Tax Credit
Service tax credit availed on an input service may be used to pay service tax on an output service. Similarly, an output service provider is allowed to avail service tax credit of the service tax paid on the same services availed through an input service provided.
Posting Lines with Service Tax and Reverse Charges
When you create a purchase document such as an invoice, or a purchase journal line that includes service tax, Microsoft Dynamics NAV validates how service tax must be calculated and if reverse charges apply. This includes determining if the journal or document contains lines with different types of reverse charge. With this release, you cannot post a purchase document or a purchase journal where one line is for GTA and other lines are for other types of reverse charge of service tax. You also cannot post a multiline document where some lines have service tax and other lines do not or have VAT. The lines must also have the same tax registration number, and they must be associated with the same service tax group. Finally, if the purchase document contains lines that result in reverse charge service tax, you must specify the service type on the Tax Information FastTab.
When reverse charge payment of service tax does not apply the normal rules for point of taxation apply. Tax is payable either when an invoice is posted or a payment is made. This is determined by whether point of taxation (PoT) is enabled for the relevant document. If PoT is not enabled, then when an invoice is posted, tax amounts are posted to interim accounts. Taxation in this case is delayed until the payment is received. At that point, the values in the interim accounts are moved to the corresponding final accounts. If PoT is enabled, then tax amounts are posted to the Service Tax Receivable account. PoT and reverse charge on service tax can be combined. One part of the amount can be reverse charge and the remaining amount can be PoT, but the amount cannot be both. In Microsoft Dynamics NAV, this is termed a split service tax. However, certain scenarios are not supported, such as a distribution of the reverse charge between the vendor and your company when PoT is not selected.