With effect from 1-7-2012, the Central Government has notified the new Reverse charge mechanism for the payment of Service Tax in respect of certain taxable services. As per Section 68(1) of the Finance Act, every person providing Taxable services to another person is liable to pay Service Tax. This means that the liability to pay the Service Tax is on the Service Provider. In exception to the stated rule, for some services, the service receiver shall be liable to pay the Service Tax wholly or partially. This is known as Reverse Charge.
For example, ABC Company purchased Security Services from Raksha Security Agency on 20.12.2012 for Rs. 1,00,000. Raksha Security Agency is liable to pay Service Tax to the extent of only 25% and so raises an Invoice accordingly. ABC Company is liable to pay the remaining 75% of the Service Tax to the Department.
To record Reverse Charge of Service Tax, the following actions are required.
1. For the Service Provider ledger: Enable the option Set/alter service tax details and provide the service tax details.
2. For the Service ledger: Select the Service category (created from Accounts Info. > Statutory Info. > Service Categories > Create > press Ctrl + C and enter the service tax and reverse charge details).
3. Purchase of Services Classified under Reverse Charge: Record a Purchase Voucher for purchase with services classified under Reverse Charge.
4. Payment to the Service Provider: Record a Payment Voucher.
5. To raise Service Tax liability: Record a Journal Voucher, with Tax on Reverse Charge as the nature of adjustment if you want to maintain it in your books. this is only for book keeping purposes.
6. Payment of Tax to the Government: Record a Payment Voucher for paying 75% of the tax. To avail credit select Recipient Liability. For normal payment select Regular.