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Accounting for Service Tax under point of taxation regime

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Back-ground

The Ministry of Finance has brought into force the Point Of Taxation Rules 2011 from July 2011. Although it has been nearly a year since these rules have been brought into effect, many of the clients find it difficult even today to keep track of service tax liability in their books of accounts. Prior to the introduction of said rules, service tax was payable on receipt basis. Consequently whenever, an invoice was raised, service tax portion of the invoice would be transferred to “Deferred Service Tax” account. Whenever collections are made against the invoice, the service tax pertaining to collections will be transferred from  “Deferred Service tax ledger” to “Service Tax Payable” ledger. The latter showed the service tax actually payable to revenue authorities on account of collections. However there were accounting issues (which continues even today with small scale entrepreneurs) when the amount was collected in advance. In most of the cases, service tax liability on advances have been debited the “Deferred Service Tax” ledger or “Service tax payable” ledger. This practice portrays erroneous balances of service tax dues.  However, as per the Provision of Point of Taxation Rules 2011, service tax, in short, has to be paid at the time of Invoicing or collection whichever is earlier. This has further complicated the book-keeping. Consequently, I felt that it might benefit the readers if I could share a method of accounting to keep track of service tax liability. I will be doing this through the following case study. I have tried my level best to keep the illustration simple so that beginners will understand. I hope you have good time in going through the following case study

Case study

Mr X, a Consultant enters into the following Service related transactions in the month of March 2012:

Date

Transactions

01-03-2012

Raises an Invoice of Rs 1,00,000 + Service tax of Rs 12,360 on Mr A

02-03-2012

Receives an advance of Rs 2,00,000 from B for an invoice to be raised in subsequent months

03-03-2012

Recieves an Invoice for input services of Rs 80,000 plus service tax of Rs 9,888 from C

He should make the following journal entries :

Date

Particulars

Debit

Credit

01-03-2012

Mr A                                    

1,12,360

   To Consultancy Charges

1,00,000

   To Service Tax payable

  12,360

(Being invoice raised)

02-03-2012

Bank A/c

2,00,000

   To Mr B – Advance ledger

2,00,000

(Being advance received from Mr Z)

03-03-2012

Service expenses

80,000

Service tax payable

 9,888

   To Mr C

89,888

(Being input services invoice received)

It should be noted that at this stage, his “service tax payable” ledger will show a balance of Rs 2,472. However this does not take into account the service tax liability of Rs 22,000 – being service tax payable on advance received (Rs 2,00,000 x 12.36/112.36). To overcome this limitation, the following journal needs to be passed on 2nd March 2012

02-03-2012

Advance Service Tax

22,0000

  To Service Tax Payable

22,000

(Being service tax payable on advance received on 2.3.2012 from Mr B)

The extract of Balance sheet (not as per revised schedule vi ) on 31.3.12 is as follows assuming that the service tax liability of Rs 24,272 is being paid in April 1st (Ignoring interest):

Liabilities

Amount

Assets

Amount

Current Liabilities and provisions :

Current Assets, Loans & Advances :

Service tax payable

24,472

Advance service tax

22,000

Mr B – Advance Ledger

2,00,000

Let us assume that the service tax of Rs 24,472 gets paid in 1.4.12 and that there are no other service related transactions till 31.5.12. The following transactions (Portrayed as Journal entries) occur in the month of June. It should be noted that the payment has not been made with respect to input services received from C till 30.6.12

Date

Particulars

Debit

Credit

01-06-2012

Mr D

3,37,080

  To consultancy charges

3,00,000

  To Service tax payable

37,080

(Being invoice raised on Mr D)

02-06-2012

Mr B – Debtors ledger

3,61,800

Mr B – Advance Ledger

2,00,000

  To Consultancy Charges

5,00,000

  To Service tax payable

61,800

(Being invoice raised on Mr B after setting off the advance received)

It should be noted that at this stage, the service tax payable ledger shows a balance of Rs 98,880. But the actual amount payable works out to Rs 86,767 as follows:

Service tax on Invoice raised on Mr D

         37,080

Balance Service tax on Invoice raised on B after adjusting advance service tax paid (561800-200000)*12.36/112.36

         39,799

Reversal of Input credit taken on March month *

           9,888

Total

         86,767

*if payment is not made within 3 months, the CENVAT taken earlier shall be reversed

To ensure that the books show Rs 86,767 as service tax payable on 30.6.12 the following entries are to be passed on 30.6.12:

Date

Particulars

Debit

Credit

30-06-2012

Service tax payable

22,000

  To Advance Service tax

22,000

(Being service tax paid in month of March 12 on account of advance received now reversed)

30-06-2012

Un-paid CENVAT (Current asset)

9,888

  To Service tax payable

9,888

(Being CENVAT credit reversed on account of non payment)

On 30.6.12, the extract of balance sheet is as follows:

Liabilities

Amount

Assets

Amount

Current Liabilities :

Current Assets :

Service tax payable

86,767

Un-Paid CENVAT credit

9,888

The unpaid CENVAT credit of Rs 9,888 can be set off against liability once the payment is being made towards the input services.

Other Important Points to be noted:

· If the audit of the client gets completed only in say August 12 for Fyr 11-12, the auditor should look for the subsequent payment being made with respect to Input service from C. Since the input service has been subsequently reversed, the said item should be dealt with under AS 4 – Contingencies and Events Occurring after Balance sheet date. The fact of reversal of CENVAT in June 12 for credit taken on 31.3.12 is not an adjusting event because, the Service Tax liability to the extent of Rs 9,888 arises only in June and not in March 12. Consequently no adjustment needs to be made for this in march 12. However, if the subsequent reversal of CENVAT credit is so material, the auditor should insist on disclosure to that extent

· The Un-paid CENVAT credit represents the future savings in Service Tax liability that will crystallize in the month in which the same will be paid. However, if the client decides not to make payment to Mr C or write back the entry made on 31.3.12 for the expenses booked, the Unpaid CENVAT credit ledger should also be correspondingly written off. Let us assume that client writes off this unpaid CENVAT credit.  However after 5 month he makes payment to Mr C. It should be noted that he will not have an “Unpaid CENVAT Credit” asset to set off service tax liability because, he has already claimed IT deduction to the extent of Rs 9,888 by writing off the CENVAT credit.




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