Service Tax Charged instead of VAT....

This query is : Resolved

Prashant (Querist)
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06 June 2009 One of Our Vendor previously work for us as Jobworker till month of Feb.09 and after from Mar. 09 Agreement Changed between us, and he charged full bill i.e. RM+PM+Processing Charges, Hence he must charged VAT of amount.
But he charged SErvice TAx as per previous practise and we booked his bill in accounts in March 09 and we final our Accounts Book.
Then what is process of Revision in Such a case for Charging VAT Instead of Service TAx?????

M Prabhakar Menon

M Prabhakar Menon (Expert)
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06 June 2009 Vat will apply since its a sale and not provision of a service covered under Service Tax Act Since VAT,a state subject, and ST,Central subject, are different Vat will be attracted in this case.The service tax paid will have to be dealt with seperately with the concerned department.

Prashant

Prashant (Querist)
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06 June 2009 But wat is procedure to get reverse Service Tax and Vat tax to be paid with interest or penalty???

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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24 July 2025 This is a classic case of incorrect tax classification — where VAT should have been charged on the invoice instead of Service Tax, due to change in the nature of the transaction from job work (service) to sale of goods (RM + PM + processing).

Here's how to rectify and deal with this situation step-by-step:

🔍 1. Why VAT applies instead of Service Tax
Since your vendor is now billing for raw material + packing material + processing, the transaction qualifies as a sale of goods, not just a provision of service. Hence:

Service Tax is not applicable

VAT is applicable, because ownership of goods is transferred

🔁 2. Steps to Reverse Service Tax and Pay VAT
Step A: Vendor must revise/cancel Service Tax invoice
Issue a credit note for the invoice raised with Service Tax

Issue a revised tax invoice charging VAT instead of Service Tax

If the ST-3 return is already filed, vendor may need to revise the return or reflect the reversal in next return

Step B: Vendor must file refund application for Service Tax (if paid)
Refund of wrongly paid service tax under Section 11B of Central Excise Act, 1944 (read with ST provisions)

Must file within 1 year from the date of payment

Justify that tax was paid under mistake of law

Must also provide declaration of non-passing of burden to you (recipient)

Step C: Pay VAT (with interest/penalty if delayed)
The vendor must now raise VAT invoice

File revised VAT returns (if allowed), or disclose the VAT liability in next return

Pay VAT with applicable interest and/or penalty for late payment (varies by State VAT Act)

🧾 3. Accounting Treatment in Your Books
If you're the recipient:

Reverse Service Tax entry if input credit was availed

Book VAT liability, if it affects your VAT input credit

Example:

Original (Wrong) Entry:

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Job Charges A/c Dr. ₹1,00,000
Service Tax Input Credit A/c Dr. ₹12,360
To Vendor A/c ₹1,12,360
Revised (Correct) Entry:

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Purchases A/c Dr. ₹1,00,000
VAT Input Credit A/c Dr. ₹4,000 (say at 4%)
To Vendor A/c ₹1,04,000
✅ 4. Key Considerations
The vendor should initiate correction proactively to avoid audit issues

If Service Tax credit was taken, you must reverse it

Follow up on vendor’s refund claim for Service Tax

Preserve all correspondence, credit notes, revised invoices as proof

🚨 Risk if not corrected:
Double taxation risk (Service Tax + VAT)

Disallowed credit by department

Interest and penalty under VAT or Service Tax laws during audit

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