Country-specific update for India - Service tax liability€¦ · India – Service tax liability White Paper This white paper describes a country-specific update released for India

Microsoft Dynamics®

AX 4.0 SP2 and Microsoft Dynamics AX 2009 SP1

Country-specific update for

India – Service tax liability

White Paper

This white paper describes a country-specific update released

for India for Microsoft Dynamics AX 4.0 SP2 and Microsoft Dynamics AX 2009 SP1. See Microsoft Knowledge Base article 2554055 for hotfix download information.

Date: June 2011

https://mbs2.microsoft.com/Knowledgebase/KBDisplay.aspx?scid=kb;en-us;2554055

2 COUNTRY-SPECIFIC UPDATE FOR INDIA–SERVICE TAX LIABILITY

Table of Contents

Introduction ................................................................................................ 3

Liability of service tax based on Point of Taxation ...................................... 3 Setup to calculate service tax ................................................................................................. 4

Set up an item sales tax group for service tax based on PoT ................................................... 4 Determining service tax liability based on PoT .......................................................................... 5

Service tax liability on sales ................................................................................................ 5 Service tax liability on purchases ......................................................................................... 7

Settling service tax payments based on PoT ............................................................................. 9 Reversing service tax payments based on PoT .........................................................................13 Modified form ......................................................................................................................14

COUNTRY-SPECIFIC UPDATE FOR INDIA–SERVICE TAX LIABILITY 3

Introduction

This white paper describes a Microsoft Dynamics® AX feature that is specific to users in India.

Service providers that provide taxable services or registered manufacturers that are eligible for service tax credit must comply with the PoT rules. For services that are provided or invoices that are created through June 30, 2011, assessees can optionally continue to use cash basis accounting or use PoT accounting. The PoT rules are not applicable for Goods Transport Agency (GTA) transactions. The PoT

rules do not apply to services that are provided or invoices that are created before April 1, 2011.

For more information about other features that apply to India, refer to the Applications and Business Processes Help. Information that is specific to India includes (IND) in the title.

Liability of service tax based on Point of Taxation

The accounting basis is used to determine the service tax liability for sales and purchase transactions. Based on the accounting basis, you can determine when a service tax is liable and how the accounting entries are generated.

Cash basis accounting and Point of Taxation (PoT) accounting are the two accounting basis options that are used to determine service tax liability.

In cash basis accounting, the service tax is payable when the payment for the service is received. The service tax is posted to an interim account when an invoice is posted. The service tax liability is identified when the payment for the invoice is realized.

In PoT accounting, the service tax liability is determined based on the following conditions:

If the invoice is issued within 14 days after the service ends, the service tax is payable on the date when the invoice is received.

Service completion date

Invoice date

Payment date Service tax liability based on PoT

June 1 June 8 June 15 June 8

If the invoice is issued more than 14 days after the service ends, the service tax is payable on the

date when the service ends or when payment is received, whichever is earlier.

Service completion

date

Invoice date



However, you are expected to issue the invoice within 14 days after the service ends. If you do not issue the invoice in time, the service tax liability starts from an earlier date. Therefore, you must consider whether to use only the invoice date or the payment date as criteria to determine the service tax liability. The following table explains the service tax liability as applicable in Microsoft Dynamics AX.

Service completion date

Invoice date





Use the Item sales tax groups form to specify the accounting basis to calculate the service tax and payment. For more information, see Set up an item sales tax group for service tax based on PoT.

Setup to calculate service tax

Complete the following tasks before you calculate service tax for sales and purchase transactions:

Set up general ledger parameters in the General ledger parameters form. For more information, see “(IND) General ledger parameters (modified form)” and “(IND) Activate service tax parameters” in the Applications and Business Processes Help.

Create a service tax code in the Sales tax codes form. For more information, see “(IND) Sales

tax codes (modified form)” and “(IND) Create service tax codes” in the Applications and Business Processes Help.

Create a tax group for service tax in the Sales tax groups form. For more information, see “(IND) Sales tax groups (modified form)” and “(IND) Create tax groups for service tax” in the Applications and Business Processes Help.

Set up an item sales tax group for service tax based on PoT.

Set up a service tax registration number in the Tax registration numbers form. For more

information, see “(IND) Tax registration numbers (form)” and “(IND) Set up service tax registration (STC) numbers” in the Applications and Business Processes Help.

Create a service tax registration group in the Tax registration group form. For more information, see “(IND) Tax registration group (form)” and “(IND) Create a service tax registration group” in the Applications and Business Processes Help.

Define a service tax component in the Tax components form. For more information, see “(IND)

Tax components (form)” and “(IND) Define a service tax component and the tax setoff” in the

Applications and Business Processes Help.

Create a tax ledger posting group and attach a service tax code in the Tax ledger posting groups form. For more information, see “(IND) Tax ledger posting groups (form)” and “(IND) Create tax ledger posting groups and attach an STC number” in the Applications and Business Processes Help.

Set up an item sales tax group for service tax based on PoT

Use the Item sales tax groups form to set up an item sales tax group for service tax transactions based on PoT. For more information, see “(IND) Item sales tax groups (modified form)” in the Applications and Business Processes Help.

You can specify an accounting basis when you set up an item sales tax group for service tax transactions. When you associate this item sales tax group with the relevant service tax transactions, you can later generate service tax invoices and make payments based on the specified accounting

basis.

1. Click General ledger > Setup > Sales tax > Item sales tax groups to open the Item sales tax groups form.

2. Create an item sales tax group. For more information, see “(IND) Create item sales tax groups for service tax” in the Applications and Business Processes Help.

3. Click the General tab, and then in the Accounting basis field, select Point of taxation basis.

Note: You cannot change the accounting basis for an item sales tax group that is saved.

4. Close the form.


Determining service tax liability based on PoT

The accounting basis of the item sales tax group is used to determine the service tax liability for sales and purchase transactions. When the accounting basis is PoT, the service tax is payable on either the invoice date or the payment date.

Service tax liability on sales

The service tax liability on sales invoices can be determined based on the accounting basis. For PoT-based transactions, the following examples, including issuing a sales invoice, issuing a payment

following a sales invoice, issuing an advance payment, and issuing an invoice after an advance payment, explain how the service tax liability is determined.

In the following examples, PoT accounting is used. The following rates are used when calculating service tax.

Type of tax Rate

Service tax 12%

E-Cess 2%

SHE-Cess 1%

Example 1 – When an invoice is issued

In this example, when an invoice is issued, the customer account is debited INR 11,236, and the sales account is credited INR 10,000. The service tax account entries are credited directly into the service tax payable, E-Cess payable, and SHE-Cess payable accounts.

Account Debit (in INR) Credit (in INR)

Customer 11,236

Sales 10,000

Service tax payable 1,200

E-Cess payable 24

SHE-Cess payable 12

Example 2 – When a payment is issued after an invoice

In this example, when the payment is issued after the invoice, the bank account is debited INR 11,236, and the customer account is credited INR 11,236. No service tax entries are made. In accordance with the PoT rules, the service tax is charged when the invoice is issued.


Bank 11,236

Customer 11,236

Example 3 – When an advance payment is issued

In this example, an advance payment is issued. The account entries are first debited into the interim accounts, and then credited into the service tax payable, E-Cess payable, and SHE-Cess payable accounts.


Advance account (bank) 11,236

Customer 11,236


Interim service tax payable 1,200

Interim E-Cess payable 24

Interim SHE-Cess payable 12


E-Cess payable 24

SHE-Cess payable 12

Example 4 – When an invoice is issued after an advance payment

In this example, an invoice is issued after an advance payment. The customer account is debited INR 11,236, and the sales account is credited INR 10,000. The service tax entries are credited into the

interim service tax payable, interim E-Cess payable, and interim SHE-Cess payable accounts.


Customer 11,236

Sales 10,000

Interim service tax payable 1200



Example 5 – When an invoice amount is more than the advance amount

In this example, the advance payment amount is INR 11,236, and the invoice amount is INR 16,854. When an advance payment has been made, and the invoice amount is more than the advance

amount, the difference in service tax amounts is directly credited into the service tax payable, E-Cess payable, and SHE-Cess payable accounts.


Customer 16,854

Sales 15,000




Service tax payable 600

E-Cess payable 12

SHE-Cess payable 6

When a payment is issued to pay the discrepancy, the following accounting entry is generated.


Bank 5,618

Customer 5,618

Example 6 – When an advance amount is more than the invoice amount

In this example, the advance amount is more than the invoice amount. The advance amount is INR 11,236, the first invoice amount is INR 8,988.80, and the second invoice amount is INR 2,247.20. The interim service tax payable, interim E-Cess payable, and interim SHE-Cess payable accounts are credited.



Customer 8,988.80

Sales 8,000


Interim E-Cess payable 19.20

Interim SHE-Cess payable 9.60

When the second invoice is issued, the following accounting entry is generated.


Customer 2,247.20

Sales 2,000


Interim E-Cess payable 4.80

Interim SHE-Cess payable 2.40

Service tax liability on purchases

The service tax liability on purchase invoices can be determined based on the accounting basis. For PoT-based transactions, the following examples, including issuing a purchase invoice, issuing a payment following a purchase invoice, issuing an advance payment, and issuing an invoice after an advance payment, explain how the service tax liability is determined.

In the following examples, PoT accounting is used. The following rates are used when calculating

service tax.

Type of tax Rate

Service tax 12%

E-Cess 2%

SHE-Cess 1%

Example 1 – When an invoice is issued

In this example, when an invoice is issued, the vendor account is credited INR 11,236, and the service/expense account is debited INR 10,000. The service tax account entries are debited directly

into the service tax recoverable, E-Cess recoverable, and SHE-Cess recoverable accounts.


Vendor 11,236

Service/expense 10,000


E-Cess payable 24

SHE-Cess payable 12

Example 2 – When a payment is issued after an invoice

In this example, when the payment is issued after the invoice, the bank account is credited INR 11,236, and the vendor account is debited INR 11,236. No service tax entries are made. In accordance with the PoT rules, the service tax is charged when the invoice is issued.



Bank 11,236

Vendor 11,236

Example 3 – When an advance payment is issued

In this example, an advance payment is issued. The account entries are first credited into the interim accounts, and then debited into the service tax recoverable, E-Cess recoverable, and SHE-Cess

recoverable accounts.



Vendor 11,236

Interim service tax recoverable 1,200

Interim E-Cess recoverable 24

Interim SHE-Cess recoverable 12

Service tax recoverable 1,200

E-Cess recoverable 24

SHE-Cess recoverable 12

Example 4 – When an invoice is issued after an advance payment

In this example, an invoice is issued after an advance payment. The vendor account is credited INR 11,236, and the service/expense account is debited INR 10,000. The service tax entries are debited

into the interim service tax recoverable, interim E-Cess recoverable, and interim SHE-Cess recoverable accounts.


Vendor 11,236






In this example, the advance payment amount is INR 11,236, and the invoice amount is INR 16,854. When an advance payment has been made and the invoice amount is more than the advance amount, the difference in service tax amounts is directly debited into the service tax recoverable, E-Cess recoverable, and SHE-Cess recoverable accounts.


Vendor 16,854





Service tax recoverable 600




When a payment is issued to pay the discrepancy, the following accounting entry is generated.


Bank 5,618

Vendor 5,618

Example 6 – When an advance amount is more than an invoice amount

In this example, the advance amount is more than the invoice amount. The advance amount is INR

11,236, the first invoice amount is INR 8,988.80, and the second invoice amount is INR 2,247.20. The interim service tax recoverable, interim E-Cess recoverable, and interim SHE-Cess recoverable accounts are debited.


Vendor 8,988.80


Interim service tax recoverable 960

Interim E-Cess recoverable 19.20

Interim SHE-Cess recoverable 9.60

When the second invoice is issued, the following accounting entry is generated.


Vendor 2,247.20


Interim service tax recoverable 240

Interim E-Cess recoverable 4.80

Interim SHE-Cess recoverable 2.40

Settling service tax payments based on PoT

When there is no service tax with an invoice, service tax does not need to be settled while settling the

payment for the invoice.

For PoT-based accounting transactions, the service tax is calculated at the time of settlement only if the service tax was calculated at the time of payment.

The following examples, including settling an invoice and an advance payment, settling an invoice and payment, settling an invoice that is more than the advance amount, and settling an invoice that is less than the advance amount, explain how the service tax liability is settled.

Note: The service tax transactions and the settlement transactions can be settled only if the accounting basis is the same. For example, when a transaction is based on PoT, you cannot settle it by using the cash accounting basis. In addition, you cannot settle cash accounting-based transactions by using the PoT basis.



Type of tax Rate

Service tax 12%

E-Cess 2%

SHE-Cess 1%

Example 1 – When an invoice is settled

In this example, when an invoice is issued, the customer account is debited INR 11,236, and the sales

account is credited INR 10,000.

When the invoice is issued, the following accounting entry is generated.


Customer 11,236

Sales 10,000


E-Cess payable 24

SHE-Cess payable 12

When an advance payment is recorded, the following accounting entry is generated.



Customer 11,236





E-Cess payable 24

SHE-Cess payable 12

When the invoice and advance payment are settled by using the Open transactions editing form

(Accounts receivable > Common Forms > Customer Details > Functions > Open transaction editing, or, Accounts receivable > Journals > Payments > Payment journal > Lines > Functions > Settlement), the following accounting entry is generated. For more information, see

“(IND) Open customer transaction editing (modified form)” in the Applications and Business Processes Help.





Service tax payable 1200

E-Cess payable 24

SHE-Cess payable 12

Example 2 – When an invoice with service tax and a payment without service tax is settled


In this example, when an invoice is issued, the customer account is debited INR 11,236, and the sales account is credited INR 10,000.



Customer 11,236

Sales 10,000


E-Cess payable 24

SHE-Cess payable 12

When the payment is recorded, the following accounting entry is generated.



Customer 11,236

When the invoice and advance payment are settled by using the Open transactions editing form (Accounts receivable > Common Forms > Customer Details > Functions > Open transaction editing, or, Accounts receivable > Journals > Payments > Payment journal > Lines > Functions > Settlement), no accounting entry is generated. For more information, see “(IND) Open customer transaction editing (modified form)” in the Applications and Business Processes Help.


In this example, the advance payment amount is INR 10,000, and the invoice amount is INR 11,236.



Vendor 11,236


Service tax recoverable 1200






Vendor 10,000








When the invoice and advance payment are settled using the Open transactions editing form (Accounts payable > Common Forms > Vendor Details > Functions > Open transaction editing, or, Accounts payable > Journals > Payments > Payment journal > Lines > Functions > Settlement), the following accounting entry is generated. For more information, see

“(IND) Open vendor transaction editing (modified form)” in the Applications and Business Processes Help.








Example 4 – When an advance amount is more than an invoice amount

In this example, the advance amount is more than the invoice amount. The advance amount is INR 20,000, and the invoice amount is INR 11,236.



Vendor 11,236








Vendor 20,000







When the invoice and advance payment are settled using the Open transactions editing form (Accounts payable > Common Forms > Vendor Details > Functions > Open transaction editing, or, Accounts payable > Journals > Payments > Payment journal > Lines > Functions > Settlement), the following accounting entry is generated. For more information, see “(IND) Open vendor transaction editing (modified form)” in the Applications and Business Processes

Help.









When the settlement is reversed using the Closed transactions editing form (Accounts payable >

Common Forms > Vendor Details > Functions > Closed transaction editing), the following accounting entry is generated. For more information, see “Closed vendor transaction editing in several currencies (form)” in the Applications and Business Processes Help.








Reversing service tax payments based on PoT

For PoT-based accounting transactions, the service tax is calculated at the time it is reversed only if the service tax was calculated at the time of payment.

Note: Reversed transactions and original transactions must have the same accounting basis. For example, when a transaction is posted based on PoT basis, you cannot reverse it by using the cash accounting basis. In addition, you cannot reverse cash accounting-based transactions by using the PoT

basis.

The following example explains how the service tax is reversed.


Type of tax Rate

Service tax 12%

E-Cess 2%

SHE-Cess 1%

Example 1 – When a sales invoice is issued and reversed

In this example, when an invoice is issued for a sales order, the customer account is debited INR 11,236, and the sales account is credited INR 10,000.



Customer 11,236

Sales 10,000



E-Cess payable 24

SHE-Cess payable 12

When a credit note is created for a sales order by using the Create credit note form (Account

receivable > Common Forms > Sales Order Details > Functions > Create credit note), the following accounting entry is generated. For more information, see “(IND) Create credit notes in sales orders for service tax transactions” and “(IND) Copy sales orders (modified form)” in the Applications and Business Processes Help.


Customer 11,236

Sales 10,000


E-Cess payable 24

SHE-Cess payable 12

Modified form

This section contains information about a modified form used to set up the accounting basis to determine service tax liability.

Form name and locator Description

Item sales tax groups (modified form)

General ledger > Setup > Sales tax > Item sales tax groups

Accounting basis field

Select the basis on which the service tax liability is determined from the following options:

Cash basis – The service tax is payable when the payment for the service is received.

Point of taxation basis – The service tax is payable on the date when the invoice is issued or the date when the payment is received.

The Microsoft Knowledge Base article number for this country-specific update is 2554055.


This document is provided “as-is”. Information and views expressed in this document, including URL and other Internet Web site

references, may change without notice. You bear the risk of using it.

Some examples depicted herein are provided for illustration only and are fictitious. No real association or connection is intended or

should be inferred.

This document does not provide you with any legal rights to any intellectual property in any Microsoft product. You may copy and

use this document for your internal, reference purposes. You may modify this document for your internal, reference purposes. © 2011 Microsoft Corporation. All rights reserved.

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Country-specific update for India - Service tax liability€¦ · India – Service tax liability White Paper This white paper describes a country-specific update released for India