JOURNAL ENTRY FOR INDIRECT EXPENSE INCLUDING SERVICE TAX ABATEMENT AND REVERSE CHARGE MECHANISM


Journal entry for expense with service tax reverses charge

Basically the service tax is collected and paid by the service provider, but there are some services for which the service receiver has to pay service tax, this system is called service tax reverse mechanism. This is applicable to companies and other type of entities irrespective of exemption limit (i.e. Rs.10 lakh).The service tax paid is eligible as CENVAT credit only services related to productive as per clarifications from the CBEC(Circular No.943/04/2011-CX,dated 29-04-2011) with regards to input and input services.
Here I am giving the list of service for which service receiver has to pay

  • Carriage Inward and outward
  • Manpower services received by public or private ltd from firm or sole proprietors
  •  Work Contract service
  •  Legal Service
  •  Insurance agent service
  •  Sponsorship service
  •  Rent a cab service



Journal Entry for Carriage Inward With Service Tax

Carriage inward of Rs.10000/- from Raj transport

                   Carriage inward A/C                    Dr      10000
                   Service Tax Received A/C            Dr         200
                                To Raj transport A/C                            10000
                                To Service tax Payable A/C                      200

(Narration: - Being Transport charges booked.)
The rules for passing Journal entry
Debit
Professional charges is expense for business and the same shown on profit on loss account at the year end. So, as per nominal account rule(Carriage inward) "debit all expense or loss"(Expense)
Debit
As we are paying duties on carriage inward are eligible for Input credit and treated as asset.(I.e. the taxes paid to creditors are not expense and it has to be treated as asset and can be set off against the duties payable, But before treating it as asset the input eligibility should be checked. Normally the purchase related to manufacture Except Factory building items Ex-Cement& steel can be availed as Input credit)Ex: - EXCISE DUTY, VAT & SERVICE TAX.
Credit
Due to credit purchase we are liable to him. And he is selling us the goods on credit.The creditors balance will increase.
As per personal account rule (ABC Associates) "Credit the giver account"(Current Liability)
Credit
Service payable will be treated as representative person. When duties are payable will be treated as liability and shown as current liability on liabilities side of balance sheet. So, As per personal account rule (Service Tax payable) "credit the giver account"(Current liability)
Here in the above case service tax can be taken as CENVAT hence it is treated as Current asset. There is abatement upto 75% so the service tax will be calculated on 25% portion only. Everyone should remember that service tax receivable cannot be adjusted against the service tax payable, it is only adjusted against Excise duty payable.
The service tax payable will be paid by the company to department.

Journal Entry for Carriage outward with Service Tax

Carriage outward of Rs.10000/- from Raj transport

                   Carriage outward A/C                 Dr      10000
                   Service Tax  A/C                        Dr         200
                                To Raj transport A/C                         10000
                                To Service tax Payable A/C                   200

(Narration: - Being Transport charges booked.)
The rules for passing Journal entry
Debit
Professional charges is expense for business and the same shown on profit on loss account at the year end. So, as per nominal account rule(Carriage inward) "debit all expense or loss"(Expense)
Debit
As we are paying duties on Carriage out ward is not eligible for Input credit and treated as expense. So, as per nominal account rule(Carriage inward) "debit all expense or loss"(Expense)
service tax paid is not eligible for CENVAT credit as per Rules so it is treated as expense.There is abatement up to 75%. So, the service tax will be calculated on 25% portion only.
Credit
Due to credit purchase we are liable to him. And he is selling us the goods on credit.The creditors balance will increase.
As per personal account rule (ABC Associates) "Credit the giver account"(Current Liability)
Credit
Service payable will be treated as representative person. When duties are payable will be treated as liability and shown as current liability on liabilities side of balance sheet. So, As per personal account rule (Service Tax payable) "credit the giver account"(Current liability)
Here in the above case service tax can be taken as CENVAT hence it is treated as Current asset. There is abatement upto 75% so the service tax will be calculated on 25% portion only. Everyone should remember that service tax receivable cannot be adjusted against the service tax payable, it is only adjusted against Excise duty payable.

The service tax payable will be paid by the company to department.

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