Service tax Point of Taxation Set up in Oracle and Accounting Entry

Point of Taxation Set up in Oracle

Point of Taxation has been introduced by the federal government through the budget 2011-12. Initially the same was made applicable form 1st April, 2011 wide NT # 18 /2011- Service Tax, But there were lot of ambiguities in the notification like the accrual basis is applicable on O2C flows, and in P2P cycle credit needs to be taken still on payment basis as Cenvat Credit Rules 2004, had not been amended. There was also no clarity on the transitional provisions.

To remove the above ambiguities the federal government has released further notifications on 31^st March 2011.

 With the introduction of POT Rules, general rule for the time of provision of service would be the earliest of the following dates:
a) Date on which service is provided or to be provided
b) Date of invoice
c) Date of payment

POT Rules provides

1. Provision for payment of service tax on accrual basis

2. Specifies the date relevant for determination of service tax

NT # 25/2011 - Service Tax has been issued to remove the ambiguity on the transitional provisions. The option is given for the user to use cash basis or accrual basis till 30^th June 2011 and it is mandatory to switch to Point of Rules form 1^st July 2011 on accrual basis both in case of P2P flows and O2C flows.

NT # 13/2011 Central Excise has been issued to remove the ambiguity on the recovery of service tax credit in P2P Cycle under Cenvat credit rules 2004. Now the user can avail service tax credit at the time of invoice entry but the same needs to be reversed if the user does not make the payment within three months. If the payments are made to the supplier after reversal, then Cenvat credit is available on those invoices to the extent of amount paid.

Setups

In the “Others” tab of the Service Tax Regime Registration new field is given to capture the effective date “Effective date for Service Tax Point of Taxation” and the effective date is the date from which the Point of Taxation is applicable. This setup is applicable for all the organizations defined for Service Tax Regime.

Before doing the setup please verify in the service tax regime the liability accounts & recovery accounts are setup properly else the accounting will not be correct.

The reversal period has to be defined in the “Other” tab of Service Tax Regime. Once it is defined in the “Others” tab the same is applicable across all the inventory organizations.

The reversal Period can be defined as days or months based on the user interpretation of the law. Currently it says 3 months.

Note: Once the setup is done the user cannot change the date and from this date accrual basis is applicable for service type of taxes in P2P and O2C flows. There is no validation for date; user has to proper case while entering the date.

Relevant Error message will be shown if the date is not entered in “DD-MM-YYYY” format.

Accounting and Repository update based on GL date

In the current architecture in P2P flows repository is updated based on the Accounting date and in case of O2C flows repository is updated based on receipt application date.

In the POT solution will be having same date for P2P and O2C flows. Repository will be updated based on the GL date both in O2C flows and P2P flows. Accounting will also be on GL date.

 

Accounting Entries

O2C flows

With effect from 1^st July 2011  this will be the accounting entry in case Manual AR Invoice, Debit Notes, Invoices  imported through Order Entry (Sales Orders & Bill only work flow)

Debtors A/c                                                     Dr                    
Revenue A/c                                                                           Cr                   
Service Tax Liability A/c                                                        Cr   
Service Tax Edu Cess Liability A/c                                        Cr
Service Tax SH  Edu Cess Liability A/c                                 Cr

Accounting entry for Cancellation of AR invoice, Debit Note

Revenue A/c                                                                 Dr                   
Service Tax Liability A/c                                            Dr   
Service Tax Edu Cess Liability A/c                             Dr
Service Tax SH  Edu Cess Liability A/c                      Dr
Debtors A/c                                                                                         Cr                               

Effective Date for Service Tax Point of Taxation is compared with the GL date and this is the date on which the repository will be updated on submission of the “India - Service Tax Processing” concurrent.

Note: In case of transactions created before 1^st July 2011 the service tax repository will be updated based on the payment basis.

P2P flows

In case of P2P flows credit is eligible on the creation of AP invoice. The AP invoice can be created as Standalone AP invoice or based on PO Match or Receipt Match.

The Accounting entry for service tax credit will be created at the time of Final or Final Post.

GL Date of the transaction will be considered for the creation of service tax credit entry and for repository update. Repository will be updated on submission of “India – Service Tax Processing” concurrent.

Interim recovery account is a suspense account which will be debited at the time of creation of base transaction and this entry will get knocked off at the time of Final or Final Post where the Cenvat credit on service tax is availed.

Accounting entry at the time of final or Final Post of Standalone AP invoice

 Service Tax Recovery A/c                                         Dr
Service Education Cess Recovery A/c                       Dr
Service Tax SH Edu Cess Recovery A/c                    Dr
Service Tax Interim Recovery A/c                                                      Cr
Service Tax Edu Cess Interim Recovery   A/c                                   Cr
Service Tax SH  Edu Cess Interim Recovery  A/c                             Cr

If the AP invoice is cancelled in the same period, recovery accounts will be reversed and if the cancellation is happening in the subsequent periods, liability account will be reversed.  Accounting entry for cancellation will be generated on the same date AP creates.

Accounting entry if cancellation happens in the same period

Service Tax Interim Recovery A/c                                           Dr
Service Tax Edu Cess Interim Recovery   A/c                        Dr
Service Tax SH  Edu Cess Interim Recovery  A/c                  Dr
Service Tax Recovery A/c                                                                  Cr
Service Education Cess Recovery A/c                                               Cr
Service Tax SH Edc Cess Recovery A/c                                            Cr

Accounting entry if cancellation happens in different period

Service Tax Interim Recovery A/c                                            Dr
Service Tax Edu Cess Interim Recovery   A/c                          Dr
Service Tax SH  Edu Cess Interim Recovery  A/c                    Dr
Service Tax Liability  A/c                                                                        Cr
Service Tax Edu Cess Liability   A/c                                                       Cr
Service Tax SH  Edu Cess Liability  A/c                                                 Cr

Note: If the user cancels the AP invoice in the prior period which is open, the accounting will also be create in that period only and user has to submit the “India – Service Tax Processing” concurrent for that date else repository will not be updated.

In case of Debit / Credit Memos created though AP Invoice workbench, Service Tax Liability account will be updated.

Accounting entry created in GL_Interface for Debit / Credit Memos

Service Tax Interim Liability  A/c                                          Dr
Service Education Cess Interim Liability A/c                         Dr
Service Tax SH Edu Cess Interim Liability A/c                      Dr
Service Tax Liability  A/c                                                                              Cr
Service Tax Edu Cess Liability   A/c                                                              Cr
Service Tax SH  Edu Cess Liability  A/c                                                        Cr

Accounting entry created in GL_Interface for Debit / Credit Memos in case of cancellation

Service Tax Liability  A/c                                                       Dr
Service Tax Educ Cess Liability   A/c                                    Dr
Service Tax SH  Edu Cess Liability  A/c                                Dr
Service Tax Interim Liability  A/c                                                      Cr
Service Education Cess Interim Liability A/c                                    Cr
Service Tax SH Edc Cess Interim Liability A/c                                 Cr

Accounting entry in case of standalone AP invoice with partial recovery of service tax

This is the accounting entry for AP invoice

Expenses A/c                                                                                                              Dr
Service Tax Interim Recovery (to the extent of Recoverable) A/c                             Dr
Expenses A/c (to the extent of Non Recoverable Service Tax) A/c                           Dr
Service Tax Educ Cess Interim Recovery(to the extent of Recoverable)   A/c           Dr
Expenses A/c (to the extent of Non Recoverable Service Tax Edu Cess) A/c           Dr
Service Tax SH  Educ Cess Interim Recovery (to the extent of Recoverable) A/c     Dr
Expenses A/c (to the extent of Non Recoverable Service Tax SH Edu Cess) A/c      Dr
Supplier Liability A/c                                                                                                              Cr 

Accounting entry at the time of Final Or Final Post of Standalone AP invoice with partial recovery of service tax

 Service Tax Recovery A/c (to the extent of Recoverable) A/c                                                                 Dr
Service Education Cess Recovery (to the extent Service Tax Edu Cess Recoverable) A/c                  Dr
Service Tax SH Edu Cess Recovery (to the extent Service Tax SH  Edu Cess Recoverable) A/c       Dr
Service Tax Interim Recovery (to the extent Recoverable)A/                                                                                 Cr
Service Tax Edu Cess Interim Recovery (to the extent Service Tax Edu Cess Recoverable)  A/c                   Cr
Service Tax SH  Edu Cess Interim Recovery (to the extent Service Tax SH  Edu Cess Recoverable)  A/c     Cr

PO Matched Invoices.

This accounting entry is passed at the time of accounting in gl interface for

Service Tax Recovery A/c                                          Dr
Service Education Cess Recovery A/c                       Dr
Service Tax SH Edc Cess Recovery A/c                    Dr
Service Tax Interim Recovery A/c                                          Cr
Service Tax Educ Cess Interim Recovery   A/c                      Cr
Service Tax SH  Edu Cess Interim Recovery  A/c                  Cr

Receipt Matched Invoices

The following is the accounting entry inserted by IL in GL Interface a t the time of receiving

Service Tax Interim Recovery A/c                                   Dr
Service Tax Edu Cess Interim Recovery A/c                  Dr
Service Tax SHE Cess Interim Recovery A/c                 Dr
Inventory Receiving A/c                                                             Cr

The following is the accounting entry at the time of accounting of AP invoice

Service Tax Recovery A/c                                          Dr
Service Education Cess Recovery A/c                       Dr
Service Tax SH Edu Cess Recovery A/c                    Dr
Service Tax Interim Recovery A/c                                          Cr
Service Tax Edu Cess Interim Recovery   A/c                       Cr
Service Tax SH  Edu Cess Interim Recovery  A/c                  Cr

In case of transactions which are created prior the “Effective date for Service Tax Point of Taxation” the user will still be eligible to take credit on payment basis. Repository will be updated based on submission of “India – Service Tax Processing Concurrent”.

Accounting for Inclusive Service Tax

This section gives the details of the accounting for inclusive service tax.

Accounting set up is Set “N” for “Account Inclusive Tax” in TDS Year info.

Accounting entries will not be generated for inclusive service tax if the setup is “N”. In case of Standard Invoice, Debit Memo’s & Credit Memos created using India Localization Support for Standalone AP invoice. Documents created through Payables invoice work bench, miscellaneous lines with +ve amount and –ve amount for service taxes are inserted for the same account.

Repository for the above transactions will be updated based on the GL date on submission of “India Service Tax Processing” concurrent.

Accounting set up is Set “Y” for “Account Inclusive Tax” in TDS Year info.

Accounting entries will be generated for inclusive service tax if the setup is “Y”. In case of Standard Invoice, Debit Memo’s & Credit Memos created using India Localization Support for Standalone AP invoice at time of Final or Final Post in the GL interface directly

This is the accounting entry at the time of accounting in GL_Interface in case of the above documents

Service Tax Recovery A/c                                          Dr
Service Education Cess Recovery A/c                       Dr
Service Tax SH Edu Cess Recovery A/c                    Dr
Service Tax Interim Recovery A/c                                          Cr
Service Tax Edu Cess Interim Recovery   A/c                       Cr
Service Tax SH  Edu Cess Interim Recovery  A/c                 Cr

Accounting entries for Receipt Matched Invoices

At the time of receiving – entry generated by base for amount including service tax

Receiving Inventory A/c                                 Dr
AP Accrual A/c                                                                       Cr

Separate account for inclusive tax (to the extent of Inclusive Tax)

AP Accrual A/c                                                           Dr
Receiving Inventory A/c                                             Cr

Accounting entry at time of delivery – passed by IL (there is no change in this entry)

Inventory Material Value A/c(full amount incl Service Tax)             Dr
Receiving Inventory A/c (full amount incl Service Tax)                                            Cr

Receiving Inventory (for service Tax)                                                Dr
Inventory Material Value A/c A/c (for Service Tax)                                      Cr

Accounting entry at the time of Invoice Match to receipt

Service Tax Interim Recovery A/c                                          Dr
Service Tax Edu Cess Interim Recovery A/c                         Dr
Service Tax SHE Cess Interim Recovery A/c                        Dr
Supplier Liability A/c                                                                                      Cr

Supplier Liability A/c                                                              Cr
AP Accrual A/c                                                                                               Dr

Accounting entry at the time of Final or Final Post

Service Tax Recovery A/c                                                      Dr
Service Education Cess Recovery A/c                       Dr
Service Tax SH Edu Cess Recovery A/c                                Dr
Service Tax Interim Recovery A/c                                                                  Cr
Service Tax Edu Cess Interim Recovery   A/c                                               Cr
Service Tax SH  Edu Cess Interim Recovery  A/c                                                     Cr

The above accounting entry will be passed in case of PO matched invoices at the time of accounting of the invoice.

Reversal Process

Reversal UI explanation

A new UI has been provided for the reversal of the Payable invoices which are not paid based on the reversal period defined in the “Other Tab” of the Service Tax Regime.

Based on the query criteria, the UI will show list of invoices which are not yet paid or partially. Here the user has the flexibility of selecting all the invoices though header level selection or specific invoices for reversal.

Date of Reversal is computed by the system based on the setup given in the Service Tax Regime and the user has the flexibility to change the same.

Batch number has to be provided for each and every reversal and based on this batch number the transactions reversed can be queried and seen in the UI.

Once you click on the Reversal Button, the reversal entries for the 'Tax to be Adjusted' portion are inserted into GL Interface. The accounting for this is based on the 'Date of Reversal' given in the UI for that particular invoice. If the invoice is partially paid, the tax reversal will happen to the extent of the open invoice amount and the tax on it.

Repository for the Reversal Transactions will be updated once the “India – Service Tax Processing” concurrent is submitted.

Query based on the 'Batch Name' will display the reversal transactions carried out in that particular batch.

Note

Credit can be availed on the invoices which are reversed once the payment is made to the supplier. Credit for such transactions is available on cash basis. Credit can be taken on the date when payment is made to the supplier. Credit on such transactions will be updated in the repository when the “India Service Tax Processing” concurrent is submitted. The process is similar to pre POT applicability date.

Accounting entry at the time of Reversal

At the time of reversal, the following accounting entry is passed into GL interface

Service Tax Interim Recovery A/c                                           Dr
Service Tax Edu Cess Interim Recovery   A/c                        Dr
Service Tax SH  Edu Cess Interim Recovery  A/c                  Dr
Service Tax Recovery A/c                                                                  Cr
Service Education Cess Recovery A/c                                               Cr
Service Tax SH Edc Cess Recovery A/c                                            Cr

Once the payment is made to the supplier for the reversed invoices, credit is available. The accounting entry and the repository update will happen as in the cash basis i.e on submission of the “India – Service Tax Processing” concurrent.

Reports

All the reports in the service tax are based on the GL date with the application of this patch i.e the date parameters in the report now refers to the GL dates of the transactions.

Service Tax Credit Register Report

Service Tax Credit Register report will show all the transactions which have updated the repository.

Two new parameters have been added to show data based on the Organization and Location. Transactions can be distinguished as cash basis or credit basis having “C” or “A” against the transaction. 

The following transactions are shown in the report

1.      Credit taken in accrual basis

2.      Credit taken in cash basis for the transactions created during the transition period.

3.      Cancellation of Standalone AP invoice if cancellation happens in the same month

4.      Manual Recovery transactions

5.      Manual Adjustment Recovery transactions

6.      Service Tax Distribution In transactions

7.      Reversed transactions for which payment is not made and on which credit it taken, reversed after the stipulated period as –ve line.

8.      Reversal Transactions for which credit is availed again after payment being made.

           

Service Tax Pending Recovery Report

This report is also now based on the GL date and the report shows all the transactions which have not updated the repository for availing credit and also on transactions on which credit can be availed.

The following transactions are shown in the report

1.      All AP invoices for which payment had been not made or partly made

2.      All AP transactions which are created post effective date setup where accounting is not completed.

3.      Reversed transactions for which payment is not made and on which credit it taken, reversed after the stipulated period as –ve line.

4.      Reversal Transactions for which credit is availed again after payment being made.

Service Tax Report

 Service Tax report will show all the transactions which have updated the repository.

Two new parameters have been added to show data based on the Organization and Location. Transactions can be distinguished as cash basis or credit basis having “C” or “A” against the transaction. 

The following transactions are shown in the report

1.      Cash basis for the transition transactions where payment has been received

2.      Accrual basis for all the transactions after the effective date

3.      Manual Liability Transactions

4.      Manual adjustment Liability entries

5.      AP Debit / Credit Memos

6.      AP invoices where cancellation has taken place in different period.

7.      Service Tax Liability distribution transactions

Service Tax Pending Liability Report

This report is also now based on the GL date and the report shows all the transactions which have not updated the repository for ascertaining the liability.

The following transactions are shown in the report

1        All AR Transactions where payments have been not received from customers. 

2        All AR Transactions created after effective date where the “Completion” even has not taken place.

3        AP Debit / Credit Memos which have been not accounted

4        AP invoices cancelled in subsequent period where Service Tax Processing is not submitted.

Service Tax Repository Review UI

Changes have also been made in the “Service Tax Repository Review”. Two new transactions sources “Payables Reversal“ & “Payables Reversal Claim ” have been introduced for identifying and view of reversal transactions and payment for reversal transactions.

Note

There can be organizations for which Point of Taxation Rules, 2011 is not applicable and in such additional setups needs to be carried out.

Piculiar Situation:

Accounting for service tax has been shifted from cash basis to accrual basis with effective from 1^st July 2011 in the federal budget 2011-12 under Point of Taxation Rules 2011. But there are some provisions under the  

Point of Taxation Rules 2011 where accrual basis is exempted i.e cash basis is applicable for certain category of service / transactions / entities.

Under  NT # 25/2011 - Service Tax  it is clearly said that cash basis is applicable for only specific organization rendering set of services.

Requirements under NT # 25/2011 - Service Tax

Individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994, shall be the date on which payment is received or made, as the case may be:

Setups

In order to enable accounting and recovery of service tax on cash basis for the specified organizations the same is provided through setups in the Service Tax Regime.

Two new lookup have been provided and once the setup is done for these two lookup and organization are assigned then cash basis will be applicable for the selected organization.

Lookup Names

Organization Classification – through this look up, it will be identified if the organization is individual, proprietary firm or partnership firm.

Services Rendered – though this lookup we will capture the service being rendered by the organization. In this look all the services provided under sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994.

The accounting entries will be generated on cash basis i.e similar to the pre Point of Taxation and service tax repository will be updated on submission of India Service Tax Processing concurrent.

Note

At the regime level the new looks should be defined as “Organization” and “Other” for both the look up and should be changed to respective values at Inventory Organization Level. If these two values are different at the organization level, then for that organization cash basis will applicable.

In case at the regime level only both are classified as cash basis in the look ups, the sane has to be changed at the organization level to enable accrual basis where ever applicable.