How to enter transactions with reverse charge service tax in QuickBooks

Reverse Charge mechanism is used in Service Tax, Swachh Bharat Cess & Krishi Kalyan Cess. In this mechanism the tax liability lies with both service receiver and service provider. Service provider raises an invoice to service receiver and collects part of Service Tax, Swachh Bharat Cess and Krishi Kalyan Cess from the service receiver and pays to the government. Service receiver is also liable to pay the part of Service Tax, Swachh Bharat Cess and Krishi Kalyan Cess which he did not pay to the service provider.

For example from 1st Oct, 2014 renting of a motor vehicle designed to carry passengers both service provider and service receiver are liable to pay 50% - 50%  of service tax (on non abated value) to the government (service provider collects 50% service tax from the service receiver and pays to the government and service receiver pays 50% tax to the government directly).

In QuickBooks, while creating the service we update the reverse charge rate applicable for that service while purchasing. Let's say we need to create a new service "Taxi Service" and enable reverse charge for this service, we would follow the steps given below:

1. Select the Gear icon at the top > Products and Services
2. Click on "New" button
3. Click on Service section
4. Enter the name of the service, here "Taxi Service"
5. Select the Service Type, "Rent a cab"
6. Check the box which says " I purchase this product/service from a supplier."
7. Enter the purchase cost of the service if you already know the rate
8. Select an expense account for this service
9. Under purchase tax drop down, select 100% service tax, eg. On 26th of Aug 100% service tax rate including cess is 15%.
10. Enter the percentage value of reverse charge, in this case 50.
11. Click "Save and close" button.

The Tax Service service will get created. Now we can use this in our bills/expense entries.
Let's create an expense entry using this service and see how the reverse charge amount gets posted:

1. Select the Plus icon (+) at the top > Expense
2. Select an account to pay the expense from
3. In item details section select "Taxi Service" in the Product/Service dorpdown
4. Enter the amount as 1000 Rs. and select 15.0% ST as tax
5. You would notice that QuickBooks already calculates the reverse charge amount and shows you:

• Reverse Charge(@50%) for Rs1,000.00            Rs500.00
• Service Tax @ 14% on 500.00                               70.00
• Swachh Bharat Cess @ 0.5% on 500.00                  2.50
• Krishi Kalyan Cess @ 0.5% on 500.00                     2.50
• Tax you owe due to reverse Charge(@50%) for Rs1,000.00 Rs75.00

6. Click on Save button
7. Now click on the "More" button and click on "Transaction Journal" link
8. You will note the following journal entry is passed:

Bank A/c........................................Cr.                        Rs1,075.00
Expense A/c...................................Dr.    Rs1,000.00
Input Service Tax A/c.......................Dr.         Rs70.00
Input Service Tax RCM A/c...............Dr.         Rs70.00
Output Service Tax RCM A/c............Cr.                             Rs70.00
Swachh Bharat Cess Expense A/c...Dr.          Rs2.50
Swachh Bharat Cess Payable A/c....Cr.                              Rs2.50
Swachh Bharat Cess Expense A/c...Dr.         Rs2.50
Input Krishi Kalyan Cess A/c............Dr.         Rs2.50
Input Krishi Kalyan Cess RCM A/c....Dr.         Rs2.50
Output Krishi Kalyan Cess RCM A/c...Cr.                           Rs2.50
Total                                                         Rs1150.00     Rs1150.00

• Bank account is credited because the amount is being paid from that account.
• Expense account is debited to book the expense
• Input service tax is debited because 50% service tax is paid to the service provider and we will use this as credit to pay our service tax liability.
• Input Service Tax RCM is debited and Output Service Tax RCM is credited to book the liability in the Output Service Tax RCM
• Swachh Bharat Cess Expense is debited to book 50% SBC paid to the service provider.
• Swachh Bharat Cess Payable is credited and Swachh Bharat Cess Expense is debited to book the liability for SBC to be paid to the government. Please note SBC is not reclaimable that is why the expense account is debited.
• Input Krishi Kalyan Cess is debited because 50% KKC is paid to the service provider and we will use this as credit to pay our KKC liability.
• Input Krishi Kalyan Cess RCM is debited and Output Krishi Kalyan Cess RCM is credited to book the liability in the Output Krishi Kalyan Cess RCM account

Before we pay our service tax, we need to first pass an adjustment for getting the correct service tax liability. We will adjust the Input Service Tax, Output Service Tax, Input Service Tax RCM agains Service Tax Payable. Once the adjustment entry is passed, the correct Service Tax liability is found.

Now the service tax is paid to the government and the payment is recorded in QuickBooks. Once the payment is recorded, the tax paid as reverse charge will be available to be applied as credit.