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former_member195383
Active Contributor
45,999
Reverse Charge

Reverse charge is a scenario in Taxation, where, the tax paying entity creates a tax liability on it self.

One of the examples of this is India GST, where reverse charge needs to be applicable under specific scenarios, such as Purchase from Unregistered Vendors, Import of services and Purchase of specific Goods and Services.

To understand it better, let us take the an example. An organization purchases goods from a supplier. That supplier is not eligible/registered to pay taxes to government. The rule in that particular tax regime tells that, in such case, the buyer needs to create a tax liability on itself and submit the tax amount to government. This concept is called reverse charge.

Let’s talk about it from an accounting point of view.

Purchase without Reverse Charge (Regular Purchase)

In case of a normal purchase, the accounting entry will be as it below.

Vendor Cr 1100

Expenses Dr 900

Input Tax Dr 100

 

In this case, the buying organization pays the tax amount to the Vendor(in the payment against invoice), who in turn will submit it to the government.



Purchase with Reverse Charge

In case of a reverse charge, the accounting entry will be as below.

Vendor Cr 1000

Expenses Dr 1000

Input Tax Dr 100

Output Tax Cr 100

 

Here the Output tax line indicated that the organization is liable to pay the tax amount to Government directly.



Handling Reverse Charge in SAP

Through Reverse Charge Tax Code Set Up

i.                Condition Type Set up in Tax Procedure.

Condition Type for Both components of the reverse charge needs to be set up in the tax procedure. In the below snapshot, ZP2 and ZP3 are these condition types.

ii.                  Define Tax code in FTXP Tcode



iii.                 Define GL accounts for these two components.

 



 



 

Then using this Tax code creates a document with reverse charge.

Vendor Cr 1000

Expenses Dr 1000

Input Tax Dr 100

Output Tax Cr 100

 

Please note that, for countries with condition based tax Procedure (India/Brazil) this will require a separate set up. That can be discussed as another section. The above explanation is applicable for countries with a formula based tax procedure.

Comments and suggestions are welcome.
2 Comments
atul_rajmane
Participant
Hi...

Very Nice post.

I have below comments.

The Screenshot under comment  Condition Type Set up in Tax Procedure ZP3 calculated from step 190 and ZP2 from step 100 (assuming Step 100 is base amount).

As per me its both ZP3 and ZP2 should be calculated from step 100 to have null effect if I am using % as tax percentage rate.

e.g.

Vendor Cr 2000

Expenses Dr 2000

Input Tax Dr 100 (5% base amount i.e. 2000)

Output Tax Cr 100 (5% base amount i.e. 2000)

Let me know if I am correct.

Regards

Atul Rajmane

 
narasimhulu_konnipati
Active Contributor
It works in both the ways.

 

  1. You can take the Tax Base amount directly from Step 100 and make the Tax percentage in Positive

  2. You can take the Tax Base amount from Step 190 and make the Tax Percentage -100 (Negative)


 

Example 1:

 

Goods/Service                   DR                  1000

Supplier/Vendor                 CR                  1000

Input Tax                            DR                    200    (20% on Basic 1000)

Output Tax                         CR                    200    (20% on Basic 1000)

 

Example 2:

 

Goods/Service                   DR              1000

Supplier/Vendor                 CR              1000

Input Tax                            DR              200    (20% on Basic 1000)

Output Tax                         CR              200    (-100% on Tax Amount from Step # 190. 200*-100/100)

 

Hope this clarifies

 

Thanks,

NSK
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