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Service tax liability and accounting

sumedha hegde (CA and CS) (43 Points)

24 June 2011

Hi All,

Could anybody help me on this?

We are a Swiss based-subsidiary(private ltd) company in India- providing marketing service to parent company. As per the agreement we are receiving marketing commission and we are paying some management fees and royalty to parent company, based on TP study.

For the financial year 2010-2011, we have not paid any management fees and royalty to our parent company. It has been paid somewhere in may-2011. As per reverse charge method of service tax rules, while making the payment, we have taken the service tax into account. That means, as on 31/03/2011, no effect has been given to service tax in books of accounts.

Now my question is:

1. Do we need to create the provision for service tax payable as on 31/03/2011?

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4 Replies

KIYOSH (TAX CONSULTANT) (332 Points)
Replied 25 June 2011

In my opinion, provision for service tax payable on 31-03-2011 is not require

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chaitanya cherukuri (Articled Student) (241 Points)
Replied 26 June 2011

Provision has to be created, if the management fee is payable for the year 2010-11. Because, any statutory dues payable has to be shown separately nd to receive comments from auditor. And also keep in mind that payment towards service provided to associated enterprise is deemed to be received when credited or debited in books. Hence, you should have paid service tax by 31-3-2011 if management fee belongs to that year. Now you have two options 1) dont show management fee in the accounts for the year 10-11. 2) pay service tax with interest.

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CA Vijay Kumar Walande (Expert) (515 Points)
Replied 26 June 2011

Dear Sumedha

Mr. Cherukuri is right.

Actually till 30th June 2011 Service tax is payable on reciept basis. i.e., When you receive payment for your services then payment of service tax is due. In case of Import of service under reverse charge on when you make payment, service tax payment is due.

Whereas there is an exception to the above rule, which is In case of associated enterprises. Service tax liability arises as soon as there is a book entry.

Thus there is an option not to take entry into books.

But, you should also consider the accrual concept of Accounting, where in you have to make an entry for the services received .

Based on above discussion I think provision has to be created.

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