Reverse Charge Tax calculation in SAP S/4HANA Cloud

This blog provides a process how to calculate Reverse Charge Tax in SAP S/4HANA Cloud.

Target Audience

Business Users, Key Users, Consultants

Target Industry

All

Reverse Charge Tax calculation

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 are below

1.      Purchase from Unregistered Vendors

2.      Import of services

3.      Purchase of specific Goods and Services.

To understand it better, let us take 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 1000

Expenses          Dr 900

Input IGST 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 RCM IGST Tax         Dr 100

RCM Payable IGST Tax    Cr 100

As part of S4HANA cloud SAP has provided below pre-defined RCM tax codes in India.

Standalone FI App

Standalone FI apps uses the country tax procedure ‘0TXIN’ – India Tax Procedure

-        Tax Procedure consists of all the condition types (base amount and different tax components)

-        Step Numbers are used to maintain the condition types in the procedure

-        ‘From’ and ‘To’ determines, the tax calculation against the condition types

-        Account Keys helps in posting the calculated condition values against the GL accounts or to inventory based on the type of account key

-        NVV – is the non-deductible account key, which loads the condition value to the inventory

-        363 routine is used to calculate taxes for import cases, which includes accessible value

-        Condition types against which the 363 routine is assigned, is applicable only for the import of goods and not the services (assessible value not applicable for services)

Note:

-        Access sequence with multiple combination of fields will not work for Standalone FI apps to determine the tax rates automatically

-        User must choose the right tax codes manually for posting Standalone FI apps

Customer Invoice creation App:  Vendor Invoice creation App:                 

0TXIN – India Tax Procedure (For your reference only)

 

Reverse Charge Condition Types for deductible and non-deductible scenarios:

Condition Type Description
JICR IN: RCM CGST
JISR IN: RCM SGST
JIIR IN: RCM IGST
JIUR IN: RCM UTGST
JCIR IN: RCM Comp. Cess
JCRN IN: RCM CGST Inv
JSRN IN: RCM SGST Inv
JIRN IN: RCM IGST Inv
JURN IN: RCM UTGST Inv
JRCN IN: RCM Cess Inv

GL accounts for reference:

GL Account Description GL Account Purpose
Reverse Charge Account IGST (IN) 12605912 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account SGST (IN) 12605913 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account CGST (IN) 12605914 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account UTGST (IN) 12605915 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account Compensation Cess (IN) 12605916 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account Import IGST (IN) 12605917 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account Import Comp. Cess (IN) 12605918 Reverse Charge Tax Account Specific to GST Tax India
Reverse Charge Account IGST Inv (IN) 12605919 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account SGST Inv (IN) 12605920 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account CGST Inv (IN) 12605921 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account UTGST Inv (IN) 12605922 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account Compensation Cess Inv (IN) 12605923 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account Import IGST Inv (IN) 12605924 Reverse Charge Tax Account for inventorized case Specific to GST Tax India
Reverse Charge Account Import Comp. Cess Inv (IN) 12605925 Reverse Charge Tax Account for inventorized case Specific to GST Tax India

 

Input Tax Codes for reference:

Tax Procedure Tax code Description
0TXIN J1 IGST 18% - Domestic input GST - RCM
0TXIN J2 CGST 9% + SGST 9% - Domestic input GST - RCM
0TXIN J3 CGST 9% + UTGST 9% - Domestic input GST - RCM
0TXIN J4 IGST 18% + Comp cess 18% - Domestic input GST - RCM
0TXIN J5 CGST 9% + SGST 9% + Comp Cess 18% - Domestic input GST - RCM
0TXIN J6 CGST 9% + UTGST 9% + Comp Cess 18% - Domestic input GST - RCM
0TXIN J7 IGST 18% + Comp cess 18% - Demestic input GST - RCM - ND
0TXIN J8 CGST 9% + SGST 9% + Comp Cess 18% - Domestic input GST - RCM - ND
0TXIN J9 CGST 9% + UTGST 9% + Comp Cess 18% - Domestic input GST - RCM - ND

Account Keys for reference:

Transaction Key Description
JRC IN: RCM CGST
JRS IN: RCM SGST
JRI IN: RCM IGST
JRU IN: RCM UTGST
JCR IN: RCM Comp Cess
JCN IN: RCM CGST ND
JSN IN: RCM SGST ND
JIN IN: RCM IGST ND
JUN IN: RCM UTGST ND
JRN IN: RCM Comp Cess ND

Deductible and Non-Deductible Taxes in SAP S4HANA Cloud

Deductible Tax – A Tax already paid to a Vendor that can be balanced against Output Tax.

While Purchase of materials, the Tax paid on the Purchase of items can be availed back from the government, this is called a Deductible Tax. Here, the Tax is not loaded to Material Inventory, It is posted to a separate G/L account as per the configuration and later stage it will be cleared-off by Financials.

In case base Price – 100 INR with IGST 18% then below accounting entry will be posted in the system

Good Receipt

Material/Exp Account   Dr        100

GR/IR Account             Cr        100

            Invoice Receipt

GR/IR Account             Dr        100

IGST Input tax A/C       Dr        18

Vendor Account            Cr        118

Non-Deductible Tax – A Tax already paid to a Vendor that cannot be balanced against Output Tax.

In case of a Non-Deductible tax, the Tax amount will be loaded to Material Inventory. Here, the Company cannot claim this Tax amount back from the government.

Taxable persons pay Input Tax to Vendors and Output Tax to the Tax Authority.

One part of the Input Tax, the Deductible Input Tax, can be balanced against the Output Tax, that is, a business pays tax on Sales and Purchases only on its own added value.

The other part, the Non-Deductible Input Tax, is excluded from this arrangement and depends on the applicable tax law of the appropriate country.

In case base Price – 100 INR with IGST 18% then below accounting entry will be posted in the system

Good Receipt

Material/Exp Account     Dr        118

GR/IR Account               Cr        118

            Invoice Receipt

GR/IR Account             Dr        118