What is Reverse Charge Mechanism & how does TDS Computation get automated – A Compiere Way

- tpblogadm

In a normal scenario, the seller charges GST to customer & remits it to the Government. In some cases, the buyer pays GST directly to the Government. This is called Reverse Charge Mechanism or (RCM)

If the supplier or vendor in this case is not registered with the GST Department but still supplies Goods to a GST registered Customer, then the Customer (buyer) will have to pay GST on the purchase on behalf of the supplier & take a corresponding input tax credit in the subsequent month. This is called RCM or reverse charge mechanism

The government has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.

For Services like Consultancy Charges, audits, HR Advisory, Taxation, the Tax Deducted at Source as per Indian Income Tax Act 1961 will also be applicable

Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment.

Instead of receiving tax on your income from you at a later date, the govt wants the payers to deduct tax before hand and deposit it with the govt

1. In TDS & RCM Combination the rate defined @ Summary Level has to be RCM Rate only)
2. Create TDS & RCM ( 10% & 18%) – New at Summary Level
3. Tax Category to be selected as GST – TDS – RCM
4. Summary Level check box to be checked
5. Rate to be given as 18
6. A Valid from Date to be given & saved

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7. TDS ( 10% & 18%) – RCM New (TDS) to be created as normal tax (TDS should be starting word and no extra words like GST & RCM to appear)
8. Tax Category to be selected as GST – TDS – RCM
9. A Valid from Date to be given
10. Parent Tax to be TDS & RCM ( 10% & 18%) – New
11. Rate to be given as 10%
12. The accounting ledgers to be mapped to correct Account element

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13. Only the TDS section payable amount to be mapped in Tax liability& Tax credit & Tax due ledgers
14. Click on the zoom button
15. It will take to the search key window
16. Remove the Organization mapped in Combination tab
17. In the search key, if the account code is known, then it can be given and entry button presse to get the account code
18. If account code not known, then in the name tab mention TDS
19. This will throw all the TDS related taxes and from them the correct tax can be selected
20. Then once again the select has to be clicked in order to map the Organisation correctly by double clicking
21. RCM ( 18% & 10%) – (RCM)to be created as normal tax (RCM to be starting word and no other words like GST & TDS to appear)
22. Tax Category to be selected as GST – TDS – RCM
23. A Valid from Date to be given
24. Parent Tax to be TDS & RCM ( 10% & 18%) – New
25. Rate to be given as 18%
26. The accounting ledgers to be mapped to correct Account element

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27. Only the RCM section payable amount to be mapped in Tax liability & Tax credit ledgers
28. Click on the zoom button
29. It will take to the search key window
30. Remove the Organisation mapped in Combination tab
31. In the search key, if the account code is known, then it can be given and entry button pressed to get the account code
32. if account code not known, then in the name tab mention %RCM
33. This will throw all the RCM related taxes and from them the correct tax can be selected
34. Then once again the select has to be clicked in order to map the Organisation correctly by double clicking

Accounting entry for Services with RCM & TDS

Example 1: Lorry service providers or UDS house cleaning providing GST related consultancy service based out of Chennai. This service has a RCM Rate of 18% TDS Deduction of 10% under Section 194 J of Income Tax Act, 1961 for INR 100000

Particular Debit Credit
Housekeeping Acc Dr 1,00,000
RCM Input – 18% 18,000
RCM Liability – 18% 18,000
To TDS – 94 J 10,000
To Party 90,000
Total 1,18,000 1,18,000

Note: IF the vendor is based in Tamil Nadu & Client also in Tamil Nadu, then only RCM Local are applicable. If vendor is based out of Tamil Nadu, then RCM – IGST is applicable

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