CHAPTER 10: ACCOUNTING FOR GOODS AND SERVICES TAX(GST)
Meaning of GST: GST is a comprehensive, multi-stage, destination-based indirect tax levied on the supply of goods and services in India. It replaced various indirect taxes previously levied by central and state governments.
GST Act was passed in the Parliament on 24th March,2017 and it came into effect from 1st July,2017.
Taxes Merged into GST:
Central level taxes that have merged into GST are as under:
State level taxes that have merged into GST are as under:
GST Rate Structure:
|
ITEMS |
RATE |
|
Essential Items including food
Common Use Items
Standard Rate
Maximum Goods & all services Standard Rate
Luxury items and tobacco |
0%
5%
12%
18%
28% |
Characteristics of Good & Service Tax (GST):
Comprehensive Indirect Tax: GST subsumed a multitude of central and state indirect taxes, such as Central Excise Duty, Service Tax, VAT, CST, Entertainment Tax, Entry Tax, Luxury Tax, etc., into a single unified tax. This simplifies the tax structure significantly.
Uniform Tax Rates: While there are multiple tax slabs, the rates for specific goods and services are generally uniform across the country. This helps in creating a common national market and reduces price disparities.
It is a Supply Based Tax: GST is charged by the seller on the both goods and services at the same rate. It can be charged by the seller only if he is registered under GST.
It is a Destination Based Tax: GST is charged every time a sale is made till the time goods or services reach the end consumer.
GST Paid is not a Cost: GST paid on purchase of goods and services is not a cost for the purchaser but an asset because it can be set off against GST collected.
GST collected is not an Income but a liability: GST collected is a liability because it is collected on behalf of the Government.
GST is a Value Added Tax: GST is a value added tax because GST Paid is set off against GST Collected.
Advantages of GST:
Decrease in the Cost of Goods: The cost of goods will decrease since tax on tax is eliminated in GST regime. In the pre-GST regime, there are many indirect taxes levied by both centre and state.
Ease of Doing Business: In a pre-GST period, there were multiple types of indirect taxes and as a result, a business was required to register itself separately under each act.
Developing Common National Market: GST is levied at the same rate on similar goods and services across all states and Union Territories.
Helpful to Tax Authorities: Since GST alone is to be administered and controlled by tax authorities as against many indirect taxes under the earlier system.
Reduction in Tax Evasion: The transparent and online nature of GST, along with the ITC matching mechanism, makes it more difficult for businesses to evade taxes.
Goods becoming Cheaper: By eliminating the cascading effect, the overall tax burden on many products is expected to decrease. This reduction in production costs can lead to lower prices for consumers, especially for goods that were previously taxed multiple times.
Attracting Foreign Investment: Foreign investment in India was hindered because of multiple indirect taxes. GST has removed this introduction of one single tax.
Tax system becomes more transparent, regular and predictable.
Types of Taxes under GST:
Central GST: Levied by: The Central Government.
Applicability: Applied on intra-state (within the same state) supplies of goods and services.
Revenue: The revenue collected under CGST goes entirely to the Central Government.
Example: If you buy a product in Jharkhand from a seller in Jharkhand, both CGST and SGST will be charged.
State GST: Levied by: The State Government.
Applicability: Applied on intra-state (within the same state) supplies of goods and services.
Revenue: The revenue collected under SGST goes entirely to the respective State Government.
Example: If you buy a product in Jharkhand from a seller in Jharkhand, both CGST and SGST will be charged.
Union Territory Goods and Services Tax (UTGST): Levied by: The Union Territory Government.
Applicability: Applied on intra-union territory supplies of goods and services in Union Territories that do not have their own legislature.
These include:
- Andaman & Nicobar Islands
- Lakshadweep
- Dadra & Nagar Haveli and Daman & Diu
- Chandigarh
- Ladakh
Note: Union Territories with their own legislature, like Delhi, Puducherry, and Jammu & Kashmir, levy SGST instead of UTGST.
Revenue: The revenue collected under UTGST goes entirely to the respective Union Territory Government.
Example: If you buy a product in Chandigarh from a seller in Chandigarh, both CGST and UTGST will be charged.
Integrated Goods and Services Tax (IGST): Levied by: The Central Government.
Applicability: Applied on inter-state (between two different states or a state and a Union Territory) supplies of goods and services. It is also applied on imports and exports.
Revenue: The IGST collected by the Central Government is later apportioned between the Central and State governments based on the principle of destination-based consumption.
Example: If a seller in Jharkhand sells goods to a buyer in Bihar, only IGST will be charged on the transaction.
Accounting Procedure:
Illustration:
Accounting for GST (M/s. Global Traders, Jharkhand)
Transactions for the month of June 2025:
June 5: Purchased goods from M/s. Local Suppliers (Jharkhand) for ₹50,000 + CGST 9% + SGST 9%. Payment made by cheque.
June 12: Sold goods to Mr. Rajesh (Jharkhand) for ₹80,000 + CGST 9% + SGST 9%. Received cash.
June 18: Purchased goods from M/s. National Distributors (Bihar) for ₹70,000 + IGST 18%. Payment made by cheque.
June 25: Sold goods to M/s. South Electronics (Telangana) for ₹1,10,000 + IGST 18%. Received cheque.
June 30: Adjustment and payment of GST for the month
Journalising the Transactions
| Particulars | L.F. | Debit (₹) | Credit (₹) |
| Purchases A/c | 50,000 | ||
| Input CGST A/c | 4,500 | ||
| Input SGST A/c | 4,500 | ||
| To Bank A/c | 59,000 | ||
| (Being goods purchased from M/s. Local Suppliers with CGST & SGST) | |||
| Cash A/c | 94,400 | ||
| To Sales A/c | 80,000 | ||
| To Output CGST A/c | 7,200 | ||
| To Output SGST A/c | 7,200 | ||
| (Being goods sold to Mr. Rajesh with CGST & SGST) |
| Purchases A/c | 70,000 | ||
| Input IGST A/c | 12,600 | ||
| To Bank A/c | 82,600 | ||
| (Being goods purchased from M/s. National Distributors with IGST) |
| Bank A/c | 1,29,800 | ||||||||||||||||||||||||||||||
| To Sales A/c | 1,10,000 | ||||||||||||||||||||||||||||||
To Output IGST A/c |
19,800 | ||||||||||||||||||||||||||||||
| (Being goods sold to M/s. South Electronics with IGST) |
| Output IGST A/c | 7,200 | ||
| Output CGST A/c | 2,700 | ||
| Output SGST A/c | 2,700 | ||
| To Bank A/c | 12,600 | ||
| (Being net GST liability paid to the government) |