Accounting for Goods and Services Tax (GST)
Before 2017, the Indian taxation system was a web of indirect taxes—VAT, Excise Duty, Service Tax, Entertainment Tax, etc. This caused a cascading effect (tax on tax). To simplify the economy, the government introduced GST (Goods and Services Tax) on July 1, 2017, under the principle of "One Nation, One Tax."
For an accountant, mastering GST is no longer optional; it is the most critical part of recording day-to-day business transactions.
1. The Types of GST & Basis of Calculation
GST is a destination-based tax. The way you calculate it depends entirely on where the goods are being sold.
When a seller and buyer are in the same state (e.g., Mumbai to Pune), the GST is split equally into two parts:
- CGST: Central GST (goes to the Central Govt.)
- SGST: State GST (goes to the State Govt.)
If GST rate is 18%, we charge 9% CGST and 9% SGST.
When the seller and buyer are in different states (e.g., Delhi to Gujarat), only ONE tax is levied:
- IGST: Integrated GST (collected by Central Govt. and later shared).
If GST rate is 18%, we charge a flat 18% IGST.
2. Input GST vs. Output GST
In accounting, we do not just write "GST Account." We must clearly separate the GST we pay from the GST we collect.
- Input GST (An Asset): The tax you pay when purchasing goods, paying for expenses, or buying fixed assets. It has a Debit balance.
- Output GST (A Liability): The tax you collect from customers when selling goods or providing services. It has a Credit balance.
The Input Tax Credit (ITC) Mechanism:
A business does not pay the total Output GST to the government. They deduct the Input GST they have already paid and only pay the difference.
Formula: Tax Payable = Output GST – Input GST
Practical Numericals & Journal Entries
Let's look at 4 practical scenarios to understand how these transactions are recorded step-by-step.
📝 Problem 1: Basic Intra-State Trade
Record the following transactions for Mr. A of Delhi. (Assume GST rate is 12% total, i.e., CGST 6% and SGST 6%).
- Purchased goods from Mr. B (Delhi) for Rs. 1,00,000 on credit.
- Sold goods to Mr. C (Delhi) for Rs. 1,50,000 on credit.
Step-by-Step Logic
Input CGST @ 6% = Rs. 6,000. Input SGST @ 6% = Rs. 6,000. Total payable to Mr. B = Rs. 1,12,000.
Output CGST @ 6% = Rs. 9,000. Output SGST @ 6% = Rs. 9,000. Total receivable from Mr. C = Rs. 1,68,000.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 1 |
Purchases A/c ... Dr. Input CGST A/c ... Dr. Input SGST A/c ... Dr. To Mr. B's A/c (Being goods purchased intra-state) |
1,00,000 6,000 6,000 |
1,12,000 |
|
| 2 |
Mr. C's A/c ... Dr. To Sales A/c To Output CGST A/c To Output SGST A/c (Being goods sold intra-state) |
1,68,000 |
1,50,000 9,000 9,000 |
📝 Problem 2: Inter-State Trade with Trade Discount
Record transactions for Sharma Traders of Mumbai, Maharashtra. (Assume IGST @ 18%).
- Purchased goods of list price Rs. 2,00,000 from Patel Bros of Gujarat at a 10% Trade Discount.
- Sold goods for Rs. 2,50,000 to Reddy & Co. of Hyderabad via Cheque.
Step-by-Step Logic
List Price = 2,00,000. Less 10% TD (20,000) = Net Purchase Rs. 1,80,000.
Input IGST @ 18% on 1,80,000 = Rs. 32,400. Total Creditor = Rs. 2,12,400.
Output IGST @ 18% = Rs. 45,000. Total Bank Receipt = Rs. 2,95,000.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 1 |
Purchases A/c ... Dr. Input IGST A/c ... Dr. To Patel Bros A/c (Being goods bought inter-state less 10% TD) |
1,80,000 32,400 |
2,12,400 |
|
| 2 |
Bank A/c ... Dr. To Sales A/c To Output IGST A/c (Being cash sales made inter-state) |
2,95,000 |
2,50,000 45,000 |
📝 Problem 3: GST on Expenses and Assets
Record transactions for a business in Kolkata (CGST 9%, SGST 9%, IGST 18%).
- Paid Rent for office premises within Kolkata: Rs. 40,000 by cheque.
- Bought Machinery from Tata Motors, Jamshedpur (Jharkhand) for Rs. 5,00,000 on credit.
Step-by-Step Logic
Rent = 40,000. Input CGST (9%) = 3,600. Input SGST (9%) = 3,600. Total Bank = 47,200.
Machinery = 5,00,000. Input IGST (18%) = 90,000. Total Creditor = 5,90,000.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 1 |
Rent A/c ... Dr. Input CGST A/c ... Dr. Input SGST A/c ... Dr. To Bank A/c (Being rent paid with GST) |
40,000 3,600 3,600 |
47,200 |
|
| 2 |
Machinery A/c ... Dr. Input IGST A/c ... Dr. To Tata Motors A/c (Being machinery bought inter-state) |
5,00,000 90,000 |
5,90,000 |
📝 Problem 4: The Final Set-Off (Payment to Govt.)
At the end of the month, a business has the following GST ledger balances:
- Input GST (Paid): CGST Rs. 10,000 | SGST Rs. 10,000
- Output GST (Collected): CGST Rs. 15,000 | SGST Rs. 15,000
Pass the journal entry to set off the Input GST against the Output GST and pay the balance to the government.
Step-by-Step Logic
We collected 15,000 CGST but already paid 10,000. Balance to pay = 5,000.
We collected 15,000 SGST but already paid 10,000. Balance to pay = 5,000.
Total Bank payment = Rs. 10,000.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| End |
Output CGST A/c ... Dr. Output SGST A/c ... Dr. To Input CGST A/c To Input SGST A/c To Bank A/c (Being GST set off and balance paid to govt.) |
15,000 15,000 |
10,000 10,000 10,000 |
Important Note on Exemptions
Not everything attracts GST! Remember that no GST is charged on paying salaries/wages, introducing capital into the business, depositing cash into the bank, or paying electricity and water bills. For these, you pass normal journal entries without any Input or Output GST components.
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