INTRODUCTION OF GST

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods
and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came
into effect on 1st July 2017; Goods & Services Tax Law in India is
a comprehensive, multi-stage, destination-based tax that is levied on every value
addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of
goods and services. This law has replaced many indirect tax laws that previously
existed in India.
GST is one indirect tax for the entire country.
So, before Goods and Service Tax, the pattern of tax levy was as follows:

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state
sales, Central GST and State GST are charged. Inter-state sales are chargeable to
Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that is levied on every value
addition.”

Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from
manufacture to final sale to the consumer.
Let us consider the following case:

 Purchase of raw materials

 Production or manufacture
 Warehousing of finished goods
 Sale to wholesaler
 Sale of the product to the retailer
 Sale to the end consumer

Goods and Services Tax is levied on each of these stages which makes it a multi-stage
tax.

Value

The manufacturer who makes biscuits buys flour, sugar and other material. The value of
the inputs increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large
quantities of biscuits and labels it. That is another addition of value after which the
warehouse sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of
the biscuits thus increasing its value.
GST is levied on these value additions i.e. the monetary value added at each stage to
achieve the final sale to the end customer.

Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in
Karnataka. Since Goods & Service Tax is levied at the point of consumption. So, the
entire tax revenue will go to Karnataka and not Maharashtra.

2. Journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft law. It
took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in the
Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.
3. Advantages Of GST
GST has mainly removed the Cascading effect on the sale of goods and services.
Removal of cascading effect has impacted the cost of goods. Since the GST regime
eliminates the tax on tax, the cost of goods decreases. GST is also mainly
technologically driven. All activities like registration, return filing, application for refund
and response to notice needs to be done online on the GST Portal; this accelerates the
processes.

4. What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

 CGST: Collected by the Central Government on an intra-state sale (Eg:

transaction happening within Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg: transaction
happening within Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra
to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime

Regime
Sale within CGST + VAT + Central Revenue will be
the State SGST Excise/Service shared equally
tax between the
Centre and the
State

Sale to IGST Central Sales There will only be

another State Tax + one type of tax
Excise/Service (central) in case of
Tax inter-state sales.
The Centre will
then share the
IGST revenue
based on the
destination of
goods.

Illustration:
 Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab
worth Rs. 50,000. The tax rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to the
Central Government.

 The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The
GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST at
6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the
Central Government and Rs. 3,000 will go to the Gujarat government as the sale is
within the state.

5. Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both state
and centre. States mainly collected taxes in the form of Value Added Tax (VAT). Every
state had a different set of rules and regulations. Interstate sale of goods was taxed by
the Centre. CST (Central State Tax) was applicable in case of interstate sale of
goods. Other than above there were many indirect taxes like entertainment tax, octroi
and local tax that was levied by state and centre. This led to a lot of overlapping of taxes
levied by both state and centre. For example, when goods were manufactured and sold,
excise duty was charged by the centre. Over and above Excise Duty, VAT was also
charged by the State. This lead to a tax on tax also known as the cascading effect of
taxes. The following is the list of indirect taxes in the pre-GST regime:

 Central Excise Duty

 Duties of Excise
 Additional Duties of Excise
 Additional Duties of Customs
 Special Additional Duty of Customs
 Cess
 State VAT
 Central Sales Tax
 Purchase Tax
 Luxury Tax
 Entertainment Tax
 Entry Tax
 Taxes on advertisements
 Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has replaced all the above taxes. However, the chargeability of
CST for Inter-state purchase at a concessional rate of 2%, by issue and utilisation of c-
Form is still prevalent for certain Non-GST goods such as: (i) Petroleum crude; (ii) High-
speed diesel; (iii) Motor spirit (commonly known as petrol); (iv) Natural gas; (v) Aviation
turbine fuel; and (vi) Alcoholic liquor for human consumption. in respect of following
transactions only:

 Resale
 Use in manufacturing or processing
 Use in the telecommunication network or in mining or in the generation or
distribution of electricity or any other power

6. What changes has GST brought in?

In the pre-GST regime, every purchaser including the final consumer paid tax on
tax. This tax on tax is called Cascading Effect of Taxes.
GST has removed this cascading effect as the tax is calculated only on the value-
addition at each stage of the transfer of ownership. Understand what the cascading
effect is and how GST helps by watching this simple video:
This indirect tax system under GST has improved the collection of taxes as well as
boosted the development of Indian economy by removing the indirect tax barriers
between states and integrating the country through a uniform tax rate.

Illustration:
Based on the above example of biscuit manufacturer along with some numbers, let’s
see what happens to the cost of goods and the taxes in the earlier and GST
regimes. Tax calculations in earlier regime:
Action Cost 10% Total
Tax

Manufacturer 1,000 100 1,100

Warehouse adds a label and repacks 1,400 140 1,540

@ 300

Retailer advertises @ 500 2,040 204 2,244

Total 1,800 444 2,244

Along the way, the tax liability was passed on at every stage of the transaction and the
final liability comes to rest with the customer. This is called the Cascading Effect of
Taxes where a tax is paid on tax and the value of the item keeps increasing every time
this happens. Tax calculations in current regime:
Action Cost 10% Actual Total
Tax Liability

Manufacturer 1,000 100 100 1,100

Warehouse adds label and 1,300 130 30 1,430

repacks @ 300

Retailer advertises @ 500 1,800 180 50 1,980

Total 1,800 180 1,980

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in
acquiring input. What happens in this case is, the individual who has paid a tax already
can claim credit for this tax when he submits his taxes. In the end, every time an
individual is able to claim the input tax credit, the sale price is reduced and the cost
price for the buyer is reduced because of lower tax liability. The final value of the
biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the tax burden
on the final customer. GST regime also brought a centralised system of waybills by
the introduction of “E-way bills”. This system was launched on 1st April 2018 for Inter-
state movement of goods and on 15th April 2018 for intra-state movement of goods in a
staggered manner. Under the e-way bill system, manufacturers, traders & transporters
are now able to generate e-way bills for the goods transported from the place of its
origin to its destination on a common portal with ease. Tax authorities are also
benefitted as this system has reduced time at check -posts and help reduce
tax evasion.
Accounting Treatment Under GST
GST will not only subsume the existing indirect taxes such as Service
Tax, VAT, Excise, CST etc. but also simplify business and accounting
processes. Initially, there may be certain transitional issues but in long
term, it will ensure more transparency in business reporting and
compliance.
In the GST regime, a taxpayer is required to maintain all types
of accounts and records related to GST transactions such as input
supplies, output supplies, production, input credit, output tax,
Stock, Import-export, reverse charge etc. To know more about types
of accounts and records under, please check – Types of Accounts
Under GST. In this article, we will discuss the different types of
business transactions related to GST accounting treatment of these
transactions in the books of accounts.
Present Scenario – Accounting Under VAT, CST, Service Tax,
Excise
In the current tax scenario, there are different types of taxes for different
business transactions and cross utilization of input credit is not allowed.
Therefore a taxpayer needs to separate ledger accounts for every tax
law:

Ledger Accounts Under

Taxpayer
Current Tax Regime
Excise Payable A/c Manufacturer

Cenvat Credit A/c Manufacturer

VAT Payable A/c Trader/Manufacturer

VAT Input Credit A/c Trader/Manufacturer

CST A/c Trader/Manufacturer (For Inter State Sale-

Purchase)

Service Tax Payable A/c Service Provider

Service Tax Credit A/c Service Provider/Manufacturer (Credit not

allowed to trader)
Types of Ledger Accounts to be Maintained Under GST
Under the GST regime, all indirect taxes will be subsumed in GST and
there will be dual GST Structure based on intra-state supplies and inter-
state supplies. The CGST and SGST will be charged on intra-state
supplies whereas the IGST (Integrated Goods and Services Tax) will be
charged on all inter-state supplies. Therefore separate ledger account is
required to be maintained related to CGST, SGST and IGST.
List Ledger Accounts To Be Maintained Under GST Regime
CGST Payable A/c (Tax on Intra-State Outward Supplies)

CGST Input Credit A/c (Input Tax on Intra-State Inward Supplies)

SGST Payable A/c (Tax on Intra-State Outward Supplies)

SGST Input Credit A/c (Input Tax on Intra-State Inward Supplies)

IGST Payable A/c (Tax on Inter-State Outward Supplies

IGST Input Credit A/c (Tax on Inter-State Inward Supplies)

Electronic Cash Ledger (to be maintained on GST Portal (gst.gov.in)

Journal Entries Under GST

1. Accounting Entries For Purchase Transactions (Input Supplies
of Goods or Services)
A.Intra-State Purchase
Purchase A/c _____________ Dr.

CGST A/c Input Credit A/c ____Dr.

SGST Input Credit A/c _______Dr.

To Creditors A/c

B. Inter-State Purchase
Purchase A/c _____________ Dr.

IGST Input Credit A/c _______Dr.

To Creditors A/c

2. Accounting Entries For Sale Transactions (Outward Supplies

of Goods and Services)
A. Intra-State Supplies
Debtors A/c _____________Dr.

To Sales A/c

To CGST Payable A/c

To SGST Payable A/c

B. Inter-State Supplies
Debtors A/c _____________Dr.

To Sales A/c

To IGST Payable A/c

3. Accounting Entries for Set Off of Input Credit Against Out Tax
Liability of GST
Under the GST law, the set-off of input credit is allowed in following
order:-

Input Credit Order of Set Off of Input Credit Against Output Liability
CGST First Towards CGST
Balance Towards IGST

SGST First Towards SGST

Balance Towards IGST
Input Credit Order of Set Off of Input Credit Against Output Liability

IGST First Towards IGST

Secondly Towards CGST
Balance Towards SGST
We can understand the order of input credit set off and its journal entries
with an example:

Example – Month End Details (Total Balances):

CGST Payable (Output) A/c – Rs. 50,000

CGST Input Credit A/c – 30000

SGST Payable (Output) A/c – Rs. 50,000

SGST Input Credit A/c -30000

IGST Payable (Output) A/c – Rs. 80000

IGST Input Credit A/c – 100000

Set Off At the end of the Month:

CGST SGST IGST
Payable Payable Payable
Input Credit Ram Hari Shyam
- Rs. - Rs. - Rs.
50000 50000 80000

CGST Input Rs. - - 2000 2000 1000

Credit 30000

SGST Input - Rs. - 1000 1000 1000

Credit 30000

IGST Input Rs. - Rs. 500000000000 00000000 22222222

Credit 20000 80000

Electronic Cash - Rs. - 800000 96.220 fnoanoif anfaonia

Ledger 20000

Total Rs. Rs. Rs. anfdoianoa ioandfsoinf oinaoisfnsaoin aionfa

 CGST SGST IGST
Payable Payable Payable
Input Credit Ram Hari Shyam
- Rs. - Rs. - Rs.
50000 50000 80000

50000 50000 80000 aonaon

Accounting Entries for this Set-off
1. CGST Payable A/c__________ Dr. 50000

To CGST Input Credit A/c 30000

To IGST Input Credit A/c 20000

2. SGST Payable A/c__________ Dr. 50000

To SGST Input Credit A/c 30000

To Electronic Cash Ledger A/c 20000

3. IGST Payable A/c__________ Dr. 80000

To IGST Input Credit A/c 80000

4. Accounting Entries For Reverse Charge Transactions in GST

Normally liability to pay GST is on supplier but the Government has
notified certain supplies covered under Reverse Charge Mechanism on
which liability to pay GST (partly or fully) is on the receiver of supply. In
such case the accounting treatment will be as follows:
A. In the Books of Supplier
Debtor A/c ____________________Dr.

To Sales A/c

To CGST Payable A/c (% of CGST Payable by Supplier, if any)

To SGST Payable A/c (% of SGST Payable by Supplier, if any)

B. In the Books of Receiver

Purchase A/c_____________________Dr.

CGST Input Credit A/c_______________Dr. (Total CGST on Input)

SGST Input Credit A/c_______________Dr. (Total SGST on Input)

To Creditors A/c

To CGST Payable A/c (% of CGST Payable by Receiver Under RCM)

To SGST Payable A/c (% of SGST Payable by Receiver Under RCM)

Note: The above entries of reverse charge transaction is shown by

assuming intra-State Supply. If there is inter-state supply then CGST
and SGST a/c should be replaced with IGST a/c.
5. Accounting Treatment of Refunds in Case of Export of Goods
and Services:
Under GST law, the exports of goods or services are treated as
Inter-State Supplies. We have already discussed the impact of GST on
exports in our previous article – How Exports are Treated Under
GST. In the case of export supplies, the exporter has two options:
A. Export Under Bond/LUT (Clear goods without payment of duty
and claim the refund of Input credits): In this case, the exporter has to
record sale without charging any tax and determine the unutilized input
credit of inputs for claiming the refund. The journal entry for refund
claim will be as follows:
CGST Refund Receivable A/c _____________ Dr.

SGST Refund Receivable A/c _____________ Dr.

IGST Refund Receivable A/c _____________ Dr.

To CGST Input Credit A/c (unutilized input credit)

To SGST Input Credit A/c (unutilized input credit)

To IGST Input Credit A/c (unutilized input credit)

B. Export Under Rebate Claim (Clear goods with payment duty and
claim the refund of duty paid on export goods): In this case, the sale
will be recorded as follows:
Debtors A/c _____________Dr.

IGST Refund Receivable A/c______Dr.

To Sales A/c

To IGST Payable A/c

6. Accounting Treatment for Imports

In our previous article “Treatment of Imports under GST regime” we
have discussed that Imports are treated as Inter-State supplies and
therefore, IGST will be payable by the importer of goods or services.
Further, the Custom duty is also applicable in the case of Import of
Goods but the input credit of Custom duty is not allowed. Hence the
importer can claim input credit of IGST and the Custom Duty will be
added in the cost of imported goods:-
Purchase A/c_________________Dr.

IGST Input Credit A/c ______________Dr.

To Creditor A/c

To IGST Payable A/c

To Custom Duty Payable A/c