Goods and service tax (GST)

Goods and service tax or GST will be one tax to subsume all taxes. It will bring in “One nation
one tax” regime. It is to be noted that the GST is a destination-based tax, which is received by a
State in which the goods are consumed but not by a state in which such goods are manufactured.
Unlike earlier when there were multiple taxes such as Central Excise, Service Tax and State
VAT etc., under GST, there is just one tax with three components- CGST, SGST and IGST.
While there will be certain initial transition challenges, GST will bring in much clarity in many
areas of business. One of the areas is accounting and bookkeeping.
Prior to the introduction of GST:
Separate accounts have to be maintained for excise, VAT, CST and service tax. Here’s a list of
the few accounts currently any business has to maintain (apart from accounts like purchase,
sales, stock) –

 Excise payable a/c (for manufacturers)

 CENVAT credit a/c (for manufacturers)
 Output VAT a/c
 Input VAT a/c
 Input Service tax a/c
 Output Service tax a/c

For example, a trader Mr. X must maintain the minimum basic accounts –

 Output VAT a/c

 Input VAT a/c
 CST A/c (for inter-state sales and purchases)
 Service tax a/c [He will not be able to claim any service tax input credit as he is a trader
with output VAT. Service tax cannot be setoff against VAT/ CST]

GST Regime
Under GST all these taxes (excise, VAT, service tax) will get subsumed into one account.
The same trader X has to then maintain the following a/cs (apart from accounts like purchase,
sales, stock) –

 Input CGST a/c.

 Output CGST a/c
 Input SGST a/c
 Output SGST a/c
 Input IGST a/c
 Output IGST a/c
 Electronic Cash Ledger (to be maintained on Government GST portal to pay GST)
While the number of accounts is more apparently, once you go through the accounting you will
find it is much easier for record keeping. One of the biggest advantages X will have is that he can
setoff his input tax on service with his output tax on sale.
Under the GST law, the central government will collect CGST, SGST or IGST depending upon
whether the transaction is intrastate or interstate.
When the supply of goods or services happens within a state it is called intra-state transactions,
then both the CGST and SGST will be collected. Whereas if the supply of goods or services
happens between the states it is called as inter-state transactions, then only IGST will be
collected. 
Central Goods and Services Tax (CGST)
Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the
Central Government and will be governed by the CGST Act. SGST will also be levied on the
same Intra State supply but will be governed by the State Government. This implies that both the
Central and the State governments will agree on combining their levies with an appropriate
proportion for revenue sharing between them. However, it is clearly mentioned in Section 8 of
the GST Act that the taxes be levied on all Intra-State supplies of goods and/or services but the
rate of tax shall not be exceeding 14%, each.
State Goods and Services Tax (SGST)
Under GST, SGST is a tax levied on Intra State supplies of both goods and services by the State
Government and will be governed by the SGST Act. As explained above, CGST will also be
levied on the same Intra State supply but will be governed by the Central Government.
Note: Any tax liability obtained under SGST can be set off against SGST or IGST input tax
credit only.
Union Territory Goods and Services Tax (UTGST)
Union Territory Goods and Services Tax or UTGST is levied by the Union Territory
governments. It refers to the tax levied on the intra-Union Territory supply of goods and
services. It is governed by the UTGST Act and is levied along with CGST. UTGST is applicable
on the supplies that take place in the Union Territories of Andaman and Nicobar Islands,
Chandigarh, Dadra and Nagar Haveli, Daman and Diu, and Lakshadweep. Please note that the
Union Territories of Delhi and Puducherry will fall under SGST law as they have their own
legislature.
The order of input tax credit (ITC) utilisation of UTGST is similar to SGST. ITC of UTGST
should first be set off against UTGST. Any balance remaining may be used to set off any IGST
liability.
Integrated Goods and Services Tax (IGST)
Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be
governed by the IGST Act. IGST will be applicable on any supply of goods and/or services in
both cases of import into India and export from India. Under IGST tax will be shared between
the Central and State Government.
Why the split into CGST, SGST and IGST?
India is a federal country where both the Centre and the States have been assigned the powers to
levy and collect taxes. Both the Governments have distinct responsibilities to perform, as per the
Constitution, for which they need to raise tax revenue. The Centre and States are simultaneously
levying GST. The three types of tax structure is implemented to help taxpayers take the credit
against each other, thus ensuring “One Nation, One Tax”.

Accounting entries under GST

Let us consider a few basic business transactions (all amounts excluding GST)-
Example 1: Intra-state

1. Mr. X purchased goods Rs. 1,00,000 locally (intrastate)

2. He sold them for Rs. 1,50,000 in the same state
3. He paid legal consultation fees Rs. 5,000
4. He purchased furniture for his office for Rs. 12,000

Assuming CGST @8% and SGST@8%

The entries will be-

1 Purchase A/c ………………Dr. 1,00,000

Input CGST A/c ……………Dr.     8,000

Input SGST A/c ………    …Dr.     8,000

              To Creditors A/c 1,16,000

2 Debtors A/c ………………Dr. 1,74,000

             To Sales A/c 1,50,000

             To Output CGST A/c 12,000

             To Output SGST A/c 12,000

3 Legal fees A/c ………..……Dr. 5,000

Input CGST A/c ……………Dr. 400

Input SGST A/c ……………Dr. 400

              To Bank A/c 5,800

4 Furniture A/c ………..……Dr. 12,000

Input CGST A/c ……………Dr. 960

Input SGST A/c ……………Dr. 960

             To ABC Furniture Shop A/c 13,920

Total Input CGST=8,000+400+960= Rs. 9,360

Total Input SGST=8,000+400+960= Rs. 9,360
Total output CGST=12,000
Total output SGST=12,000
Therefore Net CGST payable=12,000-9,360=2,640
Net SGST payable=12,000-9,360=2,640

5 Output CGST A/c ……………Dr. 12,000

Output SGST A/c ……………Dr. 12,000

          To Input CGST A/c 9,360

            To Input SGST A/c 9,360

             To Electronic Cash Ledger A/c 5,280

 
Thus due to input tax credit, tax liability of Rs. 24,000 is reduced to only Rs.5,280. Also, GST on
legal fees is also adjusted which was not possible in current tax regime.
If there had been any input tax credit left it would have been carried forward to the next year.
Example 2: Inter-state

1. Mr. X purchased goods Rs. 1,50,000 from outside the State

2. He sold Rs. 1,50,000 locally
3. He sold Rs.1,00,000 outside the state
4. He paid telephone bill Rs. 5,000
5. He purchased an air cooler for his office for Rs. 12,000 (locally)
Assuming CGST @8% and SGST@8%

1 Purchase A/c ………………Dr. 1,50,000

Input IGST A/c ……………Dr. 24,000

           To Creditors A/c 1,74,000

2 Debtors A/c ………………Dr. 1,74,000

             To Sales A/c 1,50,000

             To Output CGST A/c 12,000

             To Output SGST A/c 12,000

3 Debtors A/c ………………Dr. 1,16,000

             To Sales A/c 1,00,000

             To Output IGST A/c 16,000

4 Telephone Expenses A/c ..…Dr. 5,000

Input CGST A/c ………………..Dr. 400

Input SGST A/c …..……………Dr. 400

             To Bank A/c 5,800

5 Office Equipment A/c.…..Dr. 12,000

 Input CGST A/c ……………Dr. 960

Input SGST A/c ……………Dr. 960

             To ABC Furniture Shop A/c 13,920

Total CGST input =400+960=1,360

Total CGST output =12,000
Total SGST input =400+960=1,360
Total SGST output =12,000
Total IGST input =24,000           
Total IGST output =16,000

Particulars CGST SGST IGST

Output liability 12,000 12,000 16,000

Less: Input tax credit

   CGST 1,360

   SGST 1,360

   IGST 8,000 16,000

Amount payable 2,640 10,640 NIL

Any IGST credit will first be applied to set off IGST and then CGST. Balance if any will be
applied to setoff SGST.
So out of total input IGST of Rs. 24,000, firstly it will be completely setoff against IGST. Then
balance Rs.8,000 against CGST.
From the total Rs.40,000, only Rs. 13,280 is payable.
So the setoff entries will be-
 Setoff against CGST output

1 Output CGST ………………Dr. 9,360

           To Input CGST A/c 1,360

           To Input IGST A/c 8,000

2 Setoff against SGST output

Output SGST ………………Dr. 1,360

           To Input SGST A/c 1,360

3 Setoff against IGST output

Output IGST ………………Dr. 16,000

           To Input IGST A/c 16,000

4 Final payment

Output CGST A/c ……………Dr. 2,640

 Output SGST A/c ……………Dr. 10,640

             To Electronic Cash Ledger A/c 13,280

GST impact on financials

Profit & Loss Account

Particulars Rs. Particulars Rs.

Raw material consumption XXX [Decrease] Sales XXX***

Purchases XXX

Depreciation XXX

Other Expenses XXX

Reduction in raw material cost and other expenses

GST will mean seamless input credits for intrastate and interstate purchases of goods. This will
mean reduction in cost of raw materials as input GST can be setoff against the output GST
payable on sales. Also GST paid on many services like legal consultation, audit fees, engineering
consultation etc. can be setoff against output GST. Currently input credit of service tax paid
cannot be adjusted against output excise/VAT.

All this will effectively bring down the expenses.

***Impact on sales may vary depending on the industry and the GST rates.
Balance Sheet

Particulars Rs. Particulars Rs.

Capital XXX Fixed assets XXX [Decrease]

 Current liabilities XXX Current assets XXX

Tax payable XXX Credit receivable XXX

Effective cost of fixed assets will come down as input credit will be available on both capital
goods and services related to such goods like installation, inspection etc.
Tax payable and credit receivable will face changes too. There will be only three accounts under
each of them- SGST, CGST, IGST instead of maintaining current excise payable, CENVAT
credit, VAT payable, VAT credit, Service tax accounts.
Accounting principles
GAAP is applicable mandatorily on GST. So, all principles following revenue recognition etc.
will be applicable.
Period of retention of accounts
Every registered taxable person must keep and maintain books of account for five years from the
due date of filing of Annual Return for the relevant year.
 
Transition to GST will need to address various aspects of financial reporting systems for proper
reporting. 
It is important that businesses plan to address changes arising out GST implementation in the
best manner to reduce cost of transition and minimize business disruption.