Chapter 6: Accounting for Goods and Services Tax (GST)
What are taxes?
Taxes are compulsory financial contribution imposed by a government to raise revenue, levied
on the income or property of persons or organizations, on the production costs or sales prices of
goods and services.
The Government of any country needs money for its functioning and taxes are a major source of
revenue for a Government. The taxes thus collected are spent by Government on the public.
These taxes are broadly classified into two types:
Direct Tax and Indirect Tax
1. Direct Tax- Direct Tax is imposed on the income of an individual. The amount of tax
payable varies on the income earned by the individual from various sources such as
salary, house rent income, etc. So, the more you earn, the more tax you pay to the
Government which essentially means the rich pays more tax in comparison to the poor.
2. Indirect Tax- Indirect Tax is not imposed directly on income of individuals. Instead, it is
imposed on goods and services which in turn increase the cost MRP of Goods and
Services. Unlike direct tax, indirect tax should be borne by the end customer, rich and
poor alike. There are many indirect taxes. GST has been introduced to replace multiple
indirect taxes levied by State and Central Governments in order to simplify the indirect
tax system.
GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many
indirect taxes in India such as the excise duty, VAT, services tax, etc.
The Goods and Service Tax Act was passed in the Parliament on 29th March, 2017 and came
into effect on 1st July, 2017. In other words, Goods and Service Tax (GST) is levied on the
supply of goods and services. GST is a single domestic indirect tax law for the entire country.
Types of Taxes under GST:
GST
INTRA-STATE INTER-STATE
MOVEMENT MOVEMENT
INTEGRATED GST
CENTRAL GST (CGST) STATE GST (SGST)
(IGST)
There are three taxes applicable under this system: CGST, SGST & IGST.
CGST or Central Goods and Services Tax:
It is a tax collected by the Central Government on intra-state sales i.e. sales within the
same state.
Example: A dealer of Sikkim sells goods to a dealer/consumer in Sikkim.
SGST or State Goods and Services Tax:
It is a tax collected by the State Government on intra-state sales i.e. sales within the
same state.
Example: A dealer of Sikkim sells goods to a dealer/consumer in Sikkim.
IGST or Integrated Goods and Service Tax:
It is a tax collected by the Central Government on inter-state sales i.e. sales of goods
and services from one state to another.
Example: A dealer of Sikkim sells goods to a dealer in Chennai.
In most cases, the tax structure under the new system will be as follows:
Transaction New System Revenue Distribution
Sale within the State CGST + SGST Revenue will be shared equally between the Centre
and the State
Sale to another State IGST There will be only one type of tax (central) in case of
inter-state sales. The Centre will then share the IGST
revenue based on the destination of goods.
GST Rate Structure:
Goods and Services are divided into five slabs for the collection of GST:
On essential items including food, etc NIL
On common use items like household necessities such as 5%
edible oil, sugar, spices, tea and coffee, etc
On items like computers and processed food, etc 12% (Standard Rate)
On items like hair oil, toothpaste, capital goods and 18% (Maximum goods and all services
industrial intermediaries, etc standard rate)
On luxury items such as small cars, consumer durables 28%
like AC and refrigerators, premium cars, cigarettes and
aerated drinks, high-end motorcycles, etc
Important notes:
1. The GST which is applied on purchase of goods and services provided is called Input
GST.
So when the question deals with “purchase of goods and services”, the GST charged will
be recorded as Input CGST/Input SGST/Input IGST.
2. The GST which is applied on sale of goods and services provided is called Output GST.
So when the question deals with “sale of goods and services”, the GST charged will be
recorded as Output CGST/Output SGST/Output IGST.
3. If the GST rate is 12% -
Intra-state (i.e. within state): 6% CGST + 6% SGST
Inter-state (i.e. from one state to another): 12% IGST
4. If the GST rate is 18% -
Intra-state (i.e. within state): 9% CGST + 9% SGST
Inter-state (i.e. from one state to another): 18% IGST
5. If the question is silent on the movement of goods and services, it will be assumed that the
transaction is entered within the same state/intra-state movement.
Therefore, in such a case both CGST and SGST will be recorded.
