Chapter - 10

Accounting for Goods & Service Tax (GST)

Meaning of GST

• Goods and Service Tax (GST) is an indirect tax levied at prescribed rate on every supply of
goods and services except on petroleum and alcohol for human consumption.

• It is a nation-wide tax seeking to unify several indirect taxes and is based on the principle of
‘One Nation one Tax’.

• GST Act was passed in the Parliament on 24th March, 2017 and it came into effect from 1st
July, 2017.

GST has replaced many indirect taxes levied by Centre and State Governments. Central level taxes
that have merged into GST are as under:

Central Level Taxes merged in to GST

1) Excise Duty
2) Service tax
3) Central sales tax

State level taxes that have merged into GST are as under:

State Level Taxes merged in to GST

1) Octroi & Entry Tax

2) Purchase Tax
3) Entertainment Tax
4) Taxes on Lottery
5) VAT
6) Luxury Tax

GST Rate Structure: Goods and Services are divided into five slabs for collection of GST:

• Essential Items including food 0%

• Common Use Items 5%

• Standard Rate 12%

• Maximum Goods and all services Standard Rate 18%

• Luxury Items & Tobacco 28%

GST is paid on purchase of goods and services and it is collected from customers on sale of goods
and services. GST Paid (termed as Input GST) is set off against GST Collected (termed as Output GST).

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Characteristics of Goods & Service Tax (GST)

1) GST is a Comprehensive Indirect Tax

GST is a comprehensive indirect tax which has replaced all indirect taxes levied by Centre &
State Governments except, Custom Duty, electricity, taxes on petroleum, taxes on alcoholic
drinks and taxes levied by Local Bodies.

2) Uniform GST Rates

There are uniform rates of GST across all States and Union Territories.
3) GST Paid is not a Cost
GST paid on purchase of goods and services (termed as Input GST) is not a cost for the
purchaser but is an Asset because it can be set off against GST Collected (termed as Output
GST).
4) GST is a Value Added Tax
GST is a value added tax because GST Paid is set off against GST Collected.

Objectives or Advantages of GST

1) Decrease in the Cost of Goods

The Cost of goods will decrease since tax on tax is eliminated in GST regime.

2) Ease of Doing Business

The introduction of GST has eased the doing of business because now it will be registered and
administered only under one indirect tax i.e. GST

3) Developing Common National Market

GST is levied at the same rate on similar goods and services across all States & Union Territories.

4) Reduction in Tax Evasion

GST is administered through computer system. Electronic return filling and assessment has reduced
tax evasion and compliance cost.

5) Goods Becoming Cheaper

In the pre-GST period, there were many indirect taxes and there was no set off of tax paid (e.g. Excise
Duty) against taxes collected.

6) Foreign Investment

In Foreign investment in India was hindered because of multiple indirect taxes.

Types of Taxes under GST

• Central GST (CGST)

• State GST (SGST) or Union Territory GST (UTGST)
• Both of these taxes are levied on intra-state sales, i.e. within the same state.
• Integrated GST (IGST)
• It is levied on inter-state sales, i.e. sales of goods and services outside the state. It is also
levied on import of goods and services into India and export of goods & services from India.

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In case of Intra – state supply of goods and services (i.e., sales within the same state)

1. For Purchase of Goods:

Purchases A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Bank / Creditors A/c
(Goods Purchased)
2. For Sale of Goods:
Bank / Debtors A/c Dr.
To Sales A/c
To Output CGST A/c
To Output SGST A/c
(Goods Sold)
3. For Purchase Returns:
Creditors A/c Dr.
To Purchase Returns A/c
To Input CGST A/c
To Input SGST A/c
(Purchase Returns)
In case of purchase returns, Input CGST A/c and Input SGST A/cs are credited
because at the time of purchase Input CGST A/c and Input SGST A/cs were
debited.
4. For Sales Returns:

Sales Returns A/c Dr.

Output CGST A/c Dr.

Output SGST A/c Dr.

To Debtors A/c

(Sales Returns)

In case of sales returns, Output CGST A/c and Output SGST A/cs are debited
because at the time of sale Output CGST A/c and Output SGST A/cs were
credited.

5. For Purchase of Fixed Assets:

Fixed Asset A/c Dr.

Input CGST A/c Dr.

Input SGST A/c Dr.

To Bank A/c

(Purchased of fixed assets)

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6. For Expenses:

Expenses A/c Dr.

Input CGST A/c Dr.

Input SGST A/c Dr.

To Bank A/c

(Expenses incurred)

7. For Income (for example commission received) :

Bank A/c Dr.

To Commission Received A/c

To Output CGST A/c

To Output SGST A/c

(Income received)

8. For goods withdrawn by the Proprietor for personal use :

Drawings A/c Dr.

To Purchases A/c

To Input CGST A/c

To Input SGST A/c

(Goods taken for personal use)

9. For goods given as free samples, loss of goods by fire or goods stolen :

Advertisement A/c (Free Samples) Dr.

Loss by Fire A/c Dr.

Loss by Theft A/c Dr.

To Purchase A/c

To Input CGST A/c

To Input SGST A/c

(Goods distributed as free samples, goods stolen and goods destroyed by fire
and Input CGST and Input SGST reversed)

10. For Setting off Input CGST against Output CGST:

Output CGST A/c Dr.

To Input CGST A/c

(Input CGST set off against Output CGST)

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 11. For setting off Input SGST against Output SGST:

Output SGST A/c Dr.

To Input SGST A/c

(Input SGST set off against Output SGST)

12. For payment of GST:

Output CGST A/c Dr.

Output SGST A/c Dr.

To Bank A/c

(Balance amount of Output GST deposited with the Government)

Note Entry No. 10., 11. and 12. may be combined.

Adjustments of IGST, CGST and SGST

With effect from 1st February 2019, there is a change in the adjustment IGST :

Before 1st February 2019, it was as follows :

First of all,

• Output IGST was adjusted against Input IGST

• Output CGST was adjusted against Input CGST
• Output SGST was adjusted against Input SGST

Thereafter, excess of Input IGST or excess of Output IGST was adjusted against remaining amount of
CGST and the balance, if any, was applied to set off SGST.

However, now with effect from 1st February 2019, set off mechanism will be as follows :

First of all, Output IGST will be adjusted against Input IGST:

Output IGST A/c Dr.

To Input IGST A/c

After such adjustments there may be two situations:

1) Input IGST may exceed Output IGST, OR

2) Output IGST may exceed Input IGST

3) Case (1): If Input IGST exceeds Output IGST :

4) In such a situation excess of Input IGST will be first adjusted against Output CGST and the
balance, if any, will b applied to set off output SGST :

5) Output CGST A/c Dr.

6) Output SGST A/c Dr.

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 To Input IGST A/c

7) If, the full amount of Output CGST has not been adjusted against Input IGST, then the
remaining amount of Output CGST will be adjusted against Input CGST and the balance will
be paid off:

8) Output CGST A/c Dr.

To Input CGST A/c

To Bank A/c

9) Similarly, remaining amount of Output SGST will be adjusted against Input SGST and the
balance will be paid off:

10) Output SGST A/c Dr.

11) To Input SGST A/c

12) To Bank A/c

Case (2): If Output IGST exceeds Input IGST :

In such a situation:

a) First of all, entry for adjusting IGST will be passed:

Entry will be:

Output IGST A/c Dr.

To Input IGST A/c

a) Thereafter, Input CGST will be adjusted against Output CGST

Input SGST will be adjusted against Output SGST

Entry will be:

Output CGST A/c Dr.

Output SGST A/c Dr.

To Input CGST A/c

To Input SGST A/c

a) Thereafter, excess of Output IGST will be first adjusted against Input CGST and the balance, if
any, will be applied to adjust Input SGST.

Entry will be:

Output IGST A/c Dr.

To Input CGST A/c

To Input SGST A/c

To Bank A/c

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