The Goods and Services Tax (GST) was implemented with the motto ‘one nation, one tax’. It replaced multiple state and central taxes, brought integrity and transparency, and transformed the indirect tax system in the country. While filing GST returns like GSTR-1, GSTR-2B, and GSTR-9, it is important to ensure that there are no differences between the taxpayer’s books of accounts and the GST returns. Proper and timely reconciliation of accounts before filing GST returns is important to avoid penalties and other complications.
Previously, before the implementation of GST, various sets of accounts for excise, VAT, and service tax had to be maintained, which resulted in multiple ledger accounts being created and maintained in the books of accounts of the suppliers. Moreover, input tax credits could not be claimed for both state and central taxes. GST eliminated the necessity of multiple ledger accounts, reducing the burden for businesses. The other important benefit of GST is the provision of claiming input tax credit at every stage of the manufacturing cycle. ITC not only eliminated the cascading effect of taxes on the consumer but also lessened the burden of multiple taxes and the maintenance of several ledger accounts on the traders.
Accounting under GST
The dual component structure of GST, consisting of CGST (central GST), SGST (state GST), and IGST (integrated GST), mandates that for every GSTIN, the following accounts be maintained:
- Input CGST Account
- Output CGST Account
- Input SGST Account
- Output SGST Account
- Input IGST Account
- Output IGST Account
- Electronic Cash Ledger (to be kept up to date on the government’s GST portal in order to deposit and pay GST in cash), the E-credit ledger to fetch the input tax credit from the taxpayer’s monthly returns, and E-liability ledger which shows the taxpayer’s total tax liability for a particular month.
Accounts Required to be Maintained under GST
As per Section 35 of the CGST Act, 2017, every business owner registered under GST must maintain all records at his principal place of business as prescribed under the section. The business owner must keep the following accounts updated and in order at his principal place of business as per the act:
- Stock account that keeps track of the stocks that have been bought and sold. It should contain the opening balance, the number of items received and delivered, the balance of stock of raw materials, finished goods, scrap, waste, goods lost, stolen, destroyed, or written off, and any other information related to the business.
- Records of any loans made and received, as well as records of payments made and received.
- A tax account containing details of taxes owed, collected, tax credits claimed, ITC claimed, credit note, debit note, and delivery challan issued or received during a particular tax period
- Supplier details should contain the name and address of the person from whom the taxable goods or services were purchased.
- Recipient details should contain details such as the name and address of the buyer to whom the goods were supplied and the products or services delivered.
- Details of the warehouse or storage where the goods are stored, including goods stored during transit, along with the details of the stock stored at that time
- Accounts of production month-wise, where quantitative details of raw materials, goods manufactured, waste, and by-products produced in the process are recorded
- Accounts with details of goods used in the provision of services, details of input services utilized, and the services supplied
Apart from these, the GST officer has the authority to instruct businesses to maintain additional accounts and documents in a specific order or reason in a prescribed manner.
Accounting Entries under GST
We can understand the accounting entries under GST better with an example:
Suppose Mr. Suresh spends Rs. 100,000 on purchasing hiking bikes from a registered supplier in the state. The tax on the purchase is 18%, which is bifurcated into 9% CGST and 9% SGST. So he pays a total tax of Rs. 18000/-, split between Rs. 9000/- CGST and Rs. 9000/- SGST. He paid a consultation fee of Rs. 1000 to his CA and bought furniture for Rs. 20,000. He sold the bikes in the same state for Rs. 200,000.
The accounting journal entries with GST will be as follows:
Accounting Entries for Intrastate Transactions
|Sl no||Details||Debit (Rs)||Credit (Rs)|
|1||Purchase account (dr)||1,00,000|
|CGST Input (dr)||9,000|
|SGST Input (dr)||9,000|
|To creditors account||1,18,000|
|2||Debtors account (dr)||2,36,000|
|3||Consultation charges account (dr)||1,000|
|Input CGST (dr)||90|
|Input SGST (dr)||90|
|To bank account||1,180|
|4||Furniture account (dr)||20,000|
|Output CGST (dr)||1,800|
|Output SGST (dr)||1,800|
|To the furniture account (CR)||23,600|
By recording the GST entries in the books of account, we get:
Total Input CGST = 9000 + 90 + 1899 = 10890
Total Input SGST = 9000+90+ 800 = 10890
Total Output: CGST = 18000
Total Output: SGST = 18000
Hence, the net CGST to be paid is 18,000/10,890 = 7,110.
The net SGST to be paid is 18000 minus 10890 = 7,110.
Accounting Entries for Interstate Transactions
Suppose Mr. Suresh purchased hiking bikes from a registered dealer from outside his state for Rs. 50,000/-. The tax rate on the purchase is 18%. So he pays an IGST of Rs. 9,000. He then sells part of the stock inside the state for Rs. 20,000/- at 18% GST, which is split equally into 9% CGST and 9% SGST of Rs. 1,800/-. He sells the remaining stock outside his state for Rs. 40,000. The output tax liability is the IGST of 18%, which is 7,200/-. He paid a consultation fee of Rs. 2000 locally to his CA. The tax he pays on this is Rs. 180/-CGST and Rs. 180/-SGST.
|1||To Purchase Account (Dr)||50000|
|IGST Input (dr)||9000|
|SGST Input (dr)||180|
|2||Debtors account (dr)||23,600|
|Sales account (CR)||20,000|
|Consultation charges account (dr)||2,000|
|Input CGST (dr)||180|
|Input SGST (dr)||180|
|To a bank account||2,360|
|3||Debtors account (dr)||47,200|
Suresh’s total tax liability will be:
Net CGST payable = Output CGST – Input CGST = Rs. 1800 – 180 = 1620
Net SGST payable = Output SGST – Input SGST = 1800 – 180 = 1620
Net IGST=Output IGST-Input IGST=7200-9000=-1800. This means there is a credit of Rs. 1800.
This credit will be first applied to the net CGST liability of Rs. 1620/-, which will result in a credit of Rs. 180/-, which will be adjusted with the net SGST liability of Rs. 1620. Therefore
Total tax payable= Rs. 1620-180 = Rs. 1440
The record of transactions is the basis for the calculation of the accurate tax liability of the taxpayer. Therefore, the GST Act mandates that the records and books of accounts be maintained accurately for every transaction at the principal place of business of the dealer. They are also required to retain these books of accounts for a certain period of time. This brings transparency to the tax system and makes compliance easier for the taxpayer. It also helps the authorities monitor and audit taxpayers and ensure there is no tax evasion.
Frequently Asked Questions
- What is the retention period for the books of account for a taxpayer registered under GST?
Answer: As per GST law, every registered taxpayer must maintain their books of account for a minimum period of 6 years from the date of the last filing of the relevant annual return. The records are to be maintained at all the related business locations mentioned in the registration certificate.
- What is the rule when more than one place of business is mentioned in the registration certificate?
Answer: When more than one place of business is mentioned in the registration certificate, the records and accounts related to each place of business should be kept at the respective workplaces.
- What is the rule if a business chooses to maintain its records and accounts in electronic format?
Answer: For businesses that choose to maintain records and accounts in electronic format, they must make sure that they have a proper backup of the records and accounts. A log of every entry edited or deleted must be available. Further, they should be able to produce the records and accounts when asked for by the authorities.
- When is the business liable for an audit?
Answer: When the turnover of a business exceeds the prescribed limit, the business is liable for an audit.