Tax to GST – Sales, Purchases, Accounting

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Published Date:  12-02-2024   Author:   amitha-shet
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Introduction to taxation systems

Tax is any category of collecting money in the name of revenue which a government collects. This amount is collected to favor the public sectors and services. The GST implementation process is often used in collecting tax for social programs, maintaining the infrastructure, and other various programs. 

However, this whole process of levying taxation as per their types, the category of taxes, and its implications as per the goods type, country’s laws, and rules have a lot of discrepancies. 

These discrepancies are often dealt with through practice, experience, and a unified taxation system. These taxes are collected from various subsequents. This can include properties, income, or goods and services. 

 The revenue which is collected by collecting the tax amount is used in:

  1. National defense: It makes sure about National security and helps in maintaining the military forces. 
  2. Healthcare: It helps in hospitals, research centres, and clinics. 
  3. Infrastructure: It helps in making roads and bridges, and also helps in transport services for the public. 
  4. Education: It helps in building schooling centres, the salary of teachers, and providing different resources for education. 

What are the types of taxes?

There are two types of taxation systems.

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These are:

  1. Indirect taxes: The indirect taxes are to be paid by the customers and are generally implied on the goods and services. The price of these taxes is particularly higher. Examples of indirect taxes are excise taxes, sales value tax, and VAT. 
  2. Direct taxes: This tax category is applied directly to the resources that are generating the goods and services being sold. The price of tax is based and depends on the income/profit of the businesses. 

What are the principles of the taxation system?

The foundation of the taxation system depends on the following pillars:

  • Certainty: The system should be helpful enough to allow businesses to plan for their financial structures and plans efficiently. 
  • Efficiency: The overall process should go smoothly. There should be a minimum collection of tax rates so that no entity gets burdened. 
  • Transparency: Everything should be key and transparent between the taxpayers and the system. It should always be opened for scrutiny.

Transitioning to goods and services tax (GST)

Just when the taxation system came into being, it brought along the pros and challenges at the same time. Nonetheless, the pros are worth the discussion. There is a huge role in these taxation systems as they mounded the whole persona of business operations and engagement of the consumers in the global market.

Let’s get to know the positive side of the impact this taxation system has built over the years.

  1. It has changed the whole perspective of compliance making it more streamlined. The system has played a great role in the reduction of compliance costs and the burden which has been achieved through the administration. 
  2. The system has helped eliminate the cascading taxes. It has also worked to increase competitiveness. 
  3. The system has worked in improving the transparency in the global market and also helped in bringing efficiency.
  4. There has been a massive change recorded in the overall growth of the economy.

The challenges that have come across after this system’s implementation are:

  1. The initial period was tough when the changes had just been implemented in the system. There were many glitches related to technology, regulatory compliance, etc. 
  2. Many tax exemptions and variations in the tax rate created hurdles in the process as it was difficult to become familiar with these changes in the beginning. 
  3. Unexpected costs were incurred as there were many new technological advancements made. New staff hiring also incurred costs.

This is not an end to the GST accounting software system and the changes that have been made so far. It keeps getting changed for the good. The betterment lies within adapting the advancements.

Also Read: Challenges and Best Practices for Bill-to/Ship-to Transactions in GST

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Understanding GST structure

To understand the GST structure, there should be a proper understanding of its pillars. It is composed of four pillars including:

  1. Tax slabs: There are different slabs for various categories of goods and services. There is a certain percentage of tax that is deducted in the name of GST on certain goods. The highest tax rate recorded so far is 28% in India. 
  2. Input tax credit: The only way through which the cascading tax effect can be eradicated. However, it has its own set of rules for those who wish to claim ITC. 
  3. Place of supply: It plays a vital role in having a firm understanding of the place of supply. It also enlightens the liability of the GST. 
  4. Composite scheme: This scheme, when tax is levied, pays a certain percentage of tax as a GST so they don’t go through a long process of accounting.

It needs time and dedication to fully understand the maze of GST structure. You can explore the tax variations, different processes, and the tax implementation over time. However, always seek help when you find yourself stuck. Tax experts and consultants can make things go in the flow.

Also Read: What Is The Structure Of GST In India?

Sales tax vs GST

Sales tax and GST are both entirely different concepts. Many of us bring them under the same umbrella but it’s not true. They are indeed two forms of consumption taxes but they have their differences.

Let’s get to know the basic difference between these two:

  1. Scope of sales tax and GST
Sales Tax  GST
This tax is levied on the final sale of the goods that have been sold. However, this phenomenon is not applied to the services.  This phenomenon of levying taxes is applied to both the goods and the services. 
  1. Tax burden
Sales Tax  GST
This system can prove to be a burden on the employees who earn moderate to less. It’s because whatever their earning are, they spend a huge chunk on the goods that are taxable.  This system typically is helpful for the employee who earns less as it is involved in incorporating various taxes. 
  1. Administration
Sales Tax  GST
This system is usually governed by the different states and cities.  This system is governed and ruled by the central authority. It has more complexities. 
  1. Transparency and efficiency
Sales Tax  GST
It gets difficult to maintain transparency and efficiency in the sales tax. It’s because this process lacks the process through which the paid tax can be offset.  There are chances of maintaining the transparency and efficiency in the GST system. It’s because of the input tax credit which helps with offsetting the paid tax. 

These are some of the most common differences between the sales tax and the GST. When you find yourself in the position to choose one of them, it depends on several factors. Mostly it depends on the country’s social and economic objectives that are needed to be fulfilled.

Both of these systems offer their range of pros and cons at the same time. Therefore, to make use of these two systems, there should be a proper taxation system that knows how to create a balance between these points.

Purchases and input tax credit (ITC) under GST

Two of the important factors in the growth of a business lie in tax liability and financial status. These two factors are dependent on the purchase of input tax credits and the goods.

Purchases under GST:

  1. The purchased goods and services attract the application of GST.
  2. There should be a proper mention of the prices of GST on the invoices of the purchased goods. 
  3. If you wish to claim ITC, there should be maintenance of proper records.

Input tax credit:

It’s a methodology in which the businesses tend to offset the GST which is paid on the purchase against that GST which is paid on sales.

The Input tax credit benefits include minimising the burden of tax and also help in promoting expedited business processes. Many raw materials, office supplies, and other goods are capable of claiming ITC. Goods that are purchased for personal goods cannot claim ITC. Also, those goods whose capital has been exceeded can’t claim ITC.

There are several pros to claiming ITC. It includes:

  1. Helps maintain a proper and smooth cash flow.
  2. Helps in eliminating the burden of tax. 
  3. Helps in making the goods competitive in the global market. 
  4. Helps promote efficiency in the process along with transparency. 

While these are the pros, any system cannot go without facing its cons as well. Many challenges are faced by businesses. These are:

  • The small businesses find it difficult to streamline the compliance requirements. 
  • Many issues occur in the cash flows when there is a disrupted delay in refunds. 
  • There are many changes in tax liabilities or penalties in case of false or fake invoices.

Also Read: INPUT TAX CREDIT UNDER GST

Conclusion

There are not only one but many advantages of GST. The foremost important factor is that GST helps with streamlined compliance of the business. The proper GST compliance guidelines make the overall tax system unified and simple as well.

The GST system plays a great role in eliminating the cascading tax effect. When this effect is eliminated, it eventually helps in boosting competitiveness.

The GST system helps improve transparency which ends up building trust in the market. It has also played a great role in making the overall process efficient. GST has also been a great host in keeping up with the economic growth of the country.

There are indeed some of the challenges that come along with the GST. These include exemptions and rate variations, sudden implementation hurdles, and sometimes it gets tough to learn and adapt with the time.

Nonetheless, the Impact of GST on industries and other businesses has helped bring in undeniable success for sure. It has helped streamline the overall process, expedite the process, and create a system that is beneficial for consumers, taxpayers, and the country’s economy as well.

FAQs:

  • How to do the accounting for GST?

To do accounting on GST, there should be a separate account. The newly made account would be responsible for keeping a difference between the tax that has been paid on the input and the tax that has been received on the output. 

  • What is the journal entry for GST?

The journey entry is itself a fusion of different categories of entries. These can be:

  1. Sale transactions 
  2. Reverse charge transaction 
  3. Refunds
  4. Imports
  • Can I claim GST on purchases?

Not everyone can claim GST on a purchase. As per the GST laws, any person who is registered under the GST and is bringing the purchased goods into use for the expansion of the business has the right to claim GST on purchases.

  • Is GST a credit or a debit?

GST is a credit as it contributes to increasing the liability of the consumer. Considering there are various accounting procedures. If the GST is collected from the customers, the recorded amount has to be submitted to another separate bank account. That separate account is also sometimes referred to as a clearing account.

  • What is the purchase journal entry?

The purchase entry is often considered the main entry book. This book is used to record the invoices that are received from the supplier. Many other names are given to the purchase journal entry. These are:

  1. Credit purchase journal
  2. Purchases book
  3. Daybook
  • How is GST recorded on a balance sheet?

The GST can be recorded by a balance sheet when you include the net amount as a part of the receivable or the payables in the sheet.

  • Who audits GST?

The audit of GST is either performed by a certified chartered accountant or via a cost accountant. 

  • How input tax is calculated?

To calculate the input tax, first, you have to take the whole value of the total expense and then you can divide that amount by 9.333. That’s how input tax is calculated. 

  • What is a balanced sheet format?

It’s the only fundamental equation to have a balanced sheet. The equation is:

                         Equity + liabilities = Assets

  • What is the sales return in GST?

Sales return is any phenomenon where the goods are returned by the recipient. The returned goods are considered sales returns.

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Amitha Shet

Amitha is a creative enthusiast, which gets her into educating the world about things she comprehends. Finance, business, and digital transformation are the topics that she is profoundly interested in so that she can make things simpler for the audience. She is currently a content strategist for a fintech company. She holds a Bachelor of Engineering in Civil Engineering, although finance is a niche that piques her interest to not just educate but to invest and gain experience.

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