Goods and Services Tax, popularly known as GST, is a destination-based indirect tax that is levied on goods and services supplied in India. It was introduced in 2017 and has brought about an almost complete change in the Indian taxation system since then. Proper accounting for this GST by a business ensures compliance and ITC claiming.
It also contributes to good health for an enterprise’s financial system. During the April-December 2023 period, gross GST collection witnessed a robust 12% year-on-year growth, reaching ₹14.97 lakh crore, as against ₹13.40 lakh crore collected in the same period of the previous year (April-December 2022). This blog post explains the details of accounting for GST, including major transactions and journal entries, with their impacts.
What is GST Accounting?
Before getting into the specifics, let us understand a few core concepts of GST accounting:
Input Tax Credit
The key feature of GST is the input tax credit. This credit is allowed for the GST paid on purchases used for business purposes. This credit can be utilized against the Output GST liability to reduce the overall tax burden.
- Eligibility: The purchased goods or services should be used for business purposes. Items meant for personal consumption are normally excluded.
- Documentation: Proper Invoices containing the details of GST tax paid are prerequisites for availing the ITC.
- Reverse Charge: Sometimes, the receiver of the goods and services is forced to pay the GST by a system called reverse charge. The said payment is also allowed as ITC.
Output Tax Liability
Output Liability includes the payment that is charged by the business concerned while selling any goods or services to the customer. It is the tax collected from customers on behalf of the government.
- Calculation: Output liability is computed by charging the applicable rate of GST on the value supply.
- Components: There are three components of GST tax: Central Goods and Service Tax, State Goods and Service Tax, and Integrated Goods and Service Tax. The nature of the transaction, that is, whether it is an intra-state or an inter-state transaction, decides the composition.
- Place of Supply: The place of supply decides on the appropriate rate to apply and determines which component of GST would be applicable.
GST Returns
GST returns are periodic reports describing a firm’s sales, purchases, and tax accounting liabilities to the tax authorities. As such, returns are of immense importance in ensuring compliance and carrying ITC forward.
- Types of Returns: There are different types of GST returns for various taxpayers—GSTR-1, GSTR-3B, GSTR-9, etc.
- Due Dates: GST returns need to be filed within prescribed deadlines to avoid penalties.
- Importance: Proper and timely filing of GST returns shall help avoid litigation, claim refunds, and avail of ITC.
Common GST Accounting and Transactions Entries
GST accounting refers to the systematic recording of transactions related to the tax. Let us look at some common scenarios and their corresponding journal entries:
1. Sale of Goods or Services
When a business sells goods or services, it charges GST to the customer. The journal entry is:
- Debit: Accounts Receivable/Cash
- Credit: Sales
- Credit: Output GST Liability
2. Purchase of Goods or Services
When a business purchases goods or services, GST is incurred. The journal entry is:
- Debit: Purchases
- Debit: Input GST
- Credit: Accounts Payable/Cash
3. Input Tax Credit (ITC) Utilization
The output GST liability can be adjusted against the ITC gathered from registered purchases. The journal entry is as follows:
- Debit: Output GST Liability
- Credit: Input GST Credit
4. Reverse Charge Mechanism
Under special conditions, the recipient of goods or services pays the GST. This is the reverse charge mechanism. The supplier makes the following journal entry:
- Debit: Accounts Receivable/Cash
- Credit: Sales
- Debit: Output GST Liability
5. GST Payments and Refunds
The net GST liability is payable by every business person to the government. The journal entry would be:
- Debit: GST Payable
- Credit: Bank/Cash
If a refund is claimed, the above entry will be reversed.
Also Read:- What is GST Express Software?
Importance of Accurate GST Accounting
Accurate accounting of GST-related items is very crucial for the following reasons:
- Compliance: Proper compliance under GST law and rules prevents penalties and other legal problems.
- ITC: Proper and timely records ensure maximum ITC claims are available to the assess. This enhances cash flow.
- Financial Reporting: Accurate data related to GST is useful in the compilation of financial statements.
- Audits: Properly maintained records for the exchange of Goods and Services Tax enable smooth audits.
Also Read:- How GST Registration For MSME Important?
Challenges in GST Accounting
- Complex GST Structure: There are several tax rates, exemptions, and classifications, which make it quite a challenge.
- ITC Claims: It involves complexity in determining eligibility and claiming ITC accurately.
- Record-Keeping: Maintenance of detailed records for compliance with GST is quite time-consuming.
Takeaway
One pillar of India’s indirect tax accounting regime, GST, requires minute accounting to ensure compliance, optimize cash flow, and make informed business decisions. By knowing the intricacies of transactions, accounting entries, and ITC utilization, any business can navigate the GST tax regime.
Even though the GST has resulted in considerable changes, some problems might yet develop. The keys to overcoming these obstacles include staying current on GST legislation, keeping accurate records, and employing technology properly.
FAQs
Q.1 What if I claim excess ITC?
Excess ITC claimed is liable for penalties and interest. There has to be a proper reconciliation of ITC claims with actual purchases and proper documentation.
Q.2 How long should the GST records be retained?
The GST records shall be preserved for a minimum period of six years from the end of the relevant financial year.
Q.3 Can I carry forward unutilized ITC?
Yes, businesses can carry forward the unutilized ITC based on the specific GST laws. This usually happens when the tax burden on outputs is less than the tax paid on inputs.