Accounting for Goods and Service Tax (GST)

Meaning of GST :

Goods Service Tax (GST) is an indirect tax levied at a prescribed rate

on every supply of goods and services except on PETROLEUM and
ALCOHOL for human consumption. Here, supply of goods means sale
of goods and supply of services means rendering of services.

GST is based on the principle ‘One Nation One Tax ‘.

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

► Direct Tax : The tax which is paid directly to the Government by an

individual or organization is called Direct Tax.

► Indirect Tax : The tax which is collected by an intermediary from

the person and later on deposited to the Government is called Indirect
Tax.

Taxes Merged into GST :

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

Excise Duty Service Tax Central Sales Tax

Central level Taxes merged into GST

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

1. Octroi and Entry Tax.

2. Purchase Tax.

3. Entertainment Tax.

4. VAT

5. Luxury Tax.

6. Taxes on Lottery.

GST Rate Structure :

Essential Items including food 0%

Common Use Items 5%

Standard Rate 12%

Maximum Goods and all Services Standard Rate 18%

Luxury Items and Tobacco 28%

NOTE :

GST is paid on purchase of goods and services and is collected from

customers from sale of goods and services. GST paid (termed as
INPUT GST) is set off against GST Collected (termed as OUTPUT
GST).

Therefore, we can say that GST Paid on Purchase (Input GST) is not
the cost for the purchaser but it is an Asset as it can be set off
against GST Collected on sales (Output GST).

Similarly, GST Collected is not an Income to the seller but is a

Liability as it has to be paid to the Government.
Three Important points to be kept in mind :

1. In certain cases GST Paid cannot be set off against GST Collected.
In such cases, GST Paid on purchase of goods and services is a COST
for the purchaser. Following are the cases where GST Paid cannot be
set off :

a) Food and Beverages Expenses (Restaurant Bills)

b) Payment for Health Insurance

c) Payment of Membership Fee of a Club, Health and Fitness Centre

d) Repairs and Maintenance of Building

e) Purchase of Vehicles

f) Free Gifts to Staff

g) Payment of goods and services to for personal use.

2. Following goods and services are EXMPTED from levy of GST.

a) Payment of Wages and Salaries.

b) Supply of Services to Government or to the Embassies of other

countries.

c) Electricity and water bills.

d) Educational Services.

e) Health Services.

f) Travelling Expenses.

g) Interest.
3. GST Paid (Input GST) is Reversed in the following cases :

a) Goods purchased and then Returned (Purchase Return).

b) Goods purchased then taken by the Owner.

c) Goods purchased now stolen or lost.

d) Goods purchased now destroyed or become not saleable.

e) Goods purchased now distributed as free samples.

f) Goods purchased now given away as gifts or charity.

g) Goods sold now returned by the customer (Sales Return).

Characteristics of Goods and Service Tax (GST) :

1. GST is a comprehensive Indirect Tax.

2. Uniform GST Rates all across States and Union Territories.

3. GST Paid (Input GST) is not a Cost but is an Asset as it can be set
off against GST Collected (Output GST).

4. GST is Value Added Tax.

Objectives OR Advantages of GST :

1. Decrease in Cost of Goods as GST eliminates various indirect

taxes.

2. Ease of Doing Business as earlier business needs to register itself

under various taxes but now it can do business easily by registering
only in GST Regimes.
3. Developing Common National Market as Rates of GST are Uniform
over all States and Union Territories.

4. Reduction in Tax Evasion (avoidance) as in GST there is a simple

computerized system of filling returns.

5. Goods becoming cheaper as various other taxes are now merged in

GST.

6. Attracts Foreign Investment as GST removed multiple Indirect

Taxes.

TYPES OF TAXES UNDER GST :

1. Central GST (CGST).

2. State GST (SGST) OR Union Territory GST (UTGST) :

Both of these taxes are levied on intra-state sales, i.e. sales within
the state.

3. 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 and services from India.

NOTE :

1. GST collected under IGST is divided under Central and State

Government as per the rates specified by the Government.

2. Let’s take an example if the rate GST is 12%, it will comprise

6% CGST + 6% SGST in case of sales outside the state it will be
called IGST 12%.