Meaning of GST
Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. 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.
Taxes Merged into GST : GST has replaced many indirect taxes levied by Centre and State Governments. Central level taxes that have merged into GST are as under :
State level taxes that have merged into GST are as under:
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 and 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).
As such, GST Paid on Purchase (Input GST) is not a Cost for the purchaser but is an Asset since it can be set off against GST Collected on Sales (i.e., Output GST). Similarly, GST Collected on Sales (Output GST) is not an income of the seller but is a liability.
IMPORTANT NOTES(1) Usually, GST Paid on purchase of goods and services (i.e., Input GST) is not a Cost for the purchaser but is an Asset because it can be set off against GST Collected (i.e., Output GST)
(2) However, 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 on purchase of goods and services cannot be set off against GST collected :
(i) Food and Beverages Expenses (Restaurant Bills);
(ii) Payment for health insurance;
(iii) Payment of Membership Fee of a Club, health and Fitness Centre;
(iv) Repairs and Maintenance of Building;
(v) Purchase of Vehicles;
(vi) Free gift to Staff;
(vii) Payment for goods and services for personal use.
(3) GST Paid (i.e., Input GST) is Reversed in the following cases :
(i) Goods lost or stolen;
(ii) Goods destroyed or written off;
(iii) Goods distributed as free samples;
(iv) Goods given away as gift or charity.
(4) Following goods and services are exempt from levy of GST :
(i) Payment of Wages and Salaries;
(ii) Supply of Services to Government or to Embassies of other countries;
(iii) Electricity and water bills;
(iv) Educational Services; and
(v) Health Services.
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. In the pre-GST regime, there were many indirect taxes levied by both centre and state. For example, Centre charged excise duty on goods manufactured and States charged VAT on the same goods. This lead to a tax on tax also known as cascading effect of taxes. GST avoids this cascading effect as the tax is calculated only on the value added at each stage of transfer of ownership.
(2) Ease of Doing Business: GST harmonizes tax administration between the Centre and the States which will improve the ease of doing business.
(3) Reduce Tax Evasion: Electronic return filing and assessment will reduce tax evasion and compliance cost.
(4) Tax system becomes more transparent, regular and predictable.
Type of Taxes under GST: There are 3 taxes applicable under GST :
(i) Central GST (CGST)
(ii) State GST (SGST) or Union Territory GST (UTGST)
Both of these taxes are levied on intra-state sales, i.e. within the same state. For example, a dealer of Rajasthan sells goods to a dealer (or consumer) in Rajasthan worth ₹50,000. Suppose, the GST rate on the goods is 12%. This rate will comprise of CGST at 6% and SGST at 6%. The seller has to collect 12% of ₹50,000 i.e. ₹6,000 out of which ₹3,000 will be CGST which will go to the Central Government and ₹3,000 will be SGST which will go to the Rajasthan Government.
(iii) 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.
For example, a dealer of Rajasthan sells goods to a dealer in Madhya Pradesh worth ₹50,000. Suppose, the IGST rate is 12%. In such a case, the seller will charge ₹6,000 as IGST and this entire amount will go to Central Government.
If the GST rate is 12%, it will comprise of 6% CGST + 6% SGST; in case of sales outside the State, it will be called IGST 12%.
Accounting Procedure: In case of Intra-state supply of goods and services state)
In case of purchase returns, Input CGST A/c and Input SGST A/cs are credited because a t the time of purchase Input CGST A/c and Input SGST A/cs were debited .
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 O utput SGST A/cs were credited.
(vii) For Income (for example commission received)
(viii) For goods withdrawn by the Proprietor for personal use:
(ix) For goods given as free samples, loss of goods by fire or goods stolen:
(Goods distributed as free samples, goods stolen and goods destroyed by fire and Input CGST and Input SGST reversed)
(x) For Setting off Input CGST against Output CGST:
(xi) For setting off Input SGST against Output SGST:
(xii) For payment o f GST:
ILLUSTRATION 1. (Intra-State i.e., Within State)
Pass entries in the books of Ashok Bros, assuming that all transactions have been entered within Delhi and assuming CGST @6% and SGST @6%.
JOURNAL OF ASHOK BROS.
Total Input CGST : ₹ 12,000 + ₹3,000 + ₹600 + ₹ 1,200 = ₹ 16,800.
Total Input SGST : ₹12,000 + ₹3,000 + ₹600 + ₹1,200 = ₹16,800.
Total Output CGST ₹ 18,000
Total Output SGST ₹ 18,000
Net CGST Paid : ₹18,000 - ₹ 16,800 = ₹1,200
Net SGST Paid ₹18,000 - ₹16,800 = ₹1,200
(Intra-State i.e., Within State) Pass entries in the books of Mukul Roy & Sons, assuming all transactions have been entered within the state of West Bengal, charging CGST and SGST @ 6% each:
JOURNAL OF MUKUL ROY & SONS
Total Input CGST : 9,000-600 + 300- 1,200-900= ₹6,600
Total Input SGST : 9,000-600 + 300- 1,200-900= ₹6,600
Total Output CGST : 15,000 -480 = ₹14,520
Total Output SGST : 15,000 -480 = ₹ 14,520
Net CGST Paid : 14,520 - 6,600 = ₹7,920
Net SGST Paid : 14,520 - 6,600 = ₹7,920
ILLUSTRA TION 3 . (Intra-State i.e., Within State)
Enter the following transactions in the books of Luxmi traders assuming that all transactions have taken place in the state of Rajasthan. Assume CGST @9% and SGST @9%:
Total Input CGST : ₹36,000 + ₹4,500 + ₹ 1,800 = ₹42,300
Total Input SGST : ₹36,000 + ₹4,500 + ₹1,800 = ₹42,300
Total Output CGST : ₹28,800 + ₹9,000 + ₹900 = ₹38,700
Total Output SGST ₹28,800 + ₹9,000 + ₹900 = ₹38,700
Since Input GST is more than output GST, there is no tax liability to be paid to the Government. Excess of Input GST is called Input Tax Credit. It will be carried forward and will be adjusted in the next year.
Input Tax Credit : Input CGST - Output CGST = ₹42,300 - ₹38,700 = ₹3,600
Input SGST - Output SGST = ₹42,300 - ₹38,700 = ₹3,600
Input Tax Credit of ₹3,600 + ₹3,600 = ₹7,200 will be carried forward and will be adjusted in the next year.
In Case of Inter-State supply o f goods and services (i . e . sales from one-state to another state)
(vii) In case Input IGST exceeds the Output IGST, the excess Input IGST will be first adjusted against CGST and the balance of Input IGST, if any, will be applied to set off SGST. It is explained in Illustration 4 and 5.
ILLUSTRA TION: 4.
(Inter-State i.e., from one State to another)
Pass entries in the books of Mr. Gopal assuming CGST @6% and SGST @6%:
(i) Gopal purchased goods for ₹ 1,50,000 from outside the State and made payment by cheque.
(ii) He sold goods for ₹1,00,000 outside the State on Credit.
(iii) He sold goods for ₹ 1,80,000 locally on credit.
(iv) Paid telephone bill for ₹5,000 by cheque.
(v) He purchased an air-conditioner for his office for ₹25,000 and paid the amount by cheque.
JOURNAL OF GOPAL
*If CGST is 6% and SGST is 6%, IGST will be 6% + 6% = 12%
Important Note: If nothing is mentioned, it will be assumed that the transaction is entered within the same state.
(1) First of all, Output IGST will be adjusted against Input IGST :
2) This balance of ₹6,000 of IGST Credit will be first applied to set off CGST and the balance, if any, will be applied to set off SGST.
Pass entries in the books of Sh. Gopi Chand of Kerala assuming CGST @9% and SGST @9%:
JOURNAL OF SH. GOPI CHAND
*In case CGST is 9% and SGST is 9%, IGST will be 9% + 9% = 18%
** If nothing is stated, it will be assumed that the transaction is entered within the same state.
(4) This balance of ₹37,800 of IGST Credit will be first applied to set off CGST and the balance will be adjusted to set off SGST.
(5) IGST Credit was ₹37,800, out of which ₹22,680 has been adjusted against CGST. The Balance of IGST Credit ₹ 15,120 (i.e., ₹37,800 - ₹22,680) will be adjusted
(1) First of all, Output IGST will be adjusted against Input IGST :
Excess of Output IGST of ?63,600 is a liability payable to the Government. While making this payment, adjustment shall be made for CGST and SGST.