Recording of GST Transactions
Goods and Services Tax (GST)
The Goods and Services Tax (GST) is a unified, indirect tax system that replaces multiple indirect taxes in India. It is a destination-based consumption tax, meaning it is charged at every stage where value is added to goods or services. At each stage of supply, the supplier offsets the GST paid on inputs (from the previous stages) through the tax credit mechanism. Ultimately, the final consumer bears the full burden of GST as the last dealer passes the accumulated tax to the consumer.
Types of GST:
There are three main types of GST, depending on whether the transaction is within a state or across state borders:
1. Central Goods and Services Tax (CGST):
- CGST is levied by the Central Government on the Intra-State supply of goods or services.
- This applies to transactions where both the buyer and seller are located within the same state.
2. State Goods and Services Tax (SGST):
- SGST is levied by the State Government (or Union Territories with legislatures) on the Intra-State supply of goods or services.
- Like CGST, SGST applies when both the buyer and seller are located in the same state.
3. Integrated Goods and Services Tax (IGST):
- IGST is levied and collected by the Central Government on Inter-State supply of goods or services.
- In other words, IGST applies when goods or services are supplied from one state to another.
- IGST is essentially the sum of CGST and SGST, applied to inter-state transactions.
Classification of GST for Accounting Purposes:
To ensure that GST is recorded correctly in financial statements, it is classified into Input GST and Output GST categories, which are tracked separately based on whether they relate to intra-state or inter-state transactions.
1. Input CGST/SGST:
- Input CGST/SGST refers to the GST paid on intra-state purchases of goods or services.
- This input GST is then adjusted against Output CGST/SGST, which is the GST collected on sales.
2. Input IGST:
- Input IGST is the GST paid on inter-state purchases of goods or services.
- This input is adjusted against Output IGST, which is the GST collected on inter-state sales.
3. Output CGST/SGST:
- Output CGST/SGST refers to the GST collected on intra-state sales or supply of goods and services.
- Businesses use this collected GST to offset the input GST they paid on their intra-state purchases.
4. Output IGST:
- Output IGST refers to the GST collected on inter-state sales or supply of goods and services.
- This collected IGST is used to offset the input IGST paid on inter-state purchases.
Journal Entries (In case of Intra-state supply of goods and services i.e. sales within the same state):