Method of Accounting of GST including Reverse Charge Transactions

METHOD OF ACCOUNTING OF GST

GST is levied on the value addition made to the goods and services as it passes on from manufacturer/service provider to the ultimate consumer. For example, Raman Singh Purchases 200 Bottles of Ghee from Abdul Navaz at the rate of Rs. 100 per bottle exclusive of GST. GST rate is say, 5%. He again supplies these bottles to Balram Naidu at Rs. 150 per bottle exclusive of GST. Now on purchase from Abdul Navaz, Raman Singh will pay 5% of Rs. 20000 = Rs.1000 as Input tax on Purchase. He will collect 5% of Rs. 30000 = Rs. 1500 on sale to Balram Naidu. Now here, the Value Addition i.e. Profit is 10000. Raman Singh will be required to pay GST after taking credit of the input tax already paid from the output tax collected on supply to Balram Naidu (1500-1000 = 500). In other words he's required to pay tax only on the Value Added to the Product, i.e. profit. So GST Payable by Raman Singh will be only Rs. 500 (5% of Profit i.e. Rs.10000).

Let us see some examples for method of accounting of GST.

Example 1: Abdullah and Co., Madurai, traders in ghee have purchased 500 bottles of ghee at Rs. 200 exclusive of GST each from The Madurai District Co-operative Milk Union Association (GST@5%). Now how to Account this in the books of accounts?

Purchase 5%..........Dr. 100000
CGST ITC 2.5%.......Dr. 2500
SGST ITC 2.5%.......Dr. 2500
To Madurai District Co-op Milk union: 105000

(Being the purchase of 500 ghee bottles)

Now say in the second case, he sells it to Akash Agency.

Example 2: Abdullah and Co. sells 300 bottles of ghee at Rs.210 each to Akash Agency, Madurai.

Akash Agency.......Dr. 66150
To Sales 5%: 63000
To CGST OTC 2.5%: 1575
To SGST OTC 2.5%: 1575

(Being the sale of 300 ghee bottles)

Now here, we could see six different ledgers maintained with regard to GST, namely, Purchase 5%, SGST ITC 2.5%, CGST ITC 2.5%, Sales 5%, SGST OTC 2.5%, CGST OTC 2.5%.(Here ITC refers to Input tax Credit and OTC refers to Output tax collected). Of these six, only Purchase 5% and Sales 5% are to be brought to Profit and Loss A/c. That is, Purchase and Sales figures exclusive of GST is to be brought into profit and loss account. The Input and Output Tax ledgers should be taken over to Balance Sheet under the group Duties and Taxes or OTC under Current Liabilities and ITC under Current Assets. Ok now comes a question, will these ledgers be present throughout the year and the balances will be carried forward to all years. The answer is no. We will see the finalization aspect after seeing one more illustration on Interstate transactions.

Example 3: Asian Retail Lighting Ltd. Chennai, purchases 200 lights at a cost of Rs. 20 per piece from Chrome Lighting India Ltd., Mumbai. (IGST@12%).

Now here, this is an Interstate transaction between TamilNadu and Maharashtra.

So the entry would be as follows:

Purchase Interstate......Dr. 4000
IGST ITC @ 12%............Dr. 480
To Chrome Lighting India Ltd. 4480

(Being the purchase of 200 lights)

Example 4: Asian Retail Lighting Ltd. Sold 200 lights at a cost of Rs. 30 per unit exclusive of GST 12% to Techpro Systems, Pondicherry.

Techpro Systems.........Dr. 6720
To Sales Interstate 6000
To IGST OTC 12% 720

(Being interstate supply)

Ok friends, now we saw the method of accounting of GST. Now let us see how to set off the Input tax and Output tax.

We will set off the Input tax credit available against the output tax collected every month. Here, CGST and SGST cannot be cross utilized. However, IGST is O+ve blood. It can be utilised against CGST, SGST, IGST. For this we need to create another ledger in the name GST Paid. Let us see in the journal form first and in T-format.

Now, Say we have Input tax credit 5% (CGST 5000 and SGST 5000) of Rs. 10000, ITC 12% of Rs. 5000 (CGST 2500 and SGST 2500) and Output Tax Collected 5% Rs. 12000 (CGST 6000 and SGST 6000) and OTC 12% of Rs.6000 (SGST 3000 and CGST 3000) and IGST Payable Rs.1000 as on 30.04.2018.

We are going to integrate the OTC and ITC ledger in the GST paid ledger.

GST Paid.......Dr. 15000

To CGST ITC 2.5% 5000
To SGST ITC 2.5% 5000
To CGST ITC 6% 2500
To SGST ITC 6% 2500

(Being the transfer of ITC)

SGST OTC 2.5%........Dr. 6000
CGST OTC 2.5%........Dr. 6000
CGST OTC 6%...........Dr. 3000
SGST OTC 6%...........Dr. 3000
IGST OTC .................Dr. 1000

To GST Paid 19000

Now here, the credit side of GST Paid will have 19000 as total and Debit side will show a total of 15000. This means an additional amount of Rs.4000 is to be paid to the Government in the way of SGST as Rs.1500 CGST as Rs.1500 and IGST as Rs.1000.

The third entry will be

GST Paid........Dr. 4000
To Bank 4000

(Being GST Paid)

The entire tax paid here is neither our income, nor our expenditure. Burden is passed on to the consumer. We only collect and pay GST.

Let us visualize the ledger

GST Paid

To ITC 2.5% 5000 By SGST OTC 2.5% 6000
To ITC 2.5% 5000 By CGST OTC 2.5% 6000
To ITC 6% 2500 By SGST OTC 6% 3000
To ITC 6% 2500 By CGST OTC 6% 3000
To Bank 4000 By IGST OTC 1000

Accounting of Reverse Charge transactions

Every registered person who procures goods or services covered u/s 9(3) or 9(4) of CGST Act, 2017 should pay tax on reverse charge basis. They are also eligible for input tax credit unless expressly prohibited by law.

Example: Food and fruits (Firm) procures services of Goods Transport Agency u/s 9(3) to the tune of Rs.10000. GST say 5%. It will be accounted as follows.

Freight Charges........Dr. 10000
CGST ITC RCM..........Dr. 250
SGST ITC RCM..........Dr. 250
To Bank 10500

Both ITC Paid under RCM ledgers, are to be grouped under current assets. While utilising them against OTC they should be transferred to GST Paid ledger as mentioned earlier.

Accounting transactions under Composition Scheme in GST

Now, there is another concept called composition scheme under GST. This is a scheme which is beneficial for small dealers whose aggregate turnover does not exceed Rs. 1 Crore in a year.

At present, tax for such dealers is levied at 1% (0.5% CGST and 0.5% SGST) of the total turnover, 5% in case of service providers engaged in supply referred to in para 6(b) of Schedule II. But, such dealers covered under composition scheme are not allowed to take input tax credit on their purchases and they should not collect output tax on their sales.

For example, Chellamani co. Purchased goods worth Rs. 10000 from Azhagar Chemicals, @ 12% GST. He sold such goods to Annamalai for Rs. 15000.

Now, he's not entitled to avail input tax credit as he's covered under composition scheme. So, Purchase would be

Purchase Dr. 11200
To Azhagar Chemicals 11200
Now for sales,
Annamalai Dr. 15000
To Sales 15000

GST will be calculated @ 1% of 15000 = Rs. 150.

So Ultimately,

SGST Paid....Dr. 75
CGST Paid....Dr. 75
To Bank 150

Since he pays this out of pocket and does not collect it from customer, CGST and SGST Paid should be debited to profit and loss A/c.