GST Accounting and Compliance

Goods and Services tax (GST) has been identified as one of most important tax reforms post-independence. It is a tax trigger, which will lead to business transformation for all major industries.

There will be a great impact on the Accounting and Reporting processes pre as well as post GST. There will be a compelling need to have GST compliant invoices, record expenses, track inventory and finally automatically prepare GST-ready tax returns.

It thus encompasses the overhaul of the entire business financial processes along with the accounting and financial reporting structure. The accounting system in companies will witness significant changes in revenue reporting, calculation of tax holiday incentives, and the way tax credit is written off. To fully comprehend the impact, companies will need to evaluate the changes GST will bring on the financial reporting and indirect tax accounting. Consequently, companies will be able to figure out the realignment in accounting and financial reporting for a correct revenue recognition.

Presently, accounting treatment of various indirect taxes are covered under the Indian Accounting Standards (IND AS) where various taxes are treated based on their nature and the point of levy. GST is a consumption-based or destination based tax, which implies that all tax components are levied at the point of supply. Hence, the state that will collect taxes will be decided by the place of consumption. As a result, while projecting revenue under GST structure, companies will witness volatility in the reported revenue numbers, which may not reflect their true financial status to the stakeholders.

Another area where the GST will significantly affect the accounting structure of companies is the tax credit. Various indirect taxes such as luxury tax, octroi, entry tax, CST do not fall into the tax credit. However, after the GST comes into effect, these taxes will be eligible for tax credit. However, as per the standard accounting principles, refundable taxes are not taken as an expense—the cost incurred in the acquisition of asset but are considered as an asset in the accounting framework. This leads to major reconfiguring in inventory valuation and asset capitalization rules to ensure that the tax credits are correctly entered in the accounting system.

A potential issue that may affect the accounting and financial system of companies is whether the transition causes any significant write off of tax credits availed in particular states and not likely to be set off. While GST helps in increasing the output tax base of the nation, it also provides a wider input credit mechanism and leads to better cross-utilization of credits.

Chart of Accounts can be maintained which is a unique record for each type of asset, liability, equity, revenue, and expense that provides a complete listing of every account in an accounting system. This Chart of Accounts shall depend on various parameters such as the type of business, credit rules, and the place of supply.

In short, you must keep records and accounts for GST so that you can:

  • work out the tax you owe and / or can reclaim
  • fill in your quarterly GST return
  • make sure you are paying the right amount of GST at the right time

The following Accounts have to be maintained apart from others:

  • Input CGST a/c
  • Output CGST a/c
  • Input SGST a/c
  • Output SGST a/c
  • Input IGST a/c
  • Output IGST a/c
  • Electronic Cash Ledger (to be maintained on Government GST portal to pay GST)

Books and records you must keep include:

  • annual accounts, including trading and profit and loss accounts
  • bank statements and paying-in slips
  • cash books and other account books
  • credit or debit notes you issue or receive
  • import and export documents
  • orders and delivery notes
  • purchase and sales books

The evidence you must keep includes:

  • purchase invoices and copy sales invoices
  • records of daily takings such as till rolls
  • relevant business correspondence
  • your GST account

Also, remember to have an appropriate GST Invoice, which can be referred to from our previous article. Click here

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