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Goods and service tax or GST subsumed most of the indirect taxes. It has brought us to the “One nation one tax” regime. Accounting under GST is more simple compared to the erstwhile VAT and excise.

However, one must understand and pass accounting entries in the books of accounts regularly. It is important so as to ensure minimal or no mismatches between the books of accounts and the GST returns, such as GSTR-1, GSTR-2B and GSTR-3B. It would further help in accurate and faster reconciliation of yearly accounts for GSTR-9 filing for the financial year. Learn about the different accounting entries that need to be passed under GST in this article.

Table of contents
Accounting under VAT and Excise
Accounting under the GST Regime
How to pass accounting entries under GST
Accounting under VAT and Excise
Separate set of accounts had to be maintained for excise, VAT, CST and service tax. Moreover, the input tax credit could not be claimed between Centre imposed taxes and State imposed taxes. Therefore, there were many ledger accounts needed. However, GST has been able to do away with the need for multiple ledger accounts, keeping it to a few.

Here’s a list of the few ledger accounts that business had to maintain under the previous regime (apart from accounts like purchase, sales, stock):

Excise payable a/c (for manufacturers)
CENVAT credit a/c (for manufacturers)
Output VAT a/c
Input VAT a/c
Input Service tax a/c
Output Service tax a/c
For example, a trader Mr X had to maintain the minimum basic ledger accounts as follows:

Output VAT a/c
Input VAT a/c
CST A/c (for inter-state sales and purchases)
Service tax a/c [He would not be able to claim any service tax input credit as he is a trader with output VAT. Service tax cannot be setoff against VAT/CST]
Accounting under the GST Regime
Under GST, all these erstwhile indirect taxes such as excise, VAT, and service tax are subsumed into one account. The same trader Mr X has to then maintain the following accounts (apart from accounts like purchase, sales, stock) for every GST Identification Number (GSTIN) as follows:

Input CGST a/c
Output CGST a/c
Input SGST a/c
Output SGST a/c
Input IGST a/c
Output IGST a/c
Input Cess a/c
Output Cess a/c
Electronic Cash Ledger (to be maintained on the Government GST portal to deposit GST in cash and make payments therefrom)
Read the “complete list of accounts” to be maintained by business for an effective compliance.

Once you go through the accounting ledgers and understand its flow, you will find it is much easier for record keeping. One of the biggest advantages that Mr X will have is that he can set off his input tax on service with his output tax on sale of goods.

How to pass accounting entries under GST
Let us consider a few basic business transactions (all amounts are excluding GST).

Example 1: Intra-state purchase

Mr X purchased goods Rs.1,00,000 locally (intrastate) on 14th April 2021
He sold them for Rs.1,50,000 in the same state on 15th April 2021
He paid legal consultation fees Rs.5,000 on 18th April 2021
He purchased furniture for his office for Rs.12,000 on 28th April 2021
Assuming that the CGST is 2.5% and SGST is 2.5% on the goods traded whereas the GST on legal consultation is 9% for CGST and SGST each. Further, GST rate on furniture is 14% for CGST and SGST each.

Date Transaction Customs Rate RBI Rate SBI Rate
      Preferred by Auditors ( though RBI archives do not provide now and it is now sourced from geojit.com) Preferred by Company’s Management
26.03.2021 A Supplier from Germany loads the goods on a vessel bound to India having invoice value of USD 10,000 on CIF basis payable in 90 days from B/L 1 USD = INR 73.25 1 USD = INR 73.35 1 USD = INR 73.80
27.03.2021 Date on the Bill of Lading 1 USD = INR 73.25 1 USD = INR 73.40 1 USD = INR 73.85
28.03.2021 The Customer receives the documents viz Bill of Lading, Invoice copy, Packing List. The date on B/L is of 27.03.2021 1 USD = INR 73.25 1 USD = INR 73.00 1 USD = INR 73.50
31.03.2021 Year End Date 1 USD = INR 73.35 1 USD = INR 73.50 1 USD = INR 74.00
30.04.2021 The Customer in India files the Bill of Entry 1 USD = INR 74.00 1 USD = INR 74.10 1 USD = INR = 74.60
01.05.2021 The Customer’s CHA has cleared the goods from the customs and the goods are delivered to the buyer’s warehouse the same day 1 USD = INR 74.00 1 USD = INR 74.25 1 USD = INR 74.65

Under CIF the risk in the goods passes from the seller to the buyer at the time the goods are loaded and stowed on board the vessel. – Assumed

Question Answer as Per Accounting Standard
When should the Buyer should account for this purchase The Buyer should recognise the Import Purchase on 27.03.2021 ideally but since there is no document available as on that date, it is advisable to record the Import Purchase on 28.03.2021 ( the date on which the bill of lading copy etc is received from the seller )
Whether the outstanding amount of USD 10000 payable to the German Seller be restated as per AS 11 on 31.03.2021 ? Yes. The exchange gain / loss arising on account of the the payables in foreign currency must be restated as per AS 11
How would such stock not lying with us be reported in the Financials as on 31.03.2021 ? Will it be restated ? The Stock though not lying with us immediately but the risks and rewards of the stock are now lying with us, hence such stock would be reported in the financials as “Goods In Transit” forming a part of the “Closing Stock” under “Current Assets”. As per AS 11, Stock being a Non-Monetary item shall not be restated.
How will a query from the GST Department for Import Booking in FY 2020-21 without any corresponding bill of entry, customs and IGST payment corresponding to such purchase be explained ? The explanation would suggest that the transaction is a part of the reconciliation of the total Purchase of goods being goods in transit.
How will a query from the GST Department for Import Booking in FY 2021-22 without any corresponding import purchase corresponding to such customs and IGST payment be explained ? The explanation would suggest that the transaction is a part of the reconciliation of the total Purchase of goods being goods in transit.

If you thought all you questions were answered satisfactorily, then lets come to the confusing part.

Confusion 1 – If the date of recording is finalised, lets finalise which conversion rate we shall apply.

Confusion 2 – While the customs bill of entry suggests a very conclusive proof for a conversion rate which is acceptable and also be easily explained to the GST Department or for that matter Income Tax department however, the date of recording of the Import Purchase would again have a different conversion rate.

Confusion 3 –

The Import Purchase price on the date of accounting i.e 28.03.2021 is INR 7,30,000 ( RBI Rate – preferred by Auditors )

Hence the actual cost of my goods on the day the bill of entry was file would be INR 7,40,000 ( as per Customs rate )

Further, if the purchase is converted at the SBI rate which is closest rate at which the actual remittance would take place, the stock would value at INR 7,35,000. 

MANAGEMENT WORRIES

1. So the Management is now worried to the fact if the language of business is the language of accounts ?

 

2. Whether the costing of the stock provided by the Accountant is correct or they are actually making lesser margins based on incorrect costing details provided by the Accountant ?

3. And if recording the transactions in line with the Accounting standards but not in ease of the GST and Income Tax Law , where they would end up paying more administrative costs ?

4. And if the recording of transactions in line with accounting standards only would lead to a material misstatement while the financial statements are drawn up ?

REMARKS

1. Whatever conversion rate you choose i.e RBI / SBI / Customs / XE.com / OANDA.com – apply consistently year on year basis.

2. If you felt that the difference in purchase amounts above from 7.3 Lakhs to 7.4 Lakhs to 7.5 lakhs is not something material, imagine that if it’s a contract worth USD 10 lakh or the changes in exchange rate is atleast 3 to 5 Rupees which is very much possible or if you are an Importer having atleast 10 consignments which are in Transit as on the year end 31st March

3. The below opinion shall not apply in case of a Import Transaction which is ultimately sold on High seas sales basis

IN MY OPINION – emphasis supplied

There is only one straight jacket formula or opinion in this case –

It is advisable to record an Import Purchase on the date mentioned on the Bill of Entry with the applicable conversion rate mentioned thereon along with the customs duty and IGST amount which would also be converted on the same conversion rate.

This would achieve

1. Costing Aspects of the Stock would be more appropriate

2. Clarity during GST as well as Income Tax Assessments

3. Will not be a Material Misstatement of the Financial Statements

4. Ease of Recording – to the Accountant

5. Administrative Convenience – No reconciliations

6. Mismatch possibilities reduced between the Customs and the Income Tax Data

Let me know your feedbacks and questions on this. Also, if you want a similar article on the Export Leg of Goods, mention in the comment below.