Part 1 · Keeping the books · Chapter 1.15
GST
Draft: the wording may change. Tax rules change every year, so check current rates and dates on the official portal before you act.
The idea
GST is a relay race. Every business in the chain collects tax on its full selling price, but takes credit for the tax it already paid when it bought. So each runner pays only on the stretch it ran — the value it added. The consumer at the end carries the whole tax; the businesses only pass the baton.
At the counter
Follow one carton of biscuits from the company to the consumer. To keep the sums easy, take 18% as the rate. Real rates differ by product and change from time to time, so check the current rate for each item on the GST portal before you use it.
| Runner | Sells for | GST collected | GST already paid on purchase (input credit) | GST paid to government |
|---|---|---|---|---|
| The biscuit company | ₹1,000 | ₹180 | — | ₹180 |
| The stockist | ₹1,100 | ₹198 | ₹180 | ₹18 |
| Ravi Stores | ₹1,200 | ₹216 | ₹198 | ₹18 |
| Total | ₹216 |
The consumer paid ₹216 of tax. The government received ₹216 — in three parts. The stockist added ₹100 of value and paid ₹18 on it. That is the whole idea: tax on the value added, credit for the tax before you.
The credit you can claim is called input tax credit (ITC). It is not a refund. It is set off against the tax you owe on your own sales.
How it sits in the books
GST is never income and never expense for a business that claims credit. It moves through two accounts:
- GST Input — an asset. Tax we paid on purchases that the government owes back to us as credit.
- GST Output — a liability. Tax we collected on sales that we owe the government (chapter 1.9).
The stockist's month, in postings:
| Document | Debit | Credit |
|---|---|---|
| Purchase bill from the company | Purchases 1,000; GST Input 180 | Company 1,180 |
| Sales bill to Ravi Stores | Ravi Stores 1,298 | Sales 1,100; GST Output 198 |
| GST payment at month-end | GST Output 198 | GST Input 180; Bank 18 |
After the payment, both GST accounts are back to zero for that month. Only the ₹18 left the business.
Two kinds of GST on one bill
Inside Tamil Nadu, the tax on a bill is split into two equal halves: CGST for the Centre and SGST for the state. Sell to a buyer in another state and the bill carries one tax instead: IGST. The total is the same; who receives it changes. Your books keep each one in its own input and output account, because the credit rules for setting one against the other are fixed by law.
Common mistake
Taking credit for tax on a bill your supplier never reported. Your input credit depends on the supplier filing their own return, so the bill shows up against your GSTIN on the portal (chapter 2.6 explains how you check this). If the supplier does not file, the credit you took can be denied, and you pay that tax again — with interest. A stockist who buys from a careless supplier is running someone else's leg of the race.
Where you'll use this
In Part 3, the company sends free goods and scheme credit notes. Some carry GST and some do not, and that decides whether your input credit goes up or down. Read the tax lines on every company credit note before you post it.
Check yourself
- The stockist buys for ₹2,000 + ₹360 GST and sells for ₹2,200 + ₹396 GST. How much GST does the stockist pay in cash?
- Is GST Input an asset or a liability?
- You sell to a retailer in Kerala. Which GST goes on the bill — CGST and SGST, or IGST?
Answers
- ₹36. Output ₹396 minus input credit ₹360.
- An asset — it is credit the government owes the business.
- IGST, because the sale crosses a state border.