Your complete guide to GST and accounting - Integrate your spending with accounting

Apr 05, 2024

Though Accounting applications are very commonly used in India, spending management does not have the same importance.

As a result, they waste time duplicating records and manual effort to feed expenses and receipts into the accounting system. Is that the only valid reason to prefer integrating accounting with expense management? 

There is more. Goods and Service Tax (GST), which was introduced in 2017, is a unified tax system followed all over India, replacing VAT and service tax.

The new GST regimes (Sec 35 of CGST Act) require business owners to maintain accounting compliance by keeping GST records. If the business owner wants to assess the tax they owe or reclaim, they will need documentary evidence of the purchase, including GST details.  

So how does integrating my spend management system with accounting help? How can I automate my invoice management? We will get there.

What is GST accounting?

Before GST's arrival, multiple accounts were used for taxes like Value Added Tax (VAT), excise duty, and service tax to collect tax from taxpayers. GST has replaced all of them, and it’s much more straightforward as it has only three components, CGST, SGST, and IGST. 

GST is the sum of taxes levied for purchasing goods and services or selling goods to customers all over India.

At the same time, GST expenses accounting denotes the maintenance input and output GST components accounts and GST records for selling and purchasing goods and services.

How does GST affect the accounting structure of a business?

Though it has simplified the tax structure of Indian companies, there are still sectors affected by the implementation of GST.

Forced to register and pay taxes in every state the business operates

Presumably, you are located in New Delhi and run your business there. Currently, you are registered under your state’s GST accounts system and paying taxes there.

If you decide to expand to Punjab or Haryana, then according to section 35 of CGST, you must also do GST registration in this new state.

Whereas, in the former system, businesses that sold widely had options to opt for centralized registration to pay taxes.

After registering, the taxpayer will maintain GST accounting entries and records and pay taxes in both states, which can be a complicated bookkeeping process.

The never-ending list of accounts and documents to be maintained

There are two processes directly connected to GST. Inward supply (material purchase) and outward supply (selling).

So to imply this, they classify this into input GST and output GST and tax-payable (if applicable).

The Dual-mode tax system means both central and state governments levy taxes, which are CGST and SGST; IGST is for international exports and imports of goods (And then there is inter and intrastate goods supply too). 

So, the GST accounting entries that need to be maintained are:

Input and Output CGST

Input and Output SGST

Input IGST and Output IGST

GST payable account.

Businesses should maintain GST accounting books like bills and invoices, tax receipts, proof for the supply of goods/services (both inter and intrastate), stock records, ITC documents, payment confirmation, or refund vouchers.

Transfer of goods

When a company transfers its goods from its factory located in one state to a storage house owned by the same company in a different state, it’s still considered a supply.

The company is liable to pay tax. In this case, the factory should raise a supply invoice to the receiving end, which is the depot.

To be eligible for the input tax credit, the depot should accept the goods as purchased commodities and include the purchase records in the expense recording system and GST journal entry.

Works contracts should be treated as a supply of services

Work contracts like construction, fitting, repair and maintenance, renovation, and modification work are considered and listed as a supply of services.

But this work demands goods to be transported and used, which cannot be taxed together with contract works as the supply of services.

At the same time, the deduction of goods must be recorded by the inventory, which involves a complicated tax filing process.

Benefits of maintaining accounts and records in a business

Expenses accounting and descriptions should be maintained by every company for the following reasons.

The relationship between accounting and GST

To pay monthly and quarterly GST, the GST taxpayer should work on finding out how much tax they owe with the help of the expense-related documents.

Even one missing copy can lead to incorrect calculation. Tax waive-off applies to a few categories, which can be claimed when the records are preserved.

While paying GST, accounting records are required to submit as proof to comply with GST compliance.

Funds and business loans

Banks and vendors prefer checking your GST books and records before approving loans and funds.

Saving the accounting records can help you on getting timely financial assistance.

Readily access to accounting data any time of the year

At any point in time, you might have to go back to the old data to verify something when the account just won’t tally.

Maintenance of books of GST accounts along with respective receipts is more than necessary to tackle these situations wisely.

Business forecasting and budgeting

Plan your budgets sharply in a data-centric manner going over the data from the past.

Previous accounting and GST information make it easy to interpret and project future financial projections.

Requirements for keeping records and accounts

According to Section 35 of CGST Act, 2017, every registered GST taxpayer must maintain records of every operation and financial transaction in their business.

Here are some practices a business needs to follow to store their records and produce documentation while filing GST.

Records maintenance requirements

Both electronic and paper documents are accepted in the GST expense accounts portal.

If a business decides to proceed with e-documentation, it must authenticate each with digital signatures.

Every bill and invoice received under the taxable body’s name like credit and debit notes, delivery challan, inward and outward supply records, tax payable, and paid should be stored for six years from the date when returns were filed. 

Where to store?

The business owner must maintain the documents in the head office where primary operations are conducted.

If multiple locations are registered with GST, then the business owner must store documents relevant to each location respectively.

If a business follows e-storage methods and doesn’t have manual records, it must also have worked out a way to securely backup data. 

Responsibilities of different personnel

It is not just the work of the accounting team anymore. Every business unit needs to document quantitative details and store receipts to state as proof. 

If it’s a warehouse manager, they should store records of the amount of goods stored and their movement or dispatch and receipts pertinent to that. They should also possess track records of imported, lost, and damaged goods.

Those who handle transportation services should manage the records like how much goods were transported and delivered and how much is currently being transported.

Production zones should include records for the goods procured, how much is being produced from one period to another, and details of goods transferred from factory to warehouse.

Additionally, particulars for input tax availed, tax collected, and paid should also be stored for future reference.

What records should businesses maintain?

The new GST regime demands the business owner to support the following documents.

1. Accounts of stock

The stock accounts include the goods produced and stored by the supplier and goods purchased.

If any advance payments are given to vendors or received from customers, document them as well.

The breakdown of what would register must be stored under this category.

The initial amount of stocks before the production (opening balance)

Received Goods

Purchased Goods 

Goods produced during a particular period and raw materials utilized and wasted during the production

Goods stolen/damaged/lost

Goods given away for free

Raw materials leftover

2. Details of vendors, warehousing facility and customers

Details of vendors who are supplying raw materials and their address (suppliers)

Who is at the receiving end and their address (customers) 

Who is responsible for storing the goods or transferring them from one place to another (warehouse and transporters’ stock storage records)

When it’s a Supply of services 

Input services used

Services or goods used to provide this service

Services provided

3. When it’s a works contract

If the registered taxpayer is managing a works contract operation, here are the details that must be accounted for.

Details of the customer on whose behalf the works contract is being carried out

How much Goods or services have been received or purchased for implementation of the agreement.

Name and address of the supplier who provided goods and services to run the works contract.

Documents related to the payment made by the customer in return for the accomplished work.

4. Tax-related documents

ITC availed while purchasing goods 

Output tax payable post-sale of goods and output tax paid which is GST paid either after availing ITC or in cash.

Documents related to levying tax on the reverse charge paid by the receiver on behalf of the supplier to the government.

Documents related to import or export of goods during the taxation period.

Accounts that need to be maintained under GST

In the erstwhile tax structure, the taxpayer was required to pay indirect taxes and VAT, which required creating multiple accounts.

GST replaced that with the motto ‘one nation, one tax.’

So the taxpayer has to register and obtain GSTIN and maintain the following GST accounts based on different operations.

Input CGST account

Output CGST account

Input SGST account

Output SGST account

Input IGST account

Output IGST account

Input cess account

Output cess account

Electronic cash ledger account to deposit GST payments 

Taxpayer must ensure that there are no mismatches between the accounts and the GSTR filings.

The registered taxpayer must maintain the following accounts to meet compliance requirements.

Account of stock

Account of advance

Purchase register

Stock register

Sale register

Input tax credit availed

Tax liable to be paid

Impacts of GST on businesses

GST has been formulated to mitigate the indirect taxes implicated on businesses and consumers, which is stunting business growth.

From SMB’s point of view, this has been both a boon and bane.

Small businesses are the most benefitted

Small businesses with a turnover of less than 2 million and operate within the state don’t have to register with GST. 

Businesses operating pan India-wide had many complications with the erstwhile tax system as VAT tax varied from state to state.

Now, both accounts and records maintenance and tax liability have been uniformized throughout the country.

The Compensation scheme of GST allows traders to pay 1% of tax if their combined turnover is less than 7.5 million.

If it’s a manufacturer, they will pay 2% tax under the same case whereas a restauranteur will pay 5% tax. 

Intrastate goods transportation

Earlier, goods transported from one state to another had to wait at checkpoints to evaluate their goods and pay check-post taxes.

This increased the delivery time and shot up fuel costs. Perishable goods were prone to get damaged too.

Under the GST regime, this has been replaced by IGST, which is shared between central and state governments.

Simpler invoicing and billing

Bills and invoices carrying different taxes in multiple lines that further lead to complex calculation final price has been brought to extinct now.

Now, they have been made simple with GST alone.

Good news for businesses that provide both products and services

Before GST’s arrival, they had to calculate and file taxes separately for both products and services.

Nevertheless, GST rules this out, and taxes will be estimated and paid together.

This way, the taxpayers can use tax incentives to pay for the input supply of goods and services.

Related read - Benefits of GST registration in India for small businesses

Some limitations of GST implementation

1. A business that operates in multiple states should register in all of them and maintain records separately.

2. More closings: In a financial year, 36 GST returns have to be done, which requires businesses to keep up-to-date records and close frequently.

3. E-commerce businesses have to register anyway despite their turnover amount. They do not qualify for the composition scheme.

4. Tax rates on products or services have been hiked or slashed. For example, fashion and footwear, available to the end consumer at a 5% tax, have increased to 12%. This can have an impact on the sales of the companies operating in the related sectors.

Electronic Cash and Credit Ledger

E-ledger or electronic cash and credit ledger is a payment wallet cum passbook where you can check the GST payment details.

This is the entryway through which cash or credit could be deposited or availed. 

Cash and credit ledger in GST is made available to every registered GST taxpayer.

Here they can access the following information.

GST paid in cash to the government

Income tax credit available

Balance liability 

The Cash and credit ledger is where a taxpayer pays tax through cash or online banking or with available credit. 

Here is an example that explains an electronic credit ledger transaction.

A company that makes a profit by selling its products is liable to pay the GST amount of Rs.20000.

Their available credit is Rs.10000. So, the company will deposit the remaining Rs.10000 in an electronic cash ledger in GST.

The user will be able to select a period in which they can view the tax deposited, ITC availed, and the other different GST components.

How to pass accounting entries under GST?

With the erstwhile tax system, the taxpayer had to maintain multiple ledger accounts for different taxes.

But the new GST regime has combined all indirect taxes. 

So you should maintain ledger accounts only in the following tax systems for center and state goods purchase and sale transactions and the electronic ledger account in the GST portal.

SGST Payable account (tax applicable on intra-state outward supplies)

CGST Payable account (same as above)

IGST Payable account (interstate outward supply of goods)

SGST Input credit account (intrastate inward supply/purchase of goods)

CSGT Input credit account (same as above)

IGST Input credit account (interstate inward supply of goods)

Following are different transaction scenario under which how the accounting entry is made in ledgers. The available column in the ledger is date, particulars, debit, and credit.

Intra-state purchase of goods

  • 02/01/22
  • -
  • -
  • -

Inter-state purchase of goods

  • 02/01/22
  • -
  • -

Intra-state sale of goods

  • 02/01/22
  • -
  • -
  • -

Inter-state sale of goods

  • 02/01/22
  • -
  • -

So, the total input CGST is Rs. 800, input SGST is Rs. 800, and input CGST is Rs. 500.

Whereas the output CGST is Rs. 1250, output SGST is Rs. 1250, and output IGST is Rs. 2500. 

This is just a sample calculation of a single entry.

Estimation of input tax credit and output tax payable is calculated by summing up every tax CGST, SGST, and IGST under respective columns.

To explain availing the input tax credit in plain terms, taxpayers can reduce the input taxes (taxes spent while purchasing raw materials and goods) from Output GST taxes (tax liability out of selling goods) and deposit the rest in the Electronic cash ledger in the GST portal.

The set-off of input tax credit for availing is done in the following priority.

So if the business has to close the account and file tax after the above transactions, below tables show how the tax ledger would look like.

  • 02/01/22
  • -
  • -
  • -

Priority of set-off of input tax credit for availing

  • Input CGST
  • Input SGST
  • Input IGST

Tax ledger

  • Output CGST Payable
  • Input CGST Available
  • Output SGST Payable
  • Input SGST Available
  • Output IGST Payable
  • Input IGST Available

Reverse charges under GST

There is also a reverse charge mechanism under the GST regime. Normally, the seller of the goods and services will be liable for GST charges.

But for selling specific goods/services, the tax-paying liability is on the receiver of goods.

Here is how their accounts should be documented.

Seller of the goods

To the sales account - Rs. X

To CGST Payable a/c - Rs. Y (if there is any) 

To SGST Payable a/c - Rs. Z (if there is any) 

Receiver of the goods

Purchase account - Rs. X

CGST Input credit - Rs. A

SGST Input credit - Rs. B

To Creditors account

To CGST Payable - Rs. Y

To SGST Payable - Rs. Z

In the case of inter-state supply, the above taxes would be replaced by IGST payable.

Why is it critical to integrate your expenses with accounts?

The above estimations merely denote the tax calculations of one GST journal entry.

Imagine a business handling humungous orders and invoices and juggling receipt storage and payment processing.

If you don’t want to place yourself in this situation, GST accounting software and expense integration are crucial, especially for GST accounting.

1. Say goodbye to cumbersome accounting

A contented and cheerful accounting team is where people don’t bury themselves among paper receipts and invoices and make numerous calls to other teams during payment processing.

They rather spend their time going through payment entries, reject or approve them instantly, and process them all from one place.

This stress-free GST accounting entry includes hassle-free reimbursement management too.

It takes more than a month for a reimbursement request to be approved, processed, and finally updated in the ledger.

With the help of integrated accounting, it takes lesser time while maintain strict adherence to your company’s travel and expense policies.

2. Accuracy in GST estimation

The complicated CGST, SGST, and IGST calculations are nearly impossible to estimate manually with few accountants.

They have to feed expenses and tax amounts into the ledger manually, and missing entries can cost a lot to the company.

he team would go hysterical trying to find why the accounts wouldn’t add up at the end.

Improper reconciliation and GST accounting would cause additional work by repaying the tax on unaccounted goods/services and penal charges.

3. Data accessibility

At any given moment, you can have up-to-speed with overall accounting and money management.

Accurate and instant data availability means faster closings and tax filings. As mentioned earlier, there are 26 returns per year.

Above all, you save tons of paper going into the landfill by opting for an eco-friendly accounting system and GST accounting management.

Integrate your accounting and manage your records with Volopay

Keep your GST accounting anxieties away as the most innovative money management platform in town is here.

The only application you need to do end-to-end accounting is Volopay using which you can pay your expenses, store most-needed receipts, and process instant reimbursements.

By integrating this with other accounting apps, you escape from manually feeding information from one to another.

The user-friendly interface has multiple features like bill pay, corporate cards, reimbursements, and a home page, where you can check analytics and insights. 

Not even a single payment can get away from your sight now, as Volopay gives you the liberty to make every business transaction here.

Receive and pay your invoices, create corporate cards within less than a minute, handle subscription payments and online purchases, let your employees submit claim requests, and approve and pay them back on time.

How can Volopay help you shorten the work without affecting accuracy?

Volopay allows seamless integration with other accounting applications like Tally, Netsuite, Xero, Quickbooks, etc. So every transaction record would be safely transferred and updated automatically in your GL application. 

Volopay keeps accurate records of CGST, SGST, and IGST input and output taxes.

No more painful rechecking and penalty charges as your GST accounting is sharp.

Registered taxpayers must also document how they store the records and produce these when demanded.

Volopay stores every payment entry along with its nitty-gritty and finicky details and printable receipts in PDF format. Your accountability and tax returns’ precision would never be questioned.

The current GST regime forces taxpayers to do their tax accounting and filing.

With impeccable data records, file accurate GST accounting entries and produce indestructible e-records as documentary evidence.

Want to know more about the impact of GST for SMEs?

Check this out - How will GST impact your business' working capital?

Enjoy efficient bookkeeping and reconciliation with automated accounting