Goods and Services Tax (GST) is a single indirect tax that replaced a patchwork of central and state levies in India from July 2017. It applies to the supply of goods and services and is collected at each stage of the supply chain, with businesses able to claim credit for the GST they paid on their own purchases (input tax credit).
GST is destination-based: the tax accrues to the state where goods or services are consumed, not where they are produced. Depending on whether a supply is within a state or across states, it is collected as CGST plus SGST, or as IGST.
The charging event under GST is supply, a deliberately wide term that covers sale, transfer, barter, exchange, rental, lease and licence, and even certain transactions between related parties made without payment. Tax is computed on the transaction value, which includes incidental charges such as packing and freight billed to the customer, but excludes discounts recorded on the face of the invoice. Getting the taxable value right therefore matters as much as getting the rate right.
A short example shows the value-added effect. A trader buys goods for ₹1,00,000 and pays ₹18,000 GST on the purchase. She sells the same goods for ₹1,50,000, charging ₹27,000 GST. At filing, the ₹18,000 already paid is set off as input tax credit, so only ₹9,000 goes to the government in cash — exactly 18% of the ₹50,000 of value she added. The full ₹27,000 still reaches the exchequer, collected in stages along the chain.
In the books, GST is never income or expense for a regular taxpayer. Tax charged on sales sits in output liability ledgers, tax paid on purchases in input credit ledgers, and the two are set off when returns are filed, with the balance paid through the electronic cash ledger. The recurring mistakes are booking gross receipts to sales, overlooking reverse-charge purchases, and posting tax to the wrong head, each of which quietly corrupts both the returns and the trial balance.