ZL
Zerolev CGST · SGST · IGST · ITC · Purchase
GST Accounting · Purchase Entries · Input Tax Credit

Journal Entry for
Purchase with GST

A complete, conceptual and step-by-step guide to every type of GST purchase accounting entry — local (CGST+SGST), interstate (IGST), import of goods, capital goods, Reverse Charge Mechanism (RCM), purchase returns, blocked ITC under Section 17(5), and composite dealer purchases — with fully worked journal entries and real-world case studies.

CGST Act 2017 Section 16 — ITC Section 17(5) — Blocked ITC RCM — Section 9(3) IGST Purchase Capital Goods Import GST
01 — Core Concept

The Fundamental Concept Behind GST Purchase Accounting

Every purchase under GST creates two simultaneous events in the books: (1) recognition of the purchase cost or asset, and (2) recognition of the GST paid as an asset — the Input Tax Credit (ITC). Understanding this duality is the key to writing correct journal entries. For a broader overview of GST accounting across transactions, see our guide on GST journal entries for all transactions.

16
CGST Act Section — ITC Eligibility
3
Conditions to Claim ITC on Purchase
17(5)
Section — Blocked ITC Categories
180d
Max Days to Pay Supplier for ITC
📘 Core Concept — Why GST on Purchase is an Asset, Not an Expense: When a registered business purchases goods or services, the GST paid on that purchase is not a cost to the business. It is a tax credit — a claim against the government — which can be used to reduce output GST liability or claimed as a cash refund. Therefore, the GST component of every eligible purchase is debited to a GST Input Tax Credit A/c (an asset account under Current Assets) and not to the Purchases or Expense A/c. This distinction is fundamental to correct P&L and Balance Sheet presentation.
📗 The Three Separate ITC Accounts — Always Maintain Head-Wise: GST law mandates that CGST, SGST, and IGST ITC are tracked separately because utilisation rules are different for each head. Always maintain: GST ITC A/c — CGST, GST ITC A/c — SGST, and GST ITC A/c — IGST as three distinct sub-accounts. Merging them into a single "GST ITC A/c" prevents correct utilisation tracking, leads to errors in GSTR-3B filing, and may cause incorrect GST refund calculations.
📘 The Three Mandatory Conditions for ITC on Purchase (Section 16): ITC on a purchase is eligible only when: (1) the supplier has filed their GSTR-1 and the invoice appears in your GSTR-2B; (2) you have received the goods or services; (3) you have paid the supplier within 180 days of the invoice date — failing which the ITC must be reversed with interest. Additionally, the purchase must not fall under the blocked categories of Section 17(5). Verify all four conditions before recording ITC in your books.
02 — Categories of Purchase

All Categories of GST Purchase — A Complete Matrix

The type of GST applicable on a purchase depends on whether the transaction is intrastate or interstate, whether it falls under the forward charge or reverse charge mechanism, and whether the buyer is a regular taxpayer or a composition scheme dealer. Before initiating purchases, ensure your GST registration is complete and your GSTIN is valid.

Motor vehicles, food & beverages, personal consumption, club fees
Purchase Type GST Applicable ITC Available? Common Scenario CGST Act Section
Local / Intrastate Purchase (Registered Supplier) CGST + SGST Yes — Full ITC Purchase of raw material / goods within the same state Sec 9(1), 16
Interstate Purchase (Registered Supplier) IGST Yes — Full ITC Goods supplied from another state; IGST charged on invoice Sec 5, IGST Act; Sec 16
Purchase Under Reverse Charge (RCM) CGST+SGST or IGST (paid by buyer) Yes — After Payment to Govt GTA services, legal services, import of services from unregistered persons Sec 9(3), 9(4)
Import of Goods IGST (at customs) + BCD + Cess Yes — IGST ITC (not BCD) CIF/FOB imports; IGST paid at port of entry to customs Sec 3(7), Customs Tariff Act
Import of Services IGST (under RCM) Yes — After Self-Assessment Payment Cloud software, consultancy from foreign supplier Sec 5(3), IGST Act
Capital Goods Purchase CGST+SGST or IGST Yes — ITC on GST Component Machinery, equipment, computers — ITC on GST credited in full in Year 1 Sec 16, Rule 43
Purchase from Unregistered Dealer (B2B) CGST+SGST or IGST (under RCM) Notified categories only Notified goods/services from URD — buyer pays GST under RCM Sec 9(4)
Blocked ITC Purchase — Section 17(5) CGST+SGST or IGST No ITC — Expense to P&L Sec 17(5)
Purchase by Composition Dealer CGST+SGST or IGST No ITC — Cost to Business Composition taxpayers cannot claim ITC; GST forms part of cost Sec 10(4)
Purchase Return (Credit Note) Reversal of original entry ITC to be Reversed Goods returned to supplier; supplier issues credit note; ITC reversed Sec 34, Rule 37
⚠️ Critical — GST on Purchase is Either an Asset (ITC) or a Cost, Never Both: The moment you determine a purchase is ineligible for ITC (Section 17(5) blocked categories, composition dealer, or purchase not for business use), the entire GST amount must be included in the cost of the goods/asset/expense. You cannot park it in a separate ITC A/c for ineligible purchases. This directly impacts the value of inventory, fixed assets, and P&L expenses — and is a common audit objection.
03 — Invoice Anatomy

Anatomy of a GST Purchase Invoice — What to Book

Before writing any journal entry, you must correctly read a GST tax invoice. The invoice is the source document for every purchase entry and must be a valid GST e-invoice (for suppliers with turnover above the threshold) or a manual tax invoice. The following process strip explains how amounts flow from an invoice to your journal entry.

→
Step 1
Read Invoice Value
Identify taxable value (base price), GST rate, CGST amount, SGST amount (or IGST), and total invoice amount.
→
Step 2
Check Intra vs Inter State
Intrastate → CGST + SGST. Interstate or import → IGST. Match supplier's and buyer's GSTIN state codes.
→
Step 3
ITC Eligibility Check
Verify Section 17(5) blocked list. Check if the supplier has filed GSTR-1 and invoice reflects in GSTR-2B.
→
Step 4
Debit ITC or Cost
Eligible → Dr GST ITC A/c (asset). Ineligible → add GST to purchase cost / asset value / expense.
Step 5
Credit Supplier
Total invoice amount (including GST) credited to Accounts Payable / Creditors A/c. Pay within 180 days.
04 — Case Study: Intrastate Purchase

Case Study 1: Local / Intrastate Purchase of Goods (CGST + SGST)

This is the most common GST purchase scenario in India. When a registered dealer buys goods from a supplier in the same state, CGST and SGST are charged at equal rates. Both the CGST ITC and SGST ITC are recognised as separate current assets. Correct head-wise separation is critical for accurate GSTR-3B utilisation entries.

ABC Manufacturing Pvt. Ltd. — Maharashtra

Intrastate Purchase of Raw Materials — CGST 9% + SGST 9% = 18%

FACTS OF THE CASE

ABC Manufacturing Pvt. Ltd. (registered in Maharashtra) purchases raw material worth ₹5,00,000 from a registered supplier in Maharashtra on credit. GST rate is 18% — split as CGST 9% (₹45,000) and SGST 9% (₹45,000). Total invoice value: ₹5,90,000. The raw material is for use in manufacturing taxable goods — ITC is fully eligible.

Concept — Why CGST and SGST are Booked Separately: CGST flows to the Central Government; SGST flows to the State Government. They are governed by separate Acts (CGST Act 2017 and respective State GST Acts). Their utilisation rules differ — CGST ITC can offset CGST and IGST liability (in that order), while SGST ITC can offset SGST and IGST. Merging them in your books prevents correct utilisation and leads to incorrect GSTR-3B filing.
Entry 1: Intrastate Purchase of Raw Material on Credit (CGST + SGST @ 18%) On Purchase Date
AccountDr/CrDebit (₹)Credit (₹)
Purchases / Raw Material A/cDr5,00,000—
GST Input Tax Credit A/c — CGST (9%)Dr45,000—
GST Input Tax Credit A/c — SGST (9%)Dr45,000—
To Accounts Payable / Creditors A/cCr—5,90,000
Total5,90,0005,90,000
Being raw materials purchased from a registered intrastate supplier at ₹5,00,000 + CGST 9% (₹45,000) + SGST 9% (₹45,000). ITC is eligible under Section 16 — CGST ITC A/c and SGST ITC A/c are debited as current assets. The Purchases A/c reflects only the base value (excluding GST) — this is correct under GST law since GST is recoverable.
Entry 2: Payment to Supplier Within 180 Days On Payment Date
AccountDr/CrDebit (₹)Credit (₹)
Accounts Payable / Creditors A/cDr5,90,000—
To Bank A/cCr—5,90,000
Total5,90,0005,90,000
Payment made to supplier. ITC claimed remains valid as payment is made within 180 days of invoice. If payment is not made within 180 days, ITC claimed (₹90,000) must be reversed by crediting GST ITC A/c and debiting Output Tax Liability A/c, with interest under Section 50.
Entry 3: ITC Utilisation Against Output GST Liability At Time of GSTR-3B Filing (Monthly)
AccountDr/CrDebit (₹)Credit (₹)
Output GST Payable A/c — CGSTDr45,000—
Output GST Payable A/c — SGSTDr45,000—
To GST Input Tax Credit A/c — CGSTCr—45,000
To GST Input Tax Credit A/c — SGSTCr—45,000
Total90,00090,000
ITC utilised to set off output GST liability — CGST ITC against CGST liability, SGST ITC against SGST liability. Cross-utilisation (CGST ITC against SGST liability or vice versa) is not permitted under GST law. Any remaining ITC balance after utilisation is carried forward as a current asset in the balance sheet.
05 — Case Study: Interstate Purchase

Case Study 2: Interstate Purchase of Goods (IGST)

When goods are purchased from a supplier located in a different state, the transaction is treated as an interstate supply under the IGST Act, and Integrated GST is levied. The buyer records IGST ITC as a single asset account. IGST ITC is versatile — it can be used to offset IGST, CGST, and SGST output liabilities in that prescribed order. This flexibility makes interstate purchasing an important part of Input Tax Credit optimisation strategy.

PQR Traders Pvt. Ltd. — Delhi

Interstate Purchase from Supplier in Gujarat — IGST @ 12%

FACTS OF THE CASE

PQR Traders Pvt. Ltd. (registered in Delhi) purchases finished goods worth ₹8,00,000 from a registered supplier in Gujarat on credit. IGST rate is 12% — ₹96,000. Total invoice: ₹8,96,000. Goods are received and used for taxable supplies. ITC fully eligible.

Concept — IGST Utilisation Priority: Under Rule 88A of the CGST Rules, IGST ITC must first be utilised against IGST output liability. The remaining balance can be utilised against CGST output liability, and then against SGST output liability. This order is mandatory — you cannot choose to first use IGST ITC against CGST and save it for IGST; the portal enforces the sequence automatically.
Entry 1: Interstate Purchase on Credit (IGST @ 12%) On Purchase Date
AccountDr/CrDebit (₹)Credit (₹)
Purchases / Goods A/cDr8,00,000—
GST Input Tax Credit A/c — IGST (12%)Dr96,000—
To Accounts Payable / Creditors A/cCr—8,96,000
Total8,96,0008,96,000
Being goods purchased from a registered interstate supplier at ₹8,00,000 + IGST 12% (₹96,000). IGST ITC A/c is debited as a current asset. In the balance sheet, this IGST ITC of ₹96,000 appears under "Balances with Government Authorities" or "Other Current Assets → Taxes Recoverable."
Entry: Intrastate Cash Purchase of Goods (CGST + SGST @ 5%) On Purchase Date — Cash / Bank Payment
AccountDr/CrDebit (₹)Credit (₹)
Purchases A/cDr2,00,000—
GST Input Tax Credit A/c — CGST (2.5%)Dr5,000—
GST Input Tax Credit A/c — SGST (2.5%)Dr5,000—
To Cash / Bank A/cCr—2,10,000
Total2,10,0002,10,000
Cash purchase — creditor is replaced by Bank/Cash A/c. ITC treatment remains the same. No difference in ITC eligibility between credit and cash purchases.
06 — Reverse Charge (RCM)

Case Study 3: Purchase Under Reverse Charge Mechanism (RCM)

Under the Reverse Charge Mechanism (RCM), the liability to pay GST shifts from the supplier to the recipient (buyer). This applies to specific notified services under Section 9(3) of the CGST Act — such as Goods Transport Agency (GTA) services, legal services from individual advocates, and import of services. The buyer must self-assess, pay the GST from the cash ledger, and then — in the same tax period — claim it back as ITC. The journal entries for RCM are more complex because they involve both a liability and an asset.

⚠️ Critical — RCM ITC Cannot Be Used in the Same Month as Payment: ITC under RCM is available only in the tax period in which the GST has actually been paid in cash to the government. You cannot first claim ITC and then use it to pay the RCM liability in the same entry — the payment must come from the cash ledger first. This creates a cash flow impact. The entry sequence matters: (1) pay GST via cash ledger; (2) only then claim ITC.

LMN Pvt. Ltd. — Bengaluru

GTA (Goods Transport Agency) Service — RCM — CGST 2.5% + SGST 2.5% = 5%

FACTS OF THE CASE

LMN Pvt. Ltd. avails transportation service from a Goods Transport Agency (GTA) for ₹1,00,000. GTA services fall under RCM — GST is payable by the recipient. GST @ 5% = ₹5,000 (CGST ₹2,500 + SGST ₹2,500). LMN pays the service provider ₹1,00,000 (no GST on the invoice). LMN must self-assess and pay ₹5,000 to the government, then claim ITC.

Entry 1: GTA Service Received (No GST on Supplier's Invoice) On Service Date
AccountDr/CrDebit (₹)Credit (₹)
Transportation / Freight Charges A/cDr1,00,000—
To GTA / Service Provider A/c (Payable)Cr—1,00,000
Total1,00,0001,00,000
GTA service booked at base value. GST is not shown here as it is not charged by the supplier — RCM GST will be self-assessed and paid by LMN separately.
Entry 2: Self-Assessment — GST Liability Recognised Under RCM At Month End / Filing Date
AccountDr/CrDebit (₹)Credit (₹)
RCM GST Input Tax Credit A/c — CGSTDr2,500—
RCM GST Input Tax Credit A/c — SGSTDr2,500—
To RCM GST Payable A/c — CGSTCr—2,500
To RCM GST Payable A/c — SGSTCr—2,500
Total5,0005,000
This simultaneous Dr/Cr entry creates both the RCM ITC asset and the RCM liability. However, the ITC can only be utilised after cash payment of the liability — it cannot be used to net off the liability in the same entry. Many accountants separate this into two discrete entries (liability first, then ITC) for clarity.
Entry 3: Cash Payment of RCM GST Liability from Electronic Cash Ledger On GSTR-3B Filing / Payment Date
AccountDr/CrDebit (₹)Credit (₹)
RCM GST Payable A/c — CGSTDr2,500—
RCM GST Payable A/c — SGSTDr2,500—
To Bank A/c / GST Cash Ledger A/cCr—5,000
Total5,0005,000
RCM GST paid in cash. ITC of ₹5,000 (booked in Entry 2) is now available for utilisation against output GST liability from the next period — or in the same period if payment was made before GSTR-3B filing cutoff.
07 — Capital Goods

Case Study 4: Purchase of Capital Goods with GST

Capital goods (machinery, computers, factory equipment) attract GST, and the ITC on capital goods is available in full in the year of purchase under GST (unlike the pre-GST era under CENVAT Credit Rules where it was spread over two years). However, the asset cost in the books must be recorded excluding the GST component — since GST is recoverable as ITC and not a cost to the business. This directly impacts depreciation calculations.

📗 Capital Goods — GST Excluded from Asset Cost: Under AS 10 / Ind AS 16 (Property, Plant and Equipment), the cost of an asset comprises all costs necessary to bring it to working condition. Since GST paid on capital goods is recoverable as ITC (it is an asset, not a cost), it must be excluded from the asset's capitalised value. The depreciation base is therefore the pre-GST value of the asset. Only if ITC is not available (blocked under Section 17(5) or for composition dealer) does GST form part of the asset cost. This is a critical distinction that affects your ITC reconciliation and the company's financial statements.

DEF Industries Ltd. — Chennai

Purchase of Machinery — Intrastate — GST @ 18% (CGST 9% + SGST 9%)

FACTS OF THE CASE

DEF Industries Ltd. (registered in Tamil Nadu) purchases a manufacturing machine for ₹20,00,000 from a supplier in Tamil Nadu on credit. GST @ 18%: CGST ₹1,80,000 + SGST ₹1,80,000 = ₹3,60,000. Total invoice: ₹23,60,000. Machine is used exclusively for taxable manufacturing — ITC fully eligible.

Impact on Depreciation: Asset capitalised at ₹20,00,000 (base value). Depreciation is charged on ₹20,00,000 — not on ₹23,60,000. The ITC of ₹3,60,000 is claimed back as a current asset and then utilised against output GST. This correctly prevents double benefit — once through lower depreciation (if capitalised net) and once through ITC.
Entry: Capital Goods (Machinery) Purchase on Credit — ITC Eligible On Purchase / Installation Date
AccountDr/CrDebit (₹)Credit (₹)
Machinery A/c (Fixed Asset)Dr20,00,000—
GST Input Tax Credit A/c — CGST (9%)Dr1,80,000—
GST Input Tax Credit A/c — SGST (9%)Dr1,80,000—
To Accounts Payable / Creditors A/cCr—23,60,000
Total23,60,00023,60,000
Machinery capitalised at ₹20,00,000 (net of GST). CGST ITC ₹1,80,000 and SGST ITC ₹1,80,000 are debited as current assets. Depreciation will be charged on ₹20,00,000. If ITC were ineligible (e.g., machine for an exempt activity), the entire ₹23,60,000 would be capitalised in Machinery A/c and depreciated on the gross value.
08 — Import of Goods

Case Study 5: Import of Goods — Custom Duty, BCD & IGST

Import of goods attracts multiple levies at the port of entry: Basic Customs Duty (BCD), Social Welfare Surcharge (SWS), and Integrated GST (IGST). Of these, only the IGST component is creditable as ITC under Section 2(62) read with Section 16 of the CGST Act. BCD and SWS are not GST components and must be capitalised into the cost of goods. Understanding this split is essential for accurate ITC claims on imports.

⚠️ Critical — BCD is NOT ITC; IGST on Import IS ITC: Basic Customs Duty, Social Welfare Surcharge, and Anti-Dumping Duty are customs levies — not GST. They do not qualify as ITC and must form part of the cost of imported goods. The IGST paid at the port of entry under Section 3(7) of the Customs Tariff Act qualifies as ITC. The IGST is computed on (CIF value + BCD + SWS), not on CIF value alone — so IGST ITC will be higher than if computed on CIF alone.

GHI Imports Pvt. Ltd. — Mumbai

Import of Raw Material — CIF ₹10,00,000 — BCD 10% + SWS 10% on BCD + IGST 18%

FACTS OF THE CASE

GHI Imports Pvt. Ltd. imports raw material — CIF value ₹10,00,000. BCD @ 10% on CIF = ₹1,00,000. SWS @ 10% on BCD = ₹10,000. IGST @ 18% on (CIF + BCD + SWS) = 18% × ₹11,10,000 = ₹1,99,800. Total outflow: ₹12,09,800. IGST ITC of ₹1,99,800 is available. BCD + SWS = ₹1,10,000 is added to cost.

Entry: Import of Raw Material — Custom Duty Payment at Port On Bill of Entry Date
AccountDr/CrDebit (₹)Credit (₹)
Raw Material / Purchases A/c (CIF + BCD + SWS)Dr11,10,000—
GST Input Tax Credit A/c — IGST (18%)Dr1,99,800—
To Foreign Supplier / Accounts Payable (CIF)Cr—10,00,000
To Customs Duty Payable A/c (BCD + SWS)Cr—1,10,000
To IGST Payable A/c (at Customs)Cr—1,99,800
Total13,09,80013,09,800
Raw material is capitalised at ₹11,10,000 (CIF + BCD + SWS) — the landed cost inclusive of non-creditable levies. IGST ITC of ₹1,99,800 is separately debited as a current asset and will be used to offset output IGST/CGST/SGST liability in GSTR-3B.
09 — Blocked ITC: Section 17(5)

Case Study 6: Purchase with Blocked ITC — Section 17(5)

Section 17(5) of the CGST Act lists specific categories of goods and services where ITC is blocked — meaning the GST paid on them cannot be claimed as credit. In these cases, the GST paid is a real cost to the business and must be absorbed into the relevant expense or asset account. Mistakenly claiming ITC on blocked categories leads to notices, demands, and penalties. This is one of the most critical — and most frequently violated — provisions in GST audit.

Blocked Category — Section 17(5) GST Treatment in Books Exception (where ITC IS allowed)
Motor vehicles (capacity ≤ 13 persons) GST added to vehicle cost / P&L expense Used for transport of goods, further supply of vehicles, taxi services, driving training
Food & beverages, outdoor catering GST expensed with the meal cost Same category outward supply; obligatory under statutory law
Club memberships, health & fitness GST expensed with membership fee None
Beauty treatment, cosmetic surgery GST expensed / added to employee cost Outward supply of same
Works contract for immovable property GST capitalised into the construction cost Used for further supply of works contract / plant & machinery
Construction / renovation of own building GST capitalised into building cost Plant & machinery
Travel benefits to employees (leave travel) GST expensed with travel cost Statutory obligation under any law
Insurance for motor vehicles (personal use) GST expensed with insurance premium Fleet of goods transport vehicles

RST Consulting Ltd. — Hyderabad

Purchase of SUV for Directors' Use — GST Blocked Under Section 17(5)

FACTS OF THE CASE

RST Consulting Ltd. purchases an SUV for directors' use at ₹25,00,000. GST @ 28% + Compensation Cess 17% = 45% total = ₹11,25,000. Total invoice: ₹36,25,000. The vehicle is for personal use of directors — ITC is blocked under Section 17(5)(a). The entire GST of ₹11,25,000 is a cost, not recoverable.

⚠️ GST Forms Part of Fixed Asset Cost — Depreciation Base Increases: Since ITC is not available, the vehicle must be capitalised at the full invoice value of ₹36,25,000 (including GST). Depreciation under the Companies Act 2013 (or Income Tax Act) will be calculated on ₹36,25,000. This is directly opposite to the capital goods entry in Case Study 4, where depreciation was on the net value.
Entry: Purchase of Motor Vehicle — ITC Blocked (Section 17(5)) — GST Capitalised On Purchase Date
AccountDr/CrDebit (₹)Credit (₹)
Motor Vehicle A/c (Fixed Asset — incl. full GST)Dr36,25,000—
To Accounts Payable / Creditors A/cCr—36,25,000
Total36,25,00036,25,000
No ITC A/c is created. The entire invoice value including GST (₹36,25,000) is capitalised as the cost of the fixed asset. There is no separate debit to GST ITC A/c. Depreciation will be charged on the full capitalised value of ₹36,25,000. This is the correct treatment under Section 17(5) — the GST is a cost, not a recoverable asset.
10 — Purchase Return

Case Study 7: Purchase Return / Return to Supplier

When goods purchased (and ITC claimed) are returned to the supplier, the journal entries must be reversed — the purchase is reversed and the ITC claimed must be reversed by crediting the GST ITC A/c. The supplier issues a credit note, which is your basis for the reversal. The reversal must be reflected in your GSTR-3B and GSTR-2 for the relevant period.

Entry: Purchase Return — Intrastate (CGST + SGST) — Against Credit Note On Return / Credit Note Date
AccountDr/CrDebit (₹)Credit (₹)
Accounts Payable / Creditors A/cDr1,18,000—
To Purchases Returns A/cCr—1,00,000
To GST Input Tax Credit A/c — CGST (9%)Cr—9,000
To GST Input Tax Credit A/c — SGST (9%)Cr—9,000
Total1,18,0001,18,000
Being goods returned to supplier (base value ₹1,00,000 + CGST ₹9,000 + SGST ₹9,000). The ITC previously claimed (CGST ₹9,000 and SGST ₹9,000) is reversed by crediting the ITC A/c. Creditors are reduced by the full invoice amount. The credit note received from the supplier is the source document. Declare in GSTR-3B Table 4(B) — reversal of ITC.
11 — Composition Dealer Purchase

Case Study 8: Purchase by a Composition Scheme Dealer

A taxpayer registered under the GST Composition Scheme (Section 10) cannot claim Input Tax Credit on any purchase. The GST paid on purchases is a direct cost to the business and must be absorbed into the cost of goods purchased. This is fundamentally different from the regular taxpayer treatment. Composition dealers pay a fixed percentage of turnover as GST and cannot offset it with ITC.

⚠️ Composition Dealers — No ITC Under Any Circumstances: A composition dealer cannot debit GST ITC A/c for any purchase — whether raw materials, capital goods, or services. The entire GST paid on each purchase is a cost. This impacts inventory valuation (FIFO/Weighted Average cost per unit includes GST), asset capitalisation values, and profit margins. If a composition dealer incorrectly claims ITC in books, it may mislead lenders or investors reviewing balance sheets.
Entry: Purchase by Composition Dealer — GST Forms Part of Cost On Purchase Date
AccountDr/CrDebit (₹)Credit (₹)
Purchases A/c (inclusive of GST — ₹3,00,000 + 5% = ₹3,15,000)Dr3,15,000—
To Accounts Payable / Creditors A/cCr—3,15,000
Total3,15,0003,15,000
Being goods purchased by a composition dealer — full invoice value including GST (₹3,15,000) is booked as Purchases. No ITC A/c is created. The GST of ₹15,000 forms part of the cost of goods and is reflected in the cost of inventory and ultimately in cost of goods sold.
12 — Quick Reference

Master Quick-Reference — All Purchase Journal Entry Types

A consolidated reference table covering all major GST purchase journal entry types, their debit/credit structure, balance sheet impact, and P&L impact. Use this alongside your GST compliance calendar to ensure correct periodic accounting treatment.

Purchase Scenario Debit Accounts Credit Account ITC Treatment P&L Impact (Cost)?
Intrastate purchase (credit) Purchases A/c + CGST ITC + SGST ITC Creditors A/c Asset — Both ITC Base value only
Interstate purchase (credit) Purchases A/c + IGST ITC Creditors A/c Asset — IGST ITC Base value only
Cash purchase (intrastate) Purchases A/c + CGST ITC + SGST ITC Bank / Cash A/c Asset — Both ITC Base value only
Capital goods (ITC eligible) Fixed Asset A/c + CGST/SGST/IGST ITC Creditors A/c Asset — Full ITC Depreciation on net value
Capital goods — blocked ITC Fixed Asset A/c (at full value incl. GST) Creditors A/c No ITC — Cost Added Depreciation on gross value
Import of goods Stock/Purchases (CIF+BCD+SWS) + IGST ITC Supplier + Customs Duty Payable + IGST Payable IGST ITC Only CIF + BCD + SWS only
RCM — service received Expense A/c + RCM ITC A/c Service Provider + RCM GST Payable ITC After Cash Payment Base service value only
Section 17(5) — blocked ITC purchase Expense A/c or Asset A/c (full value incl. GST) Creditors A/c No ITC — Full Cost Full value including GST
Composition dealer purchase Purchases A/c (full value incl. GST) Creditors A/c No ITC — Cost Full value including GST
Purchase return (credit note received) Creditors A/c (full value) Purchase Returns + CGST/SGST/IGST ITC A/c ITC Reversed Base value reversed
ITC reversal — non-payment in 180 days Output Tax Liability A/c GST ITC A/c (CGST/SGST/IGST) ITC Reversed + Interest Interest — Yes (expense)
13 — Balance Sheet Presentation

How GST Purchase Accounts Appear in the Balance Sheet

After recording purchase journal entries, the GST ITC accounts will carry debit balances until utilised. These must be correctly classified in the balance sheet under Schedule III of the Companies Act 2013. Incorrect presentation is a common statutory audit qualification. The following ledger cards illustrate how each account flows.

GST Input Tax Credit A/c — CGST Current Asset — Taxes Recoverable

Debit side: All eligible CGST paid on intrastate purchases, capital goods, and services. Also includes RCM CGST after cash payment to the government.

Credit side: Utilisation against CGST output tax liability (from sales) or IGST liability (second in priority). Any reversal under Rule 42/43 (partial exemption) or Section 17(5) correction. Upon claiming ITC refund, the credit reduces the balance to zero.

Balance Sheet Position: Debit balance → "Current Assets → Other Current Assets → Balances with Government Authorities → CGST ITC Recoverable." Must never appear on the credit side unless due to reversal error.

GST Input Tax Credit A/c — IGST Current Asset — Taxes Recoverable

Debit side: All eligible IGST paid on interstate purchases, imports of goods (Section 3(7), Customs Tariff Act), import of services (RCM), and zero-rated inward supplies.

Credit side: Utilised first against IGST output liability, then CGST, then SGST (mandatory order under Rule 88A). If not utilised due to zero-rated sales, refund under Section 54(3) may be claimed.

Balance Sheet Position: Debit balance → "Current Assets → Other Current Assets → Balances with Government Authorities → IGST ITC Recoverable."

❌ Incorrect Treatment

Common Mistakes to Avoid

  • Booking GST on purchase as an expense (P&L) when ITC is available
  • Merging CGST, SGST, and IGST ITC into one account
  • Claiming ITC under RCM before paying GST in cash
  • Capitalising capital goods at gross value including GST (when ITC is available)
  • Not reversing ITC when supplier payment is not made within 180 days
  • Claiming ITC on Section 17(5) blocked category purchases
  • Not reversing ITC when goods are returned / credit note received
✅ Correct Treatment

Best Practices for GST Purchase Accounting

  • Debit separate CGST ITC, SGST ITC, IGST ITC accounts as current assets
  • Capitalise fixed assets net of ITC (when ITC is eligible)
  • Reconcile GSTR-2B monthly — only book ITC appearing in GSTR-2B
  • Pay RCM GST in cash before claiming ITC in the same period
  • Maintain a 180-day tracker for credit purchases to avoid ITC reversal
  • Check Section 17(5) eligibility before booking any ITC
  • Reverse ITC on purchase returns in the period of return / credit note
14 — FAQ

Frequently Asked Questions

Is GST paid on purchases an expense or an asset in the books of accounts?
For a GST-registered taxpayer making taxable supplies, GST paid on eligible purchases is not an expense — it is an asset (Input Tax Credit). It should be debited to "GST Input Tax Credit A/c" (current asset) and not to the purchases or expense account. Treating it as an expense inflates costs, understates profit, and misrepresents the balance sheet. The exception is: (a) purchases under Section 17(5) blocked categories — GST is a cost; (b) composition dealers — GST is always a cost; (c) exempt supply businesses (fully) — GST is a cost. For businesses with mixed taxable and exempt supplies, a proportionate reversal under Rule 42 is required.
What happens to ITC if I don't pay my supplier within 180 days?
Under Rule 37 of the CGST Rules, if you fail to pay the supplier within 180 days from the invoice date, the ITC claimed must be reversed. The reversal is done by crediting the GST ITC A/c (CGST/SGST/IGST) and debiting the Output Tax Liability A/c. Additionally, interest under Section 50 is payable on the ITC reversed from the date of ITC claim to the date of reversal. Once you subsequently pay the supplier (even after 180 days), you can re-claim the ITC in the month of payment — but the interest already paid is not refundable. This is a common issue in businesses with extended credit terms — a 180-day watch list is an essential accounting control.
Can I claim ITC on a purchase if the invoice is not in GSTR-2B?
As per Rule 36(4) of the CGST Rules (amended w.e.f. 1 January 2022), ITC is available only to the extent it appears in GSTR-2B — the auto-populated ITC statement. You cannot claim ITC on self-declared basis for invoices not appearing in GSTR-2B. If a supplier has not filed GSTR-1, the invoice will not appear in your GSTR-2B, and ITC will not be available until the supplier files. In such cases, do not debit the ITC A/c in your books — leave it as a provision or park it in a separate "Pending ITC" account (not a current asset) until it appears in GSTR-2B. This requires active follow-up with suppliers and is part of good GST compliance management.
Should freight / packing charges on a purchase invoice be shown separately in the journal entry?
If freight and packing charges appear on the same invoice as the goods and GST is charged on the total (goods + freight + packing), the treatment is simple — debit Purchases A/c for the total base value (including freight + packing) and debit the appropriate GST ITC A/c for the total GST. There is no need to split freight separately in the journal entry. However, if freight is invoiced separately by a GTA (Goods Transport Agency), it falls under RCM (5%) and must be handled as a separate RCM entry (Case Study 3 above). Always check whether freight on a purchase invoice is bundled (same supplier, same invoice) or a standalone GTA invoice.
What is the correct journal entry when ITC claimed is later found to be ineligible (e.g., due to audit)?
If ITC already claimed is subsequently found to be ineligible (blocked under Section 17(5), supplier found to be fake, goods diverted to non-business use, etc.), the ITC must be reversed. The journal entry is: Dr Output Tax Liability A/c (or Expense A/c if the underlying purchase is to be expensed) | Cr GST ITC A/c. If a tax demand is raised by the department, the GST payable must be discharged with interest (Section 50) and penalty if applicable. If the ITC was capitalised into a fixed asset (e.g., motor vehicle), the asset's book value may need to be adjusted upward (Dr Fixed Asset A/c | Cr ITC A/c), and the additional depreciation retrospectively recalculated — a significant accounting adjustment. Consult your GST auditor before making such retrospective corrections.
How is GST on advance payment to supplier recorded in the books?
Under GST, for supply of goods, GST is payable at the time of supply (delivery/invoice) — not on advance payment. Therefore, when an advance is paid to a goods supplier, no ITC is created: Dr Advance to Suppliers A/c | Cr Bank A/c. When the goods are subsequently supplied and the invoice is raised, the full ITC is booked on the invoice date: Dr Purchases A/c + Dr GST ITC A/c | Cr Creditors A/c. The advance is then adjusted: Dr Creditors A/c | Cr Advance to Suppliers A/c. For services (where GST is payable on advance receipt by the supplier), the supplier issues a Receipt Voucher and the buyer can book ITC only on the receipt of the tax invoice (not the advance payment receipt). This is a nuanced area — if in doubt, refer to our Input Tax Credit guide.
📚 Related Guides on Zerolev
📒 GST Journal Entries — All Transactions 🔄 Input Tax Credit — Eligibility & Reversal 💰 GST Refund Journal Entry Guide 📋 GSTR-3B Filing — Step-by-Step 🧾 GST e-Invoicing Guide 📊 GSTR-9 Annual Return Filing 🔍 GST Audit — GSTR-9C Reconciliation 🏢 GST Registration Process 📅 GST Compliance Calendar 2025–26