How to Maintain Proper Books of Accounts for GST & Income Tax

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How to Maintain Proper Books of Accounts for GST & Income Tax

Maintaining proper books of accounts is not just good practice – it is a legal requirement under both GST law and the Income Tax Act. Well-maintained accounts help businesses stay compliant, avoid penalties, and make informed financial decisions.

In this blog, we’ll explain what books of accounts you must maintain, legal requirements under GST and Income Tax, and practical tips to keep them updated throughout the year.

Why Maintaining Books of Accounts is Important

  • Legal Compliance: Avoid penalties under GST & Income Tax

  • Smooth GST Return Filing: Accurate records make return filing hassle-free

  • Better Financial Planning: Helps track revenue, expenses, and profitability

  • Easy Audits: Well-organized accounts simplify GST or tax audits

Legal Requirements for Maintaining Books of Accounts

Under GST Law

Section 35 of the CGST Act mandates every registered taxpayer to maintain:

  • Sales Register (Outward Supplies)

  • Purchase Register (Inward Supplies)

  • Stock Register

  • Input Tax Credit (ITC) Ledger

  • Output Tax Liability Ledger

  • Tax Payment Records

These records must be kept at the principal place of business and preserved for 72 months (6 years) from the due date of annual return.

Under Income Tax Act

Section 44AA of the Income Tax Act requires businesses and professionals to maintain books of accounts if:

  • Total income exceeds ₹2.5 lakh OR

  • Turnover exceeds ₹25 lakh for business / ₹50 lakh for profession

Common books required under Income Tax:

  • Cash Book

  • Ledger (Receipts & Payments)

  • Journal (if mercantile system is followed)

  • Bills and Vouchers (supporting documents)

  • Fixed Asset Register

Practical Tips for Maintaining Proper Books

1. Use Accounting Software

Instead of manual bookkeeping, use software like Tally, Zoho Books, QuickBooks, or Busy.

  • Auto-generates GST-compliant invoices

  • Tracks input tax credit

  • Prepares profit & loss and balance sheet automatically

2. Maintain GST-Compliant Invoices

Each invoice must include:

  • GSTIN of supplier & recipient

  • Invoice number & date

  • HSN/SAC codes

  • Taxable value and GST breakup (CGST/SGST/IGST)

Incorrect invoices may lead to denial of ITC and notices from GST department.

3. Reconcile GSTR-2B with Purchase Register

Every month, reconcile input tax credit from GSTR-2B with your purchase register to ensure ITC is correctly claimed and mismatches are avoided.

4. Track Cash & Bank Transactions

Maintain daily cash book and reconcile bank statements monthly.
Unexplained cash deposits can lead to scrutiny under the Income Tax Act.

5. Keep Proper Stock Records

Under GST, maintaining an accurate stock register is mandatory.

  • Record opening stock, purchases, sales, and closing stock

  • Useful during GST audits and for valuation purposes

6. Preserve Supporting Documents

Keep physical or digital copies of:

  • Purchase invoices

  • Sales invoices

  • Expense bills

  • Payment proofs

  • E-way bills

Preserve them for at least 6 years for both GST and Income Tax compliance.

7. Conduct Periodic Reviews

Review your books quarterly with a CA or accountant:

  • Identify errors early

  • Avoid last-minute rush during GST annual return or tax audit

  • Get advice on tax-saving opportunities

Penalties for Not Maintaining Proper Books

  • Under GST: Penalty of ₹25,000 for failure to maintain proper records

  • Under Income Tax: Penalty of ₹25,000 under Section 271A (and higher penalties under Section 271B for audit failures)

Proper bookkeeping helps you avoid these unnecessary costs.

Conclusion

Maintaining proper books of accounts is crucial for smooth business operations, GST compliance, and income tax filing. Use digital tools, reconcile regularly, and consult professionals to ensure error-free records.

Remember: Good books mean fewer notices, fewer penalties, and better financial control.

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