Inventory Management for Small Business in India: GST Rules & Methods

Ask a shop owner how many cartons of something they have, and there are often two answers: what the register says, and what's on the shelf. When they disagree, nobody can tell which entry went wrong, or when.

Inventory management is keeping those two numbers the same. This guide covers what GST law asks you to record, how to value stock, the mistakes that make it drift, and how to keep count without copying every bill into a register.

What inventory management means for a small business

Inventory, or stock, is the goods you hold to sell, or to make things to sell. Managing it means knowing, for each item, how many you have, where they are and what they're worth.

Business	What it involves
Kirana or retail shop	Hundreds of small items, some sold loose by weight; reordering before they run out
Trader or distributor	Cartons and bags in a godown, bought on credit, sent out to retailers, some coming back
Small manufacturer	Raw material in, goods out to a job worker and back, finished goods, scrap and wastage

Why the register and the shelf drift apart

Stock on paper is right only if every movement is written down once, on the day it happens. It drifts when:

• a sale is billed but the register isn't updated, or is updated twice;
• returned goods never go back into the count;
• a purchase isn't entered until its bill turns up;
• goods sent for job work or on approval are written off as sold, or forgotten;
• a broken or expired item is thrown away without a note;
• an old entry is overwritten, so nobody can see what changed.

Each is one missed or doubled entry, and they add up. Reading thousands of Play Store reviews that Indian business owners left for their billing apps, we saw the result again and again: the count doesn't match the shelf.

What GST law asks you to keep

If you're registered under GST and deal in goods, stock records aren't optional. Section 35(1) of the CGST Act asks every registered person to keep a true and correct account of their stock of goods, and rule 56(2) of the CGST Rules lists what it must show:

The stock account must show	For example
Opening balance	What you had when the period began
Receipts	Purchases, goods returned by customers
Supplies	Sales and other supplies
Goods lost, stolen, destroyed, written off, or given as gifts or free samples	Each with its reason, never just deleted
Balance	Including raw materials, finished goods, scrap and wastage

Composition dealers are left out of rule 56(2), though section 35 still applies to them. Manufacturers also keep monthly production accounts (rule 56(12)).

Three more rules:

• Each place keeps its own. If your registration lists more than one place of business, each one's accounts are kept there (section 35(1)). Keep the address of every place you store goods, including goods in transit, with the stock held there (rule 56(5)).
• No overwriting. In a paper register, a wrong entry is struck out under attestation and the correct one written after it. Electronic records must keep "a log of every entry edited or deleted" (rule 56(8)).
• Keep them 72 months from the due date of that year's annual return (section 36). That's 31 December after the year ends, so records for 2025-26 are kept until at least 31 December 2032, and longer for anything under appeal or investigation.

Stock you can't explain is taxed as sold

Under section 35(6), goods you fail to account for are taxed as if you had supplied them.

Goods genuinely lost are treated differently, if you record them. Section 17(5)(h) blocks input tax credit on goods lost, stolen, destroyed, written off, or given as gifts or free samples, and 17(5)(g) on goods used for personal consumption. Credit already claimed on them is reversed (GSTR-3B Table 4(B)(1)). A recorded loss costs you the credit; an unexplained gap can be taxed as a sale.

Goods on a delivery challan are still your stock

Goods that leave on a delivery challan for job work, on approval, to an exhibition or for repair haven't been sold, and GST treats them as still yours:

• Job work (section 143). You send inputs or capital goods to a job worker without tax, and "the responsibility for keeping proper accounts for the inputs or capital goods shall lie with the principal": you. Inputs must come back, or be supplied from the job worker's premises, within one year, and capital goods within three (moulds, dies, jigs, fixtures and tools excepted), or they're treated as supplied on the day they left.
• Sale on approval (section 31(7)). The invoice is due when the customer keeps the goods, or six months after they left, whichever is earlier. Until then, they're yours.

So keep these goods on a separate line, held on challan: still owned and counted in your stock's value, but not on the shelf to sell. If they come back, they return to the shelf; if the customer keeps them, the invoice takes them out, once.

You can make a job work or approval challan free, no sign-up needed to build it.

How to value your stock

Closing stock goes into your balance sheet, and often your bank's stock statement. The accounting standard AS 2 sets the rule: value stock at the lower of cost and net realisable value, meaning what it would sell for in the normal course, less the cost of finishing and selling it. For most stock that's above cost, so cost is the number; damaged or slow-moving stock may be worth less, and is written down.

What counts as cost

Cost is what it took to get the goods onto your shelf: the purchase price plus freight inwards and similar costs, less trade discounts. It leaves out taxes you get back. Buy a carton for ₹1,000 plus ₹180 GST (18%, still the standard rate after GST 2.0), claim the ₹180 as input tax credit, and the carton cost ₹1,000. A composition dealer can't claim the credit, so for them it cost ₹1,180.

FIFO or weighted average: a worked example

When you've bought the same item at different prices, which price does what's left carry? For ordinary, interchangeable goods AS 2 allows two methods, and LIFO isn't one of them:

• FIFO (first in, first out): the oldest stock sells first, so what's left carries the latest prices.
• Weighted average: each unit carries the average cost of everything bought, worked out for the period or after each purchase.

A shop selling LED bulbs:

	Bulbs	Rate	Value
Opening stock, 1 April	100	₹60	₹6,000
Bought, 10 April	200	₹66	₹13,200
Available	300		₹19,200
Sold in April	180
Left on 30 April	120

• FIFO: the 180 sold were the 100 old bulbs and 80 new ones, so the 120 left all carry ₹66: ₹7,920.
• Weighted average: ₹19,200 ÷ 300 = ₹64 a bulb, so the 120 left are worth ₹7,680.

When prices rise, FIFO shows a higher closing stock, and so a higher profit; weighted average smooths the swings. Both are allowed: choose one with your CA and keep to it.

Common stock mistakes

1. Deducting challan goods twice: once when they go out on an approval challan, again when they're invoiced. Deduct once, when the sale happens.
2. Not putting returns back. A sales return gets a credit note, but the goods never re-enter the count. Or the reverse: a credit note for a discount, where nothing came back, adds stock that isn't there.
3. Letting stock go negative. Minus 6 bulbs almost always means a missed purchase or a wrong opening count. Leaving the minus there hides the real gap.
4. Editing old bills. Changing a three-month-old invoice quietly rewrites the stock history behind it. Correct a sale with a credit or debit note, and stock with a dated adjustment that says why.
5. No opening stock. If the first line is "sold 12", every balance after it is wrong. Count on a fixed date, such as 1 April, and enter that first.
6. Valuing at selling price, or with the GST you claim back. Stock is worth what it cost you.

Stock register, Excel or software?

	Paper register	Excel sheet	Billing software with stock
Updates when you bill	No, written separately	No, typed separately	Yes, from the bill itself
Corrections	Struck out and attested	Easily overwritten, with no edit log	Look for a visible history of changes
Stock value	Worked out by hand	Formulas you maintain	Worked out for you
Suits	A few dozen items, low volume	One person updating a modest list	Anyone billing goods every day

The first two keep stock apart from the bills, so every sale is written twice, and any missed one is a gap.

How to track stock in CredHill

CredHill's stock tracking is built so that every number explains itself. You never type in a stock figure. Every document that moves goods (an invoice, a delivery challan, a credit note, a purchase bill, a stock adjustment) adds a line to the item's stock ledger, and the stock is the total of those lines, like a bank passbook. If a number looks wrong, the ledger shows the line behind it, linked to its document. Edit or delete a document and nothing is rewritten: the old line stays, with the line that undid it, marked Edited or Deleted.

It's off until you switch it on for an item, services are never tracked, and like the rest of CredHill it's free. Step by step (or the whole feature on one page):

1. Track stock on an item. In Item Master, edit or add an item and switch on Track stock. Enter the Opening stock, its Cost per unit before GST and the As on date you counted it, plus an optional Reorder level, at or below which it shows as Low. Decimals work, like 0.425 kg. Documents dated before the As on date never touch its stock.
2. Or import from Excel, with columns for opening stock, opening cost, opening date, purchase price, reorder level and track stock. New items arrive with their stock; items already in CredHill are skipped.
3. Bill as usual. Pick each item from your Item Master as you bill (the list shows "42 in stock", "3 left" or "Out of stock"), and a saved invoice takes it out of stock. A line needing more than you have warns "Only 3 in stock", and saving asks Go back or Save anyway (or blocks it, if you choose that in Invoice Settings → Inventory). Edit an invoice and only the difference moves; delete it and the goods come back.
4. Challan goods stay yours. A challan for job work, approval, an exhibition, or demo or repair moves goods from the godown to held (With job worker, On approval and so on): owned, but not for sale. Mark it Returned and they come back. When an approval challan becomes an invoice, the invoice takes the goods from held stock, never twice; what the customer didn't keep returns to the godown.
5. Credit notes ask "Did the goods come back?" Choose Yes, back to stock or No, value only; it starts at Yes for a sales return and No for a discount or rate correction. On Yes, the lines copied from the invoice come back into stock. (Make a one-off credit note free; stock tracking needs a free account.)
6. Record purchase bills from the PO. On a purchase order (what goes on one; make one free), choose More → Record bill / Receive goods. It opens with each line's quantity still to come; add the vendor's bill number and date, and the goods come in at the bill's rate, without any GST you can claim back. No bill yet? Leave the number blank and it's saved as "Goods received, bill awaited". The PO shows "Received 30 of 50" and closes itself when everything is in.
7. Adjust stock with a reason. For breakage, theft, a free sample or a count correction, use Adjust stock. The reasons follow rule 56's words (lost, stolen, destroyed, written off, gift or free sample and more), and those under section 17(5) are marked ITC to reverse for your accountant.
8. Read the summary and each item's ledger. Inventory → Stock Summary shows your stock value, what's low, out or held on challans, and every tracked item. Open one for its figures, each with its working (value reads "480 × ₹9.75"), and its ledger: date, document, where, in, out and balance. Each invoice, challan and credit note shows a Stock card too: "Laptop 14-inch −2 PCS from Main godown".

Stock is valued at average purchase cost: the cost of everything bought, opening stock included, divided by the quantity bought, without GST you can claim back. Selling prices never change it.

CredHill counts stock in one godown, in each item's own unit; it doesn't handle batches, expiry dates, serial numbers or barcodes.

Frequently asked questions

Stock register kaise banaye?

Give each item its own page or sheet, with columns for date, particulars (the bill or challan number), in, out and balance. Start from a physical count, write every movement on the day, and never overwrite: strike out the wrong entry and write the right one below. In CredHill, each item's stock ledger is that register, filled from your bills.

Godown ka stock kaise maintain kare?

Keep a separate count for each place you store goods, with its full address (rule 56(5)). Goods found at an undeclared place without valid documents can be taxed as if sold (rule 56(6)), so check with your CA that every godown is on record. Between your own godowns under one GSTIN, goods move on a delivery challan, without tax. CredHill counts one godown, with challan goods shown as held.

Is a stock register mandatory under GST?

Yes, for registered businesses dealing in goods: section 35 requires an account of stock, and rule 56(2) lists what it must show. Composition dealers are outside rule 56(2), but not section 35.

Can I keep my stock register in Excel?

Electronic records are allowed, but rule 56(8) asks for "a log of every entry edited or deleted", and a plain spreadsheet keeps none. If you use Excel, never change old rows; add a dated correction that says why.

What if my stock doesn't match in a GST audit?

Goods you can't account for can be taxed as if supplied (section 35(6)). Goods recorded as lost, stolen, destroyed, written off or given away are treated differently: you reverse the input tax credit on them (section 17(5)(h)).

Closing stock ki value kaise nikale?

Multiply the quantity left by its cost, not its selling price, without the GST you've claimed back. Use FIFO or weighted average consistently, and write down anything damaged to what it would fetch. In CredHill, each item's value shows its working: quantity × average purchase cost.

How often should I count stock?

Count fast movers monthly and everything at least once a year, before closing the books. Post each difference as a correction with its reason (in CredHill, a Stock count correction), and trace big gaps before writing them off.

Not tax advice. The sections and rules cited are the CGST Act and Rules as of October 2026. For job work, composition and write-offs especially, check how they apply to you with a chartered accountant.