The Goods and Services Tax is a single indirect tax on the supply of most goods and services in India. It came into effect on 1 July 2017 and replaced a tangle of older levies: VAT, service tax, central excise, octroi, entry tax and several others that each applied at different points and often stacked on top of one another.
It is an indirect tax, meaning it is collected by businesses but ultimately borne by the final consumer. Your income tax and TDS are direct taxes on you. GST is a tax on what you buy.
The three components
Every GST transaction splits into components depending on where buyer and seller are located.
- CGST goes to the central government
- SGST goes to the state government
- IGST applies to inter-state supplies and imports, and is later apportioned between centre and state
For a sale within Maharashtra at 18%, the invoice shows 9% CGST and 9% SGST. For a sale from Maharashtra to Karnataka at 18%, it shows 18% IGST. The total you pay is the same either way, so this split matters to businesses filing returns rather than to you as a buyer.
Rate slabs
GST has historically operated on a multi-rate structure, with the main slabs being 5%, 12%, 18% and 28%, plus a nil rate for essentials and a compensation cess on a few categories such as tobacco and large vehicles.
Broadly, essential food items and basic services sit at the lower end, most standard goods and services at 12% or 18%, and luxury and demerit goods at the top. Petrol, diesel, alcohol for human consumption and electricity remain outside GST and continue to be taxed separately by states, which is one reason fuel prices vary so much across state borders.
Rate slabs and the classification of individual items are decided by the GST Council and have been revised repeatedly since 2017, including a significant restructuring exercise. Check the current rate for a specific item rather than assuming a figure.
Input tax credit, which is the whole design
This is the mechanism that makes GST different from the taxes it replaced, and it is worth understanding even as a consumer.
A registered business can claim credit for the GST it paid on its own purchases and set that off against the GST it collects on sales. So tax is effectively charged only on the value added at each stage rather than compounding at every link in the chain.
A simplified chain at 18%:
| Stage | Value added | GST charged | Credit claimed | Net paid |
|---|---|---|---|---|
| Manufacturer | Rs 1,000 | Rs 180 | Nil | Rs 180 |
| Wholesaler | Rs 400 | Rs 252 | Rs 180 | Rs 72 |
| Retailer | Rs 600 | Rs 360 | Rs 252 | Rs 108 |
The government collects Rs 360 in total, which is exactly 18% of the Rs 2,000 final price. The consumer pays it. Nobody in the chain pays tax on tax, which is what used to happen under the older cascading system.
When you actually see it
On a Rs 1,000 service taxed at 18%, your invoice reads Rs 1,180, of which Rs 180 is GST. Common consumer touchpoints include restaurant bills, telecom and broadband, insurance premiums, hotel stays, and the interest and fees on a credit card.
That last one surprises people: GST applies to credit card interest and charges, so the effective cost of carrying a balance is higher than the stated interest rate alone.
Registration and compliance for small businesses
Registration is mandatory once turnover crosses a specified threshold, with separate limits for goods and services and lower limits for certain special category states. Registration is also compulsory regardless of turnover in some cases, such as inter-state supply of goods and most e-commerce selling.
Registered businesses file periodic returns, with the main ones being an outward supplies statement and a summary return, plus an annual return above a turnover threshold. A composition scheme is available for very small businesses, offering a flat low rate with simplified filing but no input tax credit.
Thresholds, return formats and due dates have changed frequently since 2017. A small business should confirm current requirements on the GST portal or with a practitioner rather than working from older guidance.
Common misconceptions
GST is not a tax on income. A freelancer charging GST is collecting it on behalf of the government; it is not part of their earnings and it does not reduce their income tax.
Charging GST without registration is illegal. If an invoice shows GST, it should show a valid GSTIN, and you can verify it on the GST portal.
GST is not always in addition to the price. Consumer goods are typically sold at an MRP that is inclusive of GST. Use our GST calculator to work backwards from an inclusive price or forwards from an exclusive one.