Goods and Services Tax (GST) is the single indirect tax that applies to the supply of almost every good and service in India. Understanding how it works, and where a given transaction fits into it, is the starting point for every other GST topic on this site: registration, returns, input tax credit, and refunds.
What GST Is
GST is a destination-based, multi-stage tax levied on the supply of goods and services. “Destination-based” means the tax revenue goes to the state where the goods or services are consumed, not where they are produced. “Multi-stage” means it is collected at every point in the supply chain, from manufacturer to final consumer, but only on the value added at each stage.
GST was introduced on 1 July 2017 under the 101st Constitutional Amendment Act, 2016, which inserted Article 246A (giving Parliament and state legislatures concurrent power to levy GST) and Article 269A (governing GST on inter-state trade) into the Constitution. It replaced a layered structure of central and state indirect taxes, including:
- Central excise duty
- Service tax
- Value Added Tax (VAT)
- Central Sales Tax (CST)
- Entry tax and octroi
- Luxury tax, entertainment tax, and purchase tax
The idea behind “One Nation, One Tax” was to remove the cascading effect of tax-on-tax under the older system, and to create a common national market with a uniform tax base across states.
How the Tax Actually Works
GST relies on Input Tax Credit (ITC): every registered person can claim credit for the GST they paid on their purchases, and set it off against the GST they collect on their sales. Tax is effectively paid only on the value added at each stage.
A simplified example at an 18% rate:
- A manufacturer buys raw material for ₹100 and pays ₹18 GST (total ₹118). This ₹18 becomes his input tax credit.
- He sells the finished product to a wholesaler for ₹150, charging ₹27 GST (total ₹177), and deposits ₹27 minus ₹18, or ₹9, with the government.
- The wholesaler sells to a retailer for ₹200, charging ₹36 GST, and deposits ₹9 (₹36 minus ₹27).
- The retailer sells to the final consumer for ₹250, charging ₹45 GST, and deposits ₹9 (₹45 minus ₹36).
The consumer, who cannot claim ITC, bears the full ₹45 embedded in the price. Each business in between only ever pays tax on its own margin. This chain is why unbroken ITC documentation matters so much in GST compliance.
The taxable event itself is “supply,” defined broadly under Section 7 of the CGST Act, 2017 to include sale, transfer, barter, exchange, licence, rental, lease, and disposal made for consideration in the course of business. This replaced the older, narrower taxable events of “manufacture” (excise), “sale” (VAT), and “provision of service” (service tax).
CGST, SGST, IGST: The Dual Structure
India runs a dual GST model, with both the Centre and the states taxing the same transaction:
- Intra-state supply (buyer and seller in the same state): CGST (Central GST) and SGST (State GST), or UTGST in Union Territories without a legislature, are charged together, usually splitting the applicable rate equally. An 18% supply within Maharashtra, for instance, is charged as 9% CGST plus 9% SGST.
- Inter-state supply (buyer and seller in different states) and imports: IGST (Integrated GST) is charged at the full rate, collected by the Centre and apportioned to the destination state.
The mechanics of cross-utilising ITC between these three heads, and the place-of-supply rules that decide which one applies, are covered in the dedicated CGST/SGST/IGST article.
Current GST Rates (Post GST 2.0)
The rate structure changed significantly in 2025. Following the 56th GST Council meeting on 3 September 2025, the earlier five-tier structure (0%, 5%, 12%, 18%, 28%) was rationalised into a simpler structure effective 22 September 2025:
| Rate | Applies broadly to |
|---|---|
| 0% (Nil) | Essential and life-saving goods and services: fresh food, specified healthcare and education, listed life-saving drugs |
| 5% | Mass-consumption and daily-use items |
| 18% | The standard, default rate: most goods and services, including the bulk of professional and business services |
| 40% | Luxury and “sin” goods: tobacco products, pan masala, aerated drinks, and select high-end goods |
| Special rates | 3% on gold, silver, and jewellery; 0.25% on rough diamonds |
If you have seen the older 12% and 28% slabs referenced elsewhere online, that content predates this rationalisation. Item-level classification still matters and can be disputed, so when the exact rate for a specific product or service is commercially important, it is worth confirming against the current HSN/SAC-wise notification rather than relying on a general guide.
What Falls Outside GST
A handful of items remain outside the GST net and continue to be taxed under the older regime:
- Alcohol for human consumption (state excise duty and state VAT)
- Five specified petroleum products: crude oil, petrol, high-speed diesel, aviation turbine fuel, and natural gas (currently under central excise and state VAT, pending a GST Council decision to bring them into GST)
- Electricity (state electricity duty)
Who Needs to Register
Registration is generally driven by aggregate turnover in a financial year, computed on a PAN-India basis across all business verticals and locations:
- Goods suppliers: ₹40 lakh in normal category states, ₹20 lakh in special category states (subject to conditions)
- Service providers: ₹20 lakh in normal category states, ₹10 lakh in special category states
Certain categories must register regardless of turnover, including inter-state suppliers, e-commerce operators and many sellers on e-commerce platforms, casual and non-resident taxable persons, and persons liable to pay tax under reverse charge. The full registration process, documentation, and these mandatory categories are covered in the dedicated GST Registration article.
Composition Scheme, Returns, and the Rest
Two things worth flagging here, without going into full detail:
- Small taxpayers below a specified turnover can opt into the Composition Scheme, paying a flat, lower rate on turnover with simplified compliance, in exchange for giving up ITC. Covered in the dedicated Composition Scheme article.
- Registered persons file periodic returns, primarily GSTR-1 (outward supplies), GSTR-3B (summary return and tax payment), and GSTR-9 (annual return). Each is covered separately under Returns.
FAQs
What does GST stand for?
Goods and Services Tax: a single indirect tax on the supply of goods and services across India.
When was GST introduced, and why?
On 1 July 2017, to replace a fragmented system of central and state indirect taxes with one uniform tax, removing tax-on-tax and creating a common national market.
What taxes did GST replace?
Primarily central excise duty, service tax, VAT, Central Sales Tax, entry tax and octroi, and luxury and entertainment taxes.
What is the difference between CGST, SGST, and IGST?
CGST and SGST apply together on supplies within a state; IGST applies on inter-state supplies and imports. All three are forms of the same GST, directed to different governments.
What are the current GST rates?
Primarily 0%, 5%, and 18%, with 40% on luxury and sin goods, and niche rates of 3% on gold, silver and jewellery and 0.25% on rough diamonds, effective from 22 September 2025.
Did GST rates recently change?
Yes. The 12% and 28% slabs were removed and most goods within them moved to 5% or 18%, under the GST 2.0 reforms approved at the 56th GST Council meeting.
What is Input Tax Credit (ITC)?
The credit a registered person gets for GST paid on purchases, which can be set off against GST collected on sales, so tax is paid only on value addition.
What is not covered by GST?
Alcohol for human consumption, five specified petroleum products (crude oil, petrol, diesel, ATF, natural gas), and electricity.
Who has to register for GST?
Businesses crossing ₹40 lakh (goods) or ₹20 lakh (services) turnover in normal category states, lower thresholds in special category states, and certain categories regardless of turnover, such as inter-state suppliers and e-commerce sellers.
What happens if a business doesn’t register after crossing the threshold?
It is treated as an unregistered taxable person and remains liable for GST, interest, and penalty on turnover from the date registration became mandatory, in addition to losing the ability to claim ITC for that period.
This article is for general information and does not constitute tax advice. GST classification, rates, and compliance requirements can be fact-specific. For guidance on your situation, contact Chhajer Yash & Co. at ychhajer17@gmail.com.
Chhajer Yash & Co. 
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