FinanceIndiaTax

How GST Works in India: A Complete Guide

Everything Indian business owners, freelancers, and startup founders need to know about GST — slabs, CGST vs IGST, ITC, registration thresholds, and common invoicing mistakes.

8 min read

TL;DR — Key Points

GST launchGoods and Services Tax replaced VAT, Service Tax, and 17 other indirect taxes on July 1, 2017 under the 'One Nation, One Tax' framework.

GST slabsFour main slabs: 5%, 12%, 18%, 28%. Plus 0% (exempt) and 3% (gold/silver). Most services fall under 18%. Most daily necessities are 0% or 5%.

CGST + SGSTFor intra-state (within same state) supply, GST is split equally: half goes to Centre (CGST), half to State (SGST). 18% GST = 9% CGST + 9% SGST.

IGSTFor inter-state supply (across states) or imports, the full GST is charged as Integrated GST (IGST) and goes to the Centre, which then distributes to states.

Input Tax Credit (ITC)Registered businesses can offset GST paid on purchases against GST collected on sales. Only the net GST (output − input) is paid to the government.

Registration thresholdMandatory registration if turnover exceeds ₹20 lakh/year (₹10 lakh for special category states). E-commerce sellers must register regardless of turnover.

What Is GST and Why Was It Introduced?

Goods and Services Tax (GST) is a comprehensive, destination-based, multi-stage indirect tax that replaced over 17 central and state taxes in India on July 1, 2017. Before GST, India's indirect tax system was a complex patchwork — VAT at the state level, Service Tax and Central Excise at the Centre, plus Entry Tax, Octroi, and various state-specific levies that created a cascade of taxes on top of taxes. A product could be taxed at multiple stages with no credit for taxes already paid, inflating prices and creating enormous compliance burdens.

GST was designed on the principle of "One Nation, One Tax, One Market." Its key innovation is the seamless Input Tax Credit (ITC) chain — each registered business in the supply chain pays GST on its sales but receives credit for GST paid on its purchases. Only the net tax reaches the government, eliminating cascading. A manufacturer pays GST on raw materials, claims that as ITC, then pays GST on the finished goods sold — only the value added at each stage is taxed.

GST is a dual structure — both the Centre and States levy GST simultaneously. For supplies within a state, it splits into CGST (Central) and SGST (State). For cross-state supplies, it becomes IGST (Integrated), which the Centre collects and distributes to the destination state. This dual structure was necessitated by the federal nature of India's constitution, where both Centre and States have the right to levy indirect taxes.

For businesses, GST registration creates both an obligation (to collect and remit tax) and a benefit (to claim ITC on inputs). For registered businesses buying from you, your GSTIN on the invoice is critical — it allows them to claim ITC, making you a more attractive supplier than an unregistered competitor. Understanding when you are required to register, and when voluntary registration is beneficial, is the first practical decision every Indian business owner must make.

GST Slabs and What Falls Under Each

GST rates are set by the GST Council (a constitutional body with Union Finance Minister as Chair and state finance ministers as members). The Council meets periodically and revises rates. The current slab structure:

GST Rate	Common Examples	Key Notes
0% (Exempt)	Fresh vegetables, fruits, milk, eggs, bread, salt, cereals, educational services, healthcare	Essential food items and basic necessities. No GST charged, no ITC available.
0% (Nil-rated)	Fresh fish, meat, honey, newspapers, hotels below ₹1,000/night	Different from exempt — nil-rated means taxable at 0%, ITC rules differ.
3%	Gold, silver, precious metals and jewellery	Special slab for precious metals only.
5%	Packaged food, edible oils, sugar, tea, coffee, household items, economy class air travel, restaurants in hotels below ₹7,500/night	Basic goods and essential services.
12%	Processed foods, fruit juices, computers, business class air travel, medicines (most)	Mid-range goods and some services.
18%	Software, IT services, consulting, financial services, mobile phones, appliances, restaurants, most professional services	The most common slab for services. Most B2B transactions.
28%	Luxury cars, tobacco, aerated drinks, casinos, online gaming (real money), cement, luxury goods	Sin goods and luxuries. Often has additional cess on top.

Note: GST rates change periodically. Always verify the current rate for your specific goods or services using the GST Rate Finder on the official GST portal (gst.gov.in) or by checking the latest GST Council notification. The HSN (Harmonised System of Nomenclature) code for goods and SAC (Service Accounting Code) for services determines the applicable rate.

CGST, SGST, and IGST — The Three Components

The type of GST charged depends on whether the supply is within the same state (intra-state) or across states (inter-state). The total tax burden on the buyer is the same in both cases — the difference is how the revenue is divided between Centre and State:

Supply Scenario	GST Type	Invoice Example	Revenue Goes To
Mumbai seller → Mumbai buyer (intra-state)	CGST + SGST	18% GST = 9% CGST + 9% SGST. Both appear on invoice separately.	CGST to Centre, SGST to Maharashtra
Mumbai seller → Delhi buyer (inter-state)	IGST	18% GST = 18% IGST on invoice. Single line item.	IGST to Centre, Centre distributes to Delhi
Bengaluru seller → export (outside India)	Zero-rated (IGST = 0%)	Export is zero-rated. Exporter can claim refund of input taxes paid.	No GST collected; refund of input taxes available
Import into India	IGST (+ Customs Duty)	IGST charged at point of import on (Customs Value + Customs Duty). Treated like inter-state.	IGST to Centre, Centre distributes to destination state

The place of supply rules determine whether a transaction is intra-state or inter-state. For goods, the place of supply is where the goods are delivered. For services, it is generally the location of the recipient. Special rules apply to certain services (like immovable property, transportation, digital services from abroad) — always verify the applicable place of supply rule before raising an invoice.

Input Tax Credit — What Qualifies and What Doesn't

ITC is the most powerful feature of GST for businesses — it eliminates the cascading tax-on-tax effect and effectively means registered businesses only pay tax on the value they add. However, Section 17(5) of the CGST Act specifically blocks ITC for certain categories even when the purchase is for business use:

Purchase Item	ITC Eligible?	Notes
Raw materials for manufacturing	Yes	Fully eligible — directly used in business output
Office computers and equipment	Yes	Capital goods used in business — eligible
Software subscriptions (Zoom, AWS, etc.)	Yes	Business service — eligible if used for taxable supplies
Business travel (flights, hotels)	Yes	Eligible if for business purpose and proper invoice
Food and beverages for employees	No	Section 17(5) blocks — food/beverages unless for resale or catering business
Personal car purchase	No	Motor vehicles for personal use blocked under Section 17(5)
Health insurance for employees	No (partial)	Group health insurance ITC blocked. Only if legally obligated under any law.
Construction of building	No	Works contract and construction blocked — even if for business premises

GST Registration Thresholds

Registration becomes mandatory when your aggregate turnover (total sales across all businesses, all states) crosses the threshold. Note that aggregate turnover includes exempt and nil-rated supplies — it is not just taxable turnover:

Category	Threshold	Notes
Regular businesses (goods)	₹40 lakh/year	Increased from ₹20L to ₹40L for goods suppliers from April 2019
Regular businesses (services)	₹20 lakh/year	Remains at ₹20 lakh for service providers
Special category states (goods)	₹20 lakh/year	J&K, Himachal, Uttarakhand, NE states, Manipur, Nagaland, etc.
Special category states (services)	₹10 lakh/year	Lower threshold for hilly/NE states
E-commerce sellers	No threshold	Must register regardless of turnover — even ₹1 of sales on Amazon/Flipkart
Casual taxable persons	No threshold	Must register before making any taxable supply in a state where not resident
Non-resident taxable persons	No threshold	Must register before supplying goods/services in India

How to Handle Common GST Scenarios

You are a freelancer/consultant billing a client in the same state

→ Charge CGST + SGST. For 18% GST on a ₹50,000 invoice: 9% CGST = ₹4,500 + 9% SGST = ₹4,500. Total invoice: ₹59,000.

You are billing a client in a different state (e.g., Mumbai to Delhi)

→ Charge IGST only. For 18% GST on ₹50,000: 18% IGST = ₹9,000. Total invoice: ₹59,000. Same total tax, different type.

Your annual turnover is below ₹20 lakh and you want to know if you need GST registration

→ If you are a service provider under ₹20 lakh turnover in a non-special-category state, GST registration is not mandatory. However, voluntary registration allows you to claim ITC and issue GST invoices to registered clients who need ITC.

You want to know if a purchase qualifies for Input Tax Credit

→ Ask three questions: (1) Are you a registered GST taxpayer? (2) Is the purchase used for your taxable business activity? (3) Is the supplier's invoice GSTIN-valid and filed? If all three yes, and the item is not in Section 17(5) blocked list, ITC is available.

Your client is asking for a GST invoice but you are not registered

→ Unregistered persons cannot charge GST or issue GST invoices. If your client needs a GST invoice for ITC purposes, you may need to register voluntarily. Do not add GST on invoices without being registered — it is illegal and you cannot deposit that GST with the government.

You are an e-commerce seller on Amazon or Flipkart

→ Register for GST immediately regardless of your turnover. E-commerce operators are required to collect TCS (Tax Collected at Source) at 1% only from registered sellers. GSTIN is mandatory to list on Amazon, Flipkart, Meesho, and other major platforms.

GST Calculation Scenarios with INR Examples

Business Scenario	GST Calculation and Result
Bengaluru IT consultant billing ₹1,00,000 to Mumbai company	Inter-state: IGST 18% = ₹18,000. Total invoice: ₹1,18,000. Mumbai company can claim ₹18,000 as ITC.
Delhi retailer buying goods from Delhi wholesaler for ₹50,000	Intra-state: CGST 9% = ₹4,500 + SGST 9% = ₹4,500. Total: ₹59,000. Retailer claims ₹9,000 ITC.
Freelancer earning ₹15 lakh/year — needs GST registration?	Service provider under ₹20 lakh threshold. Not mandatory. Consider voluntary registration if clients need ITC.
Startup with ₹25 lakh revenue — monthly GST liability calculation	Revenue ₹25L, GST collected 18% = ₹4.5L. ITC on purchases ₹50,000. Net GST payable = ₹4,50,000 − ₹50,000 = ₹4,00,000 for the year.
Extracting base price from GST-inclusive amount of ₹1,18,000	18% inclusive: Base = ₹1,18,000 ÷ 1.18 = ₹1,00,000. GST = ₹18,000. Use reverse calculation.
Restaurant bill of ₹2,000 — what GST rate applies?	Standalone restaurant or hotel below ₹7,500/night: 5% GST (no ITC). Hotel restaurant above ₹7,500/night: 18% GST (with ITC).

Frequently Asked Questions

What is the difference between CGST, SGST, and IGST?

All three are components of GST — they differ only in who receives the revenue. CGST (Central GST) goes to the Central Government. SGST (State GST) goes to the State Government. For any intra-state supply, GST is split equally between these two — 18% becomes 9% CGST + 9% SGST on the invoice. IGST (Integrated GST) applies to inter-state supplies and imports — the full tax rate goes to the Centre, which then distributes the state's share. The buyer's total tax burden is identical in both cases.

When must I register for GST?

Mandatory registration is required if: (1) your aggregate turnover exceeds ₹20 lakh/year for services (₹40 lakh for goods in most states); (2) you sell goods or services across state lines regardless of turnover; (3) you sell on any e-commerce platform (Amazon, Flipkart, Meesho, etc.) regardless of turnover; (4) you are a casual taxable person or non-resident taxable person making supplies in India. Voluntary registration is possible below these limits and beneficial if your clients are registered businesses who need your GSTIN for ITC claims.

What is Input Tax Credit (ITC) and how do I claim it?

ITC allows you to offset GST you paid on purchases (input tax) against GST you collected on sales (output tax). Only the net difference is paid to the government. To claim ITC: (1) you must be a GST-registered taxpayer; (2) you must have a valid tax invoice from a GST-registered supplier; (3) the supplier must have filed their returns and paid the tax — ITC is reflected in your GSTR-2B automatically; (4) the goods/services must be used for your taxable business supplies; (5) the purchase must not be in the Section 17(5) blocked list (food, personal vehicles, construction, etc.).

What is the Composition Scheme?

The Composition Scheme is a simplified GST option for small businesses with turnover up to ₹1.5 crore (₹75 lakh for service providers). Under this scheme, businesses pay GST at a flat rate (1% for traders, 2% for manufacturers, 5% for restaurants) without claiming ITC. Returns are filed quarterly instead of monthly. The limitation: composition dealers cannot charge GST on invoices (they pay it themselves), cannot claim ITC, and cannot make inter-state supplies. It simplifies compliance but reduces competitiveness with large GST-registered clients who need ITC.

What is Reverse Charge Mechanism (RCM) in GST?

Under Reverse Charge Mechanism, the buyer (not the seller) is liable to pay GST to the government. RCM applies in specific situations: (1) supply from an unregistered dealer to a registered dealer for specified goods/services; (2) specified services like legal services from an advocate to a business, goods transport agency (GTA) services, director's remuneration, import of services from outside India. Under RCM, the buyer pays the GST, can claim ITC for it (if eligible), and the transaction appears in their GST return.

How often do I need to file GST returns?

Filing frequency depends on your scheme and turnover. Under QRMP (Quarterly Return Monthly Payment) scheme for taxpayers with up to ₹5 crore turnover: GSTR-1 (sales) quarterly, but tax paid monthly via PMT-06. GSTR-3B (summary return + tax payment) quarterly. For taxpayers above ₹5 crore: GSTR-1 monthly, GSTR-3B monthly. Annual return (GSTR-9) is mandatory for all registered taxpayers above ₹2 crore turnover. Late filing attracts ₹50/day penalty (₹20/day for nil returns) capped at ₹10,000 per return.

Can I claim GST refund on exports?

Yes — exports are zero-rated under GST, meaning you charge 0% GST to the foreign buyer but can claim a refund of all input taxes paid on the inputs used to produce the exported goods or services. There are two refund routes: (1) Export under LUT (Letter of Undertaking) — export without paying IGST and claim refund of input taxes; (2) Export with payment of IGST — pay IGST on export invoice and claim full refund of IGST paid. Most exporters prefer the LUT route as it avoids blocking working capital in IGST payments.

What is E-way bill and when is it required?

An E-way bill is an electronic document required for movement of goods worth more than ₹50,000 within or between states. It is generated on the GST portal (ewaybillgst.gov.in) before the goods are moved. The bill contains details of the supplier, recipient, goods, vehicle, and route. It is valid for 1 day per 200 km of distance. Failure to carry a valid E-way bill can result in seizure of goods and penalties equal to 100% of the tax due or ₹10,000, whichever is higher. Certain goods and movements are exempt from E-way bill requirements.