How GST Works in India: Rates, Registration, Returns, and Input Tax Credit
GST replaced 17 different taxes in India with a single indirect tax — understanding it is now unavoidable for anyone running a business.
When India launched GST on 1 July 2017, it replaced a patchwork of 17 central and state taxes — including excise duty, service tax, VAT, and octroi — with a single consumption tax. Nearly a decade in, GST is the backbone of indirect taxation for every business selling goods or services in India. This guide explains how it works, what rates apply, when you must register, and how to file returns.
The Structure of GST: CGST, SGST, and IGST
GST is a dual levy: both the central government and state governments collect a share.
| Transaction | Tax Applied | Goes to |
|---|---|---|
| Within the same state | CGST + SGST (equal split) | Centre + State |
| Between two states (inter-state) | IGST | Centre (later distributed to destination state) |
| Import of goods | IGST + Customs Duty | Centre |
If you are a Mumbai-based company selling to a client in Mumbai, you charge CGST (9%) + SGST (9%) = 18%. If you sell to a client in Delhi, you charge IGST (18%) instead. The total tax is the same; only the accounting and recipient of the tax differs.
GST Rate Slabs
India uses a multi-rate structure:
| Slab | Examples |
|---|---|
| 0% (Exempt) | Fresh fruits, vegetables, milk, bread, salt, textbooks, healthcare services, educational services |
| 5% | Packaged food grains, edible oil, sugar, domestic LPG, economy class air travel, restaurant services in specified categories |
| 12% | Butter, cheese, frozen meat, cell phones, non-AC restaurants |
| 18% | Most services (IT, consulting, banking fees, telecom), most manufactured goods, AC restaurants, hotel rooms above ₹7,500/night |
| 28% | Luxury items: automobiles, tobacco, aerated drinks, five-star hotel services, casinos, online gaming |
Additionally, a cess is levied on top of 28% for certain luxury and demerit goods (high-end cars, pan masala, cigarettes).
When Must You Register for GST?
GST registration is mandatory if:
| Condition | Threshold |
|---|---|
| Aggregate turnover for goods (most states) | Exceeds ₹40 lakh per year |
| Aggregate turnover for services (most states) | Exceeds ₹20 lakh per year |
| Special category states (North-East, hilly states) | ₹10 lakh for services |
| Selling on e-commerce platforms (Amazon, Flipkart) | No threshold — mandatory from day one |
| Inter-state supply | No threshold — mandatory regardless of turnover |
Below the threshold, registration is voluntary. Voluntary registration lets smaller businesses claim Input Tax Credit and appear more credible to B2B clients. Use the GST calculator to compute GST on your sales and purchases.
How GST is Calculated
Formula:
GST Amount = Taxable Value × (GST Rate ÷ 100)
Invoice Total = Taxable Value + GST Amount
Example:
IT service invoice — taxable value: ₹1,00,000, GST rate: 18%
GST amount = ₹1,00,000 × 18% = ₹18,000
Total invoice = ₹1,18,000
For intra-state supply:
CGST payable = ₹9,000
SGST payable = ₹9,000
Filing GST Returns: The Key Forms
Registered businesses must file returns periodically:
| Return | Who Files | Frequency | What It Contains |
|---|---|---|---|
| GSTR-1 | All registered taxpayers | Monthly (or quarterly under QRMP) | Outward supply details (sales) |
| GSTR-3B | All registered taxpayers | Monthly | Summary of sales, ITC claimed, tax payable |
| GSTR-9 | Annual return | Annually (by 31 December) | Annual reconciliation |
| GSTR-4 | Composition scheme dealers | Annually + quarterly statement | Turnover and tax paid summary |
QRMP scheme: Taxpayers with turnover up to ₹5 crore can file GSTR-1 quarterly but pay taxes monthly using a fixed sum (Invoice Furnishing Facility). This reduces compliance burden for smaller businesses.
Late filing attracts interest at 18% per annum on tax due, plus penalties. Timely filing is non-negotiable.
Composition Scheme: A Simpler Option for Small Businesses
Businesses with turnover up to ₹1.5 crore (goods) or ₹50 lakh (services) can opt for the Composition Scheme:
- Pay a flat tax rate (1% for traders, 5% for restaurants, 6% for services)
- File only one quarterly return instead of monthly
- Cannot collect GST from customers or claim Input Tax Credit
- Cannot make inter-state sales
Ideal for local retailers, small restaurants, and service providers whose clients are mostly end-consumers without ITC needs.
Conclusion
GST is not optional, and understanding its mechanics is essential for anyone running a business in India. The dual CGST/SGST structure, five rate slabs, registration thresholds, and filing calendar all need to be on your radar. For businesses that buy inputs and sell outputs, the Input Tax Credit mechanism — covered in detail in the GST Input Tax Credit guide — is where real tax savings lie. Use the GST calculator to work out exact tax amounts on your invoices.
These figures are estimates for educational purposes. Consult a SEBI-registered advisor for personalised advice.
Frequently asked questions
Is GST applicable on all goods and services in India?+
No. Several categories are exempt from GST, including fresh produce, milk, bread, educational services, and most healthcare services. Petroleum products (petrol, diesel, ATF) are currently outside GST and taxed under the older excise and VAT system.
Can I run a business without GST registration if my turnover is below ₹20 lakh?+
Yes, for most service providers below ₹20 lakh and goods sellers below ₹40 lakh in most states. However, you cannot charge GST to clients or claim Input Tax Credit, which may disadvantage you in B2B transactions where your clients want ITC.
What is the penalty for not registering for GST?+
Failure to register when mandatory attracts a penalty of 100% of the tax due or ₹10,000, whichever is higher. For genuine cases of no tax liability, a fixed penalty of ₹10,000 applies.
How is GST different from the old VAT and service tax system?+
VAT applied only to goods; service tax applied to services; excise duty applied to manufacture. Each had its own registration, filing, and credit mechanism. GST unified all of these into a single tax with one registration, one return system, and seamless credit across goods and services.
What is the reverse charge mechanism under GST?+
Under reverse charge, the buyer (instead of the seller) is liable to pay GST to the government. This applies in specific cases: purchasing from unregistered suppliers, certain notified services (like advocate fees, GTA transport), and imports of services.
Try the calculators
Keep reading
- GST Input Tax Credit Explained: How to Claim ITC and Reduce Your Tax Bill
Input Tax Credit is the mechanism that prevents cascading tax-on-tax — if you are not claiming it correctly, you are overpaying GST.
- Sales Tax vs VAT vs GST: What’s the Difference?
Three names for "tax on what you buy" — here’s how sales tax, VAT, and GST actually differ, and how to do the math either way.
- How to Calculate Business Profit Margin in India: Gross, Operating, and Net
Revenue is vanity, profit is sanity — but only if you know which margin number actually matters for your type of business.
Elena writes about taxes and the money side of running a small business. She’s on a mission to make VAT, margins, and break-even points feel a lot less scary.