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What is GST?

Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. Introduced on 1st July 2017, GST replaced multiple cascading taxes like VAT, Service Tax, Excise Duty, and CST with a single unified tax structure. GST follows a destination-based taxation model, meaning the tax is collected by the state where goods or services are consumed, not where they are produced.

GST is administered jointly by the Central Government and State Governments through the GST Council, which decides on tax rates, exemptions, and procedural rules. The tax is collected at every stage of the supply chain but allows input tax credit (ITC), ensuring tax is effectively levied only on the value added at each stage.

GST Rates in India — 5%, 12%, 18%, 28%

India follows a multi-tiered GST rate structure with four main slabs:

• 5% GST — Essential items such as packaged food, sugar, tea, edible oils, economy class air travel, and small restaurants
• 12% GST — Processed food items, business class air travel, work contracts, frozen meat products, and cell phones
• 18% GST — Most goods and services fall here including electronics, financial services, IT services, restaurants in hotels, and capital goods
• 28% GST — Luxury and demerit goods such as automobiles, cement, tobacco, aerated drinks, air conditioners, and dishwashers

In addition, certain items like fresh fruits, vegetables, milk, unprocessed food, and healthcare services attract 0% GST (exempt). Some items like gold and precious stones are taxed at 3%, and rough diamonds at 0.25%.

CGST vs SGST vs IGST — Understanding the Components

GST in India is divided into three components based on the nature of the transaction:

• CGST (Central GST) — Collected by the Central Government on intra-state (within the same state) transactions. It makes up half of the total GST amount.
• SGST (State GST) — Collected by the State Government on intra-state transactions. It is equal to CGST and together they make up the full GST amount.
• IGST (Integrated GST) — Collected by the Central Government on inter-state (between two different states) transactions and imports. IGST equals the full GST rate and is later settled between the Centre and the destination state.

For example, if a product sold within Maharashtra has 18% GST, the buyer pays 9% CGST + 9% SGST. If the same product is sold from Maharashtra to Karnataka, the buyer pays 18% IGST.

GST Calculation Formula

There are two ways to calculate GST depending on whether the price is exclusive or inclusive of GST:

Example (Exclusive): A product costs Rs 10,000 before GST at 18%. GST = 10,000 x 18/100 = Rs 1,800. Total = Rs 11,800. For intra-state: CGST = Rs 900, SGST = Rs 900.

Example (Inclusive): An item is priced at Rs 11,800 inclusive of 18% GST. Base = 11,800 x 100/118 = Rs 10,000. GST = Rs 1,800.

GST for Businesses

Understanding GST is critical for businesses of all sizes in India. Key aspects include:

• GST Registration — Mandatory for businesses with annual turnover above Rs 40 lakhs (Rs 20 lakhs for special category states). E-commerce sellers and inter-state suppliers must register regardless of turnover.
• Input Tax Credit (ITC) — Businesses can claim credit for GST paid on purchases (inputs) against GST collected on sales (output). This eliminates the cascading tax effect.
• GST Returns — Registered businesses must file monthly/quarterly returns (GSTR-1, GSTR-3B) and an annual return (GSTR-9). Timely filing is essential to avoid penalties.
• E-Invoicing — Businesses with turnover above Rs 5 crores must generate e-invoices through the GST portal for B2B transactions.
• Reverse Charge Mechanism (RCM) — In certain cases, the buyer must pay GST directly to the government instead of the seller, such as when purchasing from unregistered dealers.