GST Explained: How India’s Goods and Services Tax Works

GST, or the Goods and Services Tax, is the single indirect tax that India levies on the supply of most goods and services across the country. Introduced on 1 July 2017, it replaced a tangled collection of central and state levies with one framework, and it is often described by the phrase “one nation, one tax, one market”. Whether you buy a packet of biscuits, book a cinema ticket or hire an accountant, some portion of what you pay is GST.

This explainer walks through how GST works in plain language: what it replaced, how the tax is split between the Centre and the states, why the concept of input tax credit matters, how rates are decided, who must register, and what the criticisms and benefits are. It is written as an evergreen guide to the structure of the system. Rates and thresholds are revised from time to time, so always confirm the current position on the official GST portal before making a financial decision. Last updated: 29 September 2026.

What Is GST? The Basic Idea

GST is a tax on the supply of goods and services. Every time a product or service moves from one stage of the chain to the next, from manufacturer to wholesaler to retailer to the consumer, tax is charged. What makes GST different from the older system is that each business in the chain can claim back the tax it has already paid on its purchases. In the end, the burden of the tax falls on the final consumer, and businesses in between act mainly as collectors for the government.

GST is a comprehensive tax because it covers almost the whole range of goods and services, with a limited list of exclusions. It is multi-stage because it applies at every point of supply. And it is destination-based, which means the tax accrues to the state where the goods or services are finally consumed, not the state where they are produced. This is a major departure from the earlier arrangement, in which producing states often collected the most revenue.

Why a Single Tax Was Needed

Before 2017, a manufactured item could attract a central excise duty at the factory gate, a state value added tax when sold within the state, a central sales tax if it crossed a state border, an entry tax or octroi at the city limits, and separate charges on the services attached to it. Each layer was calculated on the earlier layer, so the final price carried taxes on top of taxes. Businesses spent as much effort navigating the paperwork as they did in trading.

The Taxes GST Replaced

GST subsumed a large number of indirect taxes levied by the Union and the states. Not every tax disappeared, but the most important ones were folded in.

Central taxes subsumed

• Central excise duty and additional excise duties
• Service tax
• Additional customs duty, commonly known as countervailing duty, and special additional duty of customs
• Central sales tax (CST)
• Various cesses and surcharges connected with the supply of goods and services

State taxes subsumed

• State value added tax (VAT) or sales tax
• Entertainment tax (other than that levied by local bodies)
• Octroi and entry tax
• Luxury tax
• Taxes on lotteries, betting and gambling
• State cesses and surcharges relating to supply of goods and services

Basic customs duty on imports continues to be levied separately, so an imported good bears customs duty and then IGST when it enters the country. Taxes such as stamp duty, property tax and road tax also remain outside the GST net.

The Road to GST: A Short History

The idea of a national goods and services tax was discussed for well over a decade before it became law. Early groundwork in the early 2000s was followed by a committee of state finance ministers that worked on the design of a dual GST model. The Union Budget of 2006 announced a target date for introduction, but consensus proved difficult, mainly because states worried about losing their fiscal autonomy and revenue.

The passage of the constitutional amendment required a two-thirds majority in each House of Parliament and ratification by at least half of the state legislatures, which reflected the fact that GST affects both levels of government. The rollout itself was marked by a special midnight session of Parliament in the Central Hall, an unusual ceremony reserved for very few moments in independent India’s economic history.

The Constitutional Framework

The 101st Constitutional Amendment Act, 2016 made several important changes to make a joint tax possible. Before it, the Constitution gave the Union the power to tax the manufacture of goods (excise) and the states the power to tax their sale, with services taxed largely by the Centre. GST required both to share power over the same base.

• Article 246A gives both Parliament and state legislatures the power to make laws on GST. Parliament has exclusive power over GST on inter-state supplies.
• Article 269A provides that GST on inter-state supply is levied and collected by the Government of India and apportioned between the Union and the states.
• Article 279A establishes the GST Council as a constitutional body.
• Article 366(12A) defines “goods and services tax” for constitutional purposes, and related provisions also changed the definition of terms like “services”.

Because the arrangement touches state finances, the amendment also allowed Parliament to provide compensation to states for any loss of revenue during an initial transition period, for up to five years from the date of introduction.

The Dual GST Model: CGST, SGST, UTGST and IGST

India has a dual GST because it is a federal country. Both the Centre and the states levy tax on the same transaction, at the same time, on a common base. The design gives each level its own share and keeps a way to handle trade between states.

How the split works in practice

Suppose a shopkeeper in Jaipur sells goods to a customer in Jaipur, and the applicable GST rate is 18 per cent. The transaction is intra-state, so the tax is split into 9 per cent CGST and 9 per cent SGST. If the same goods were sold from Jaipur to a buyer in Pune, the sale is inter-state and IGST of 18 per cent applies. The Centre collects it and passes the state’s share to Maharashtra, where the goods are consumed. This mechanism keeps the credit chain unbroken even when goods cross state lines.

Input Tax Credit: Ending the “Tax on Tax”

Input tax credit, or ITC, is the heart of GST. It lets a registered business subtract the GST it has paid on its purchases (inputs) from the GST it owes on its sales (outputs). Only the value added at each stage is effectively taxed, and the tax does not cascade.

A simple illustration

Imagine a manufacturer buys raw material for 100 rupees plus 18 rupees GST, and sells the finished product to a wholesaler for 150 rupees plus 27 rupees GST. The manufacturer has collected 27 rupees but already paid 18 rupees, so only 9 rupees is deposited with the government. The wholesaler then repeats the process, claiming credit for the 27 rupees. At every step the government gets tax on the value added, and by the time the product reaches the consumer, the total tax equals the rate applied to the final selling price.

Conditions and limits

• The recipient must hold a valid GST registration and possess a tax invoice or similar document.
• The goods or services must be received and used for business purposes.
• The supplier must have actually filed the relevant return and paid the tax, and the details must appear in the buyer’s records.
• Some categories, such as certain personal consumption items, are “blocked” and do not qualify for credit.

Because credit depends on the supplier’s compliance, the system creates a natural incentive for businesses to deal with registered and honest suppliers, which in turn pulls informal trade into the formal economy.

GST Rates and Slabs

When GST was launched, goods and services were placed under a multi-tier structure. The classic slabs were 0 per cent (for essentials such as many unprocessed foodgrains), 5 per cent, 12 per cent, 18 per cent and 28 per cent. Luxury and “sin” goods, such as tobacco products and some automobiles, attracted the highest slab and sometimes an additional compensation cess.

The rate structure has been changed many times by the GST Council since 2017, with individual items moved up or down. In 2025 the Council approved a major rationalisation that simplified the multi-slab structure, moving the bulk of items into two main slabs of 5 per cent and 18 per cent, with a higher special rate for a narrow set of luxury and sin goods. Since rates are periodically reviewed, readers should treat any table of slabs as a snapshot and check the latest notified rate for a specific product or service.

Compensation cess

A compensation cess was levied on some goods, such as tobacco products, aerated drinks and certain vehicles, to fund payments to states for revenue loss during the transition. It was originally intended to run for a limited period, and its scope has been adjusted over time.

What Stays Outside GST

Certain items were deliberately kept out of the GST base, mostly because they are major sources of state or central revenue and states were reluctant to give up direct control over them.

• Petroleum products: crude petroleum, petrol, diesel, natural gas and aviation turbine fuel remain outside GST for now and are taxed through central excise and state VAT. The Constitution allows the GST Council to recommend a date for bringing them in.
• Alcohol for human consumption: taxed by states through state excise duty and VAT.
• Electricity: taxed by states through their own levies.
• Real estate transactions such as stamp duty on property registration, and land itself, are outside GST, although construction services attract it.
• Tobacco is within GST but also attracts central excise duty in addition.

The exclusion of petroleum, in particular, has attracted much discussion, because fuel is a major cost input for businesses and the exclusion means input tax credit does not flow fully through that part of the supply chain.

The GST Council: Cooperative Federalism at Work

The GST Council, established under Article 279A, is the body that recommends rates, exemptions, thresholds, model laws and special provisions for certain states. It is a rare example of a constitutional forum in which the Centre and the states sit together to take tax decisions.

Composition and voting

• The chairperson is the Union Finance Minister.
• The Union Minister of State in charge of Revenue or Finance is a member.
• Each state and Union Territory with a legislature nominates a minister in charge of finance or taxation as a member.

Decisions are taken by a majority of at least three-fourths of the weighted votes cast. The Centre carries one-third of the weight, and all states together carry two-thirds. No decision can pass without the Centre’s support, and the Centre alone cannot pass a decision without a good number of states. This design pushes the Council toward consensus.

The Council also acts as a forum to resolve disputes and to recommend on issues such as the compensation payable to states. Its recommendations are then converted into law and notifications by Parliament and state legislatures.

GSTN: The Digital Backbone

GST would be unworkable on paper. The Goods and Services Tax Network, or GSTN, is the technology platform on which the entire system runs. It was created as a non-profit, non-government company in the early 2010s to provide the shared IT infrastructure for the Centre, the states, taxpayers and other stakeholders, and was later brought under full government ownership.

Through the GST portal, businesses can:

• Apply for registration and receive a 15-character GSTIN, a unique identification number for each registered taxpayer in each state
• Upload invoices and file returns
• Pay tax through online challans
• Claim refunds and track the status of applications
• Match input credit with supplier data

The portal also allows tax authorities to reconcile data across states, which helps in detecting mismatches and fake invoicing.

Registration, Thresholds and the Composition Scheme

Not every business needs to register. GST law provides a turnover threshold below which registration is optional, with lower thresholds for special category states in the North-East and hill regions, and for some kinds of suppliers. Broadly, a common threshold has applied to suppliers of goods and a lower one to suppliers of services, though the exact amounts have been revised by notification, so it is wise to check the current figure.

When registration is compulsory regardless of turnover

• Persons making inter-state supplies of goods (with certain relaxations for small suppliers)
• Casual taxable persons and non-resident taxable persons
• E-commerce operators and those supplying through them, in most cases
• Persons required to deduct or collect tax at source

The Composition Scheme

To ease compliance for small taxpayers, the law offers a Composition Scheme. Eligible businesses pay tax at a low flat percentage of turnover, file simplified returns, and avoid the detailed invoice-level compliance. The trade-offs are that they cannot collect GST from customers separately, cannot claim input tax credit, and cannot make inter-state supplies of goods. There is an annual turnover ceiling to be eligible, and it has been revised periodically. The scheme suits small traders and restaurants with mostly local customers, but a business that sells to other registered businesses may prefer the regular scheme because buyers cannot claim credit on composition supplies.

Returns, E-Way Bills and E-Invoicing

Compliance under GST is mostly digital and built around returns that record sales, purchases and tax paid.

Key returns in brief

• GSTR-1: details of outward supplies (sales), filed monthly or quarterly depending on the taxpayer.
• GSTR-3B: a summary return in which tax liability is declared and paid, after adjusting input tax credit.
• GSTR-2A and 2B: auto-generated statements that show the credit available to a buyer based on supplier filings.
• GSTR-4: the return for composition taxpayers.
• GSTR-9: an annual return consolidating the year’s activity.

E-way bill

An e-way bill is an electronic document that must generally accompany the movement of goods above a specified value. It records the consignment, the vehicle and the parties, and lets officials check goods in transit digitally rather than through paper documents at state check posts. The removal of state border check posts has been one of the visible gains for truckers, who earlier lost hours in queues at borders.

E-invoicing

E-invoicing requires certain businesses, above a notified turnover limit, to register their business-to-business invoices on a government portal, which returns a unique invoice reference number and a QR code. The purpose is to reduce fake invoices, allow automatic data flow into returns, and speed up credit claims. The turnover limit for e-invoicing has been lowered in phases since it was first introduced.

Benefits and Criticisms

Any large tax reform has supporters and critics, and GST is no exception. A fair reading treats both sets of arguments together.

Commonly cited benefits

• A unified national market: goods can move across state borders without repeated tax barriers, cutting delays and logistics costs.
• Less cascading: input tax credit reduces the “tax on tax” embedded in prices.
• Transparency and formalisation: invoice matching and digital records make evasion harder and bring more businesses into the tax net.
• A wider tax base: by covering goods and services together, the system taxes a broader set of economic activity.
• Buoyant revenue: monthly gross collections now run into lakhs of crores of rupees, reflecting the size of the base.

Commonly cited criticisms

• Compliance burden: frequent returns, matching requirements and system glitches, especially in the early years, were difficult for small businesses.
• Multiple rate slabs: many slabs led to classification disputes and confusion, one reason the rate structure has been reworked.
• Exclusions: keeping petroleum and alcohol outside the system limits the reach of the credit chain.
• State fiscal autonomy: states have given up much of their independent power to set tax rates, and compensation arrangements have been a subject of discussion between the Centre and the states.
• Frequent changes: repeated notifications on rates and procedures make it hard for taxpayers to keep track.

Conclusion

GST is one of the largest indirect tax reforms in India’s history. It replaced a maze of levies with a single framework built on destination-based taxation, dual collection by the Centre and states, and input tax credit. Its institutions, particularly the GST Council and GSTN, show how a federal country can share a tax base while preserving a role for its states. The system continues to evolve as rates are simplified and compliance is streamlined, but its core principles of one tax on value added, credit for tax already paid, and consumption-based revenue remain the same.

Frequently Asked Questions

What does GST stand for and when did it start in India?

GST stands for Goods and Services Tax. It came into effect across India on 1 July 2017, following the 101st Constitutional Amendment Act of 2016, and replaced several central and state indirect taxes such as excise duty, service tax and VAT.

What is the difference between CGST, SGST and IGST?

CGST and SGST are levied together on supplies within a single state, with the revenue going to the Centre and the state respectively. IGST is levied on inter-state supplies and imports, collected by the Centre and apportioned to the state where the goods or services are consumed. Union Territories without a legislature levy UTGST in place of SGST.

What is input tax credit?

Input tax credit allows a registered business to reduce its GST liability by the amount of GST already paid on its business purchases. It prevents tax from being charged on tax, so that only the value added at each stage is effectively taxed.

Who decides GST rates in India?

The GST Council, established under Article 279A of the Constitution, recommends rates, exemptions and thresholds. It is chaired by the Union Finance Minister and includes the finance ministers of the states and Union Territories with legislatures. Its decisions require a three-fourths majority of weighted votes.

Which goods are outside GST?

Crude petroleum, petrol, diesel, natural gas and aviation turbine fuel, alcohol for human consumption and electricity are taxed outside GST through central or state levies. Stamp duty and property tax also remain separate.

Does every business have to register for GST?

No. Small businesses below a notified annual turnover threshold can stay unregistered, unless they fall in a category requiring compulsory registration, such as certain inter-state suppliers or e-commerce sellers. Small taxpayers may also opt for the Composition Scheme, which offers simpler compliance at a low flat rate.

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