GST (Goods and Services Tax) is India's single, destination-based indirect tax on the supply of goods and services, in force since 1 July 2017. It is collected at every stage of the supply chain, but businesses claim input tax credit for GST paid on purchases, so tax falls only on the value added. Intra-state sales attract CGST plus SGST; inter-state sales attract IGST.
GST, or the Goods and Services Tax, is the indirect tax that sits on almost every sale a business makes in India. If you run a shop, a factory, an agency or a freelance practice, GST decides what you charge on your invoices, what you can claim back on purchases and which returns you file each month.
This guide explains what GST is, how it works in practice, how the tax is split between the Centre and states, and what a small business owner needs to know before issuing a first GST invoice.
What is GST in simple words?
GST is a single tax on the supply of goods and services. It replaced a patchwork of central and state taxes — excise, service tax, VAT, central sales tax, entry tax, octroi and others — with one system that works the same way across the country.
Three ideas sit at the heart of GST:
- It is a tax on supply. The taxable event is the supply of goods or services for a consideration in the course of business, not manufacture or sale as under the old laws.
- It is destination-based. The tax revenue goes to the state where the goods or services are consumed, not the state where they are produced.
- It is multi-stage with credit. Tax is charged at every step of the chain, but each registered business deducts the GST it already paid on inputs (input tax credit, or ITC). The net effect is that tax is paid only on the value added at each stage.
GST took effect on 1 July 2017 under the Constitution (101st Amendment) Act, 2016. The detailed law lives in the Central GST (CGST) Act, the Integrated GST (IGST) Act, the Union Territory GST (UTGST) Act and the SGST Act of each state, plus the rules and notifications issued under them.
How does GST work? A worked example
The easiest way to understand GST is to follow one product down the supply chain. Assume a product taxed at 18% moves from a manufacturer to a wholesaler to a retailer to a consumer, all within Maharashtra.
| Stage | Sale value (₹) | GST charged @18% (₹) | ITC on purchase (₹) | Net GST paid to govt (₹) |
|---|---|---|---|---|
| Manufacturer sells to wholesaler | 10,000 | 1,800 | 0 | 1,800 |
| Wholesaler sells to retailer | 12,000 | 2,160 | 1,800 | 360 |
| Retailer sells to consumer | 15,000 | 2,700 | 2,160 | 540 |
| Total | 2,700 |
The total tax collected by the government (₹1,800 + ₹360 + ₹540 = ₹2,700) is exactly 18% of the final consumer price of ₹15,000. Each business paid tax only on the value it added: the wholesaler added ₹2,000 (₹360 tax) and the retailer added ₹3,000 (₹540 tax). There is no "tax on tax", which was the main problem with the old system where, for example, central excise could not be set off against state VAT.
Because the sale is within one state, each ₹ of GST is split equally into CGST and SGST. The retailer's ₹2,700, for instance, appears on the invoice as ₹1,350 CGST and ₹1,350 SGST.
What are CGST, SGST, UTGST and IGST?
India is a federal country, so GST is a "dual" tax: both the Centre and the states levy it on the same transaction.
| Component | Levied by | When it applies |
|---|---|---|
| CGST | Central government | Supply within one state or UT |
| SGST | State government | Supply within one state (paired with CGST) |
| UTGST | Union territory administration | Supply within a UT without its own legislature (paired with CGST) |
| IGST | Central government (shared with destination state) | Inter-state supply, imports, exports and supplies to SEZs |
The rule of thumb: if the supplier's location and the place of supply are in the same state, charge CGST + SGST; if they are in different states, charge IGST. Deciding the "place of supply" correctly is therefore one of the most important steps on every invoice — see our guide to place of supply rules. For a deeper comparison of the three components, including how credits are set off, read CGST vs SGST vs IGST.
Who has to pay GST?
The person making a taxable supply — the supplier — is normally liable to charge GST and pay it to the government. In a few notified cases the liability shifts to the buyer under the reverse charge mechanism, for example certain services from goods transport agencies or advocates.
A business must register for GST when:
- its aggregate turnover in a financial year crosses the threshold that applies to its state and type of supply, or
- it falls into a category that must register regardless of turnover, such as inter-state suppliers of goods, casual taxable persons, e-commerce operators and persons liable under reverse charge.
The exact limits (₹40 lakh, ₹20 lakh or ₹10 lakh depending on the case) are explained in our article on the GST registration threshold limit. Once registered, each business gets a 15-character GSTIN, which must be printed on every tax invoice.
Small businesses with turnover up to a notified limit can choose the composition scheme, which lets them pay tax at a low flat rate on turnover with simpler quarterly payments, in exchange for giving up input tax credit and the right to charge GST to customers.
What are the current GST rates?
Every good is classified under an HSN code and every service under a SAC code, and the rate depends on that classification. Following the GST Council's 56th meeting, the rate structure was rationalised with effect from 22 September 2025. The old four-slab structure of 5%, 12%, 18% and 28% gave way to two main rates:
- 5% — a merit rate covering many essentials and items that were earlier at 12%.
- 18% — the standard rate, which now covers most goods and services, including many items formerly taxed at 28%.
- 40% — a special rate for a short list of luxury and "sin" goods.
Alongside these, some supplies are exempt or nil-rated, and a few special rates apply to items such as gold and precious stones. Tobacco products were handled under separate transition arrangements. Always check the current rate for your specific HSN or SAC code in the official rate notifications before invoicing. Our guide on GST rates and slabs covers the structure in more detail, and the GST calculator helps you work out tax-inclusive and tax-exclusive prices.
What is input tax credit and why does it matter?
Input tax credit is the mechanism that makes GST a tax on value added rather than on the full price at each stage. When you buy goods or services for your business from a registered supplier, the GST shown on that supplier's invoice can be claimed as credit and used to pay your own output GST.
Conditions apply. Broadly, you must:
- hold a valid tax invoice or debit note,
- have actually received the goods or services,
- see the invoice reflected in your auto-generated statement (GSTR-2B), because the supplier reported it,
- ensure the supplier has paid the tax to the government, and
- have filed your own return.
Some credits are blocked outright — for example, food and beverages and many motor vehicle costs, subject to exceptions. Getting ITC right is often the single biggest driver of a business's GST cash outflow, which is why matching purchase invoices every month matters.
What compliance does GST involve?
Once registered, a regular taxpayer has four recurring jobs:
- Issue proper invoices. Tax invoices must carry the mandatory fields — GSTIN, invoice number and date, HSN/SAC, taxable value, rate and tax amount, place of supply, and so on. Businesses above the notified turnover limit must also generate e-invoices with an IRN.
- Move goods with an e-way bill where the consignment value exceeds the limit (generally ₹50,000).
- File returns. Typically GSTR-1 (outward supplies) and GSTR-3B (summary return with tax payment), monthly or quarterly under the QRMP scheme, plus an annual return where applicable.
- Keep records of sales, purchases, stock, ITC and payments for the period prescribed under the law.
The date on which tax becomes payable on a particular sale is governed by the time of supply rules, which matter especially when you receive advances or invoice late.
What are the benefits of GST for small businesses?
GST is not without its paperwork, but it brought real advantages compared with the earlier regime:
- One tax across states. A trader selling from Gujarat to Karnataka no longer deals with central sales tax, entry tax and the receiving state's VAT separately.
- Seamless credit. Credit of IGST, CGST and SGST flows across goods and services, so a service business can use GST paid on its laptop purchase, and a manufacturer can use GST on professional fees.
- Online registration and returns. Everything is done on the GST portal, with no visits to tax offices in most cases.
- Fewer check-posts. State border check-posts were removed and replaced by the electronic e-way bill system, cutting transit time for goods.
- Formal credit. A GSTIN and filed returns help small businesses win B2B customers and access working-capital loans.
Common mistakes new businesses make with GST
- Charging IGST on a local sale (or CGST+SGST on an inter-state one). The wrong tax type cannot simply be adjusted; you pay the correct tax and claim a refund of the wrong one.
- Using an outdated rate. After the September 2025 rationalisation, many products moved from 12% to 5% or from 28% to 18%. An item master that was never updated means wrong invoices.
- Missing the registration trigger. Inter-state sale of goods requires registration from the very first sale, not after crossing ₹40 lakh.
- Claiming ITC on invoices the supplier never reported. If an invoice does not appear in GSTR-2B, the credit is generally not available yet.
- Ignoring reverse charge. Paying a goods transport agency or an advocate may make you liable to pay GST in cash.
- Not printing place of supply on inter-state invoices. It is a mandatory field and determines which tax applies.
Billing Software by Betterwork picks the correct tax type from your state and the customer's place of supply, applies the rate from each item's HSN/SAC code and exports your sales data for GSTR-1, which removes most of these errors at the invoice stage. You can also try the free GST invoice generator for one-off bills.
Key takeaways
- GST is a single, destination-based tax on the supply of goods and services, in force since 1 July 2017.
- Intra-state supplies attract CGST + SGST (or UTGST); inter-state supplies, imports and exports attract IGST.
- Input tax credit means each business pays tax only on the value it adds.
- From 22 September 2025, most goods and services fall in the 5% or 18% slab, with 40% for a small list of luxury and sin goods.
- Registration depends on turnover and on the type of business; some categories must register from day one.
- Correct invoices, timely returns and clean ITC matching are the core of GST compliance.
This guide is general information, not tax advice. Rules last checked on 20 October 2026; confirm with your tax professional for your situation.