Goods and Services Tax (GST) in India: Structure, Slabs, and Compliance
Goods and Services Tax (GST) is India's landmark indirect tax reform, introduced on 1 July 2017. It replaced a patchwork of over 17 central and state taxes — including VAT, service tax, excise duty, and octroi — with a single unified framework. Understanding GST is essential for any business operating in India.
What Makes GST Different
Before GST, a product could attract excise duty at the factory, VAT when sold to a distributor, and octroi when crossing a state border — each levied on a value that already included the previous tax. This is the cascading effect (tax on tax), which inflated prices throughout the supply chain.
GST eliminates cascading by allowing businesses to claim Input Tax Credit (ITC): the GST paid on inputs can be set off against the GST collected on outputs.
Example:
| Stage | Value Added | GST Collected | ITC Claimed | Net GST Paid |
|---|---|---|---|---|
| Manufacturer | ₹1,000 | ₹180 (18%) | ₹0 | ₹180 |
| Wholesaler | ₹500 | ₹90 | ₹180 | ₹0 (credit exceeds liability) |
| Retailer | ₹300 | ₹54 | ₹90 | ₹0 |
| Government receives | ₹234 total |
The total tax is collected once, not at every stage.
The Three Components: CGST, SGST, IGST
GST in India is divided into three components based on the nature of the supply:
| Component | Full name | Who collects | When applicable |
|---|---|---|---|
| CGST | Central GST | Central government | Intra-state transactions |
| SGST | State GST | State government | Intra-state transactions |
| IGST | Integrated GST | Central government (shared with states) | Inter-state transactions and imports |
For an intra-state sale at 18% GST: 9% goes as CGST + 9% as SGST. For an inter-state sale at 18% GST: 18% goes as IGST, which is later apportioned between the central and destination state.
Tax Rate Slabs
GST uses a four-tier rate structure:
| Rate | Categories |
|---|---|
| 0% | Essential goods: fresh vegetables, rice, wheat, milk, eggs, books, newspapers |
| 5% | Mass consumption items: edible oil, sugar, spices, tea, coffee, coal, transport services |
| 12% | Processed food, computers, business class air travel, construction services |
| 18% | Most manufactured goods and services: telecom, IT services, financial services, restaurants (AC), cement |
| 28% | Luxury and demerit goods: automobiles, tobacco, aerated drinks, casinos, online gaming |
There is also a compensation cess on top of the 28% rate for certain items (luxury cars, tobacco) to compensate states for revenue losses from the GST transition.
Registration Requirements
Who must register:
| Threshold | Applies to |
|---|---|
| Turnover > ₹40 lakh | Goods suppliers (general category states) |
| Turnover > ₹20 lakh | Service providers; special category states (Northeast, J&K, Himachal, Uttarakhand) |
| Any turnover | Inter-state suppliers, e-commerce sellers, casual taxable persons, non-residents |
Once registered, a business receives a GSTIN — a 15-digit GST Identification Number. The first two digits are the state code; the next 10 are the business's PAN.
Composition Scheme
Small businesses (turnover ≤ ₹1.5 crore for goods, ₹50 lakh for services) can opt for the Composition Scheme:
- Pay a flat rate (1% for traders, 2% for manufacturers, 5% for restaurants) on turnover
- No need to collect GST from customers
- Cannot claim ITC
- File returns quarterly (vs. monthly for regular taxpayers)
This significantly reduces compliance burden for small businesses but restricts them from selling interstate.
Key Compliance Requirements
Returns
| Return | Who files | Frequency | Contents |
|---|---|---|---|
| GSTR-1 | All regular taxpayers | Monthly (or quarterly if turnover < ₹5 cr) | Outward supplies (sales) |
| GSTR-3B | All regular taxpayers | Monthly | Summary of sales, ITC, tax payable |
| GSTR-9 | Annual return | Yearly | Full-year summary |
Tax Invoice Requirements
Every GST invoice must include:
- Supplier's GSTIN and legal name
- Invoice number and date
- Recipient's GSTIN (for B2B)
- HSN/SAC code for goods/services
- Taxable value, tax rate, CGST/SGST/IGST amounts separately
- Place of supply
E-Way Bill
For goods movement worth more than ₹50,000, an E-Way Bill must be generated on the government portal. It is a compliance document that GST officers can check during transit.
Input Tax Credit: Rules and Restrictions
ITC is available only when:
- The supplier has filed their returns and paid the tax to the government
- The goods/services are used for business purposes
- The tax invoice is in your possession
Blocked credits (ITC cannot be claimed on):
- Food and beverages
- Club memberships
- Health and fitness services
- Personal use vehicles (except for businesses selling or renting them)
- Works contract services for construction of immovable property
Impact of GST
Benefits realized:
- Simplified compliance (one tax instead of many)
- Reduced logistics costs (no state border checkposts for octroi)
- Formal economy growth: businesses need GSTIN to claim ITC, incentivizing registration
- Real-time invoice matching reduces under-reporting
Ongoing challenges:
- High compliance burden for MSMEs (frequent return filings, technology requirements)
- Frequent rate changes create uncertainty
- Complexity for sectors with exemptions (healthcare, education, agriculture)
- GST on petroleum products still pending — state governments resist giving up this revenue source