Goods and Services Tax: What is GST in India? Indirect Tax Law Explained

GST or Goods and Services tax is an indirect tax charged on supply of goods and services in India. GST law in India unifies indirect tax replacing VAT, excise, and service tax. It's been 8 years since the introduction of GST law in India. Continue reading to learn A-Z about GST in India.

Key takeaways

• GST is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc.
• GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
• On 1st July 2017, the GST Law came into force and popular as ‘One Nation, One Tax’.
• e-Invoicing and e-way bills are part of GST compliance.

What is GST in India?

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

Goods and Service Tax (GST) is levied on the supply of goods and services. It is a comprehensive, multi-stage, destination-based tax levied on every value addition.

Before the Goods and Services Tax could be introduced, the structure of indirect tax levy on goods in India was as follows:

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Now, let us understand the definition of Goods and Service Tax, as mentioned above, in detail.

Multi-stage

An item goes through multiple change-of-hands along its supply chain: Starting from manufacture until the final sale to the consumer.

Let us consider the following stages:

• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Selling to wholesalers
• Sale of the product to the retailers
• Selling to the end consumers

The Goods and Services Tax is levied on each of these stages making it a multi-stage tax.

Value Addition

A manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs increases when the sugar and flour are mixed and baked into biscuits.

The manufacturer then sells these biscuits to the warehousing agent who packs large quantities of biscuits in cartons and labels it. This is another addition of value to the biscuits. After this, the warehousing agent sells it to the retailer.

The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits, thus increasing its value. GST is levied on these value additions, i.e. the monetary value added at each stage to achieve the final sale to the end customer.

Destination-Based

Consider goods manufactured in Maharashtra and sold to the final consumer in Karnataka. Since the Goods and Service Tax is levied at the point of consumption, the entire tax revenue will go to Karnataka and not Maharashtra.

The Journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.

Objectives Of GST

• 'One Nation, One Tax' - GST has replaced multiple indirect taxes, ensuring every state follows the same rate for a particular product or service.
• Subsume majority indirect taxes - GST subsumed several erstwhile indirect taxes such as service tax, VAT, and Central Excise, which used to be levied at multiple supply chain stages.
• Eliminate cascading effect - Tax is levied only on net value added at each stage. Previously, taxpayers could not set off the tax credits of one tax against the other, leading to a tax-on-tax effect.
• Curb tax evasion - Input tax credit can be claimed only on invoices uploaded by suppliers, minimising fake ITC claims. e-Invoicing has further reinforced this.
• Increase the taxpayer base - GST is a consolidated tax levied on both goods and services, widening the tax base with defined turnover thresholds for registration.
• Online procedures - Everything from registration to return filing, refunds, and e-way bill/e-invoice generation is done online, contributing to ease of doing business.
• Improved logistics - GST minimises transportation cycle times, improves supply chain turnaround time, and leads to warehouse consolidation.
• Competitive pricing - Removal of the cascading effect has brought Indian goods prices closer to global market levels, boosting consumption and indirect tax revenues. 

Advantages of GST

GST has mainly removed the cascading effect on the sale of goods and services. Removal of the cascading effect has impacted the cost of goods. Let's look at some key advantages of GST:

1. Removing the cascading effect of tax
2. Higher threshold for GST registration
3. Composition scheme for small businesses
4. Simpler online facilities for GST compliance
5. Relatively lesser compliances under GST
6. Defined treatment for e-commerce activities
7. Increased efficiency in logistics
8. Regulating the unorganised sector

What are the components of GST?

There are three taxes applicable under this system: CGST, SGST/UTGST & IGST.

• CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
• SGST/UTGST: It is the tax collected by the state government/Union Territories on an intra-state sale (e.g., a transaction happening within Maharashtra)
• IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Illustration:

• Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth Rs. 50,000. The tax rate is 18% comprising of only IGST.

In such a case, the dealer has to charge IGST of Rs.9,000. This revenue will go to Central Government.

• The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on goods is 12%. This rate comprises CGST at 6% and SGST at 6%.

The dealer has to collect Rs.6,000 as Goods and Service Tax, Rs.3,000 will go to the Central Government and Rs.3,000 will go to the Gujarat government since the sale is within the state.

GST Rates in India

GST rates refer to the percentage rates of tax imposed on the sale of goods or services under the CGST, SGST and IGST Acts. A business registered under the GST law must issue invoices with GST amounts charged on the value of supply.

The GST rates in CGST and SGST (For intrastate transactions) are approximately the same. Whereas, the GST rate in the case of IGST (For interstate transactions) is approximately the sum total of CGST and SGST rate.
The primary GST slabs for any regular taxpayers are presently pegged at 0% (nil-rated), 5%, 12%, 18% & 28%. There are a few lesser-used GST rates such as 3% and 0.25%.

Tax Laws before GST

In the earlier indirect tax regime, states mainly collected taxes in the form of Value Added Tax (VAT), with every state having a different set of rules. Inter-state sale of goods was taxed by the centre via CST. Entertainment tax, octroi and local tax were levied together by both state and centre, leading to significant overlapping and a cascading effect of taxes. 

The following table list down the taxes in pre-GST regime:

*Certain taxes such as the GST levied for the inter-state purchase at a concessional rate of 2% by the issue and utilisation of ‘Form C’ is still prevalent.

It applies to certain non-GST goods such as:

1. Petroleum crude;
2. High-speed diesel
3. Motor spirit (commonly known as petrol);
4. Natural gas;
5. Aviation turbine fuel; and
6. Alcoholic liquor for human consumption.

It applies to the following transactions only:

• Resale
• Use in manufacturing or processing
• Use in certain sectors such as the telecommunication network, mining, the generation or distribution of electricity or any other power sector

How Has GST Helped in Price Reduction?

Under the pre-GST regime, every purchaser including the final consumer paid tax on tax; a condition known as the cascading effect. GST removes this by calculating tax only on the value-addition at each stage of ownership transfer. 

Understand what the cascading effect is and how GST helps by watching this simple video:

Illustration:

Based on the above example of the biscuit manufacturer, let’s take some actual figures to see what happens to the cost of goods and the taxes, by comparing the earlier GST regimes.

Tax calculations in earlier regime:

The tax liability was passed on at every stage of the transaction, and the final liability comes to a rest with the customer. This condition is known as the cascading effect of taxes, and the value of the item keeps increasing every time this happens.

Tax calculations in current regime:

In the case of Goods and Services Tax, there is a way to claim the credit for tax paid in acquiring input. The individual who has already paid a tax can claim credit for this tax when he submits his GST returns.

In the end, every time an individual is able to claims the input tax credit, the sale price is reduced and the cost price for the buyer is reduced because of lower tax liability. The final value of the biscuits is therefore reduced from Rs.2,244 to Rs.1,980, thus reducing the tax burden on the final customer.

What are the New Compliances Under GST?

Apart from online filing of the GST returns, the GST regime has introduced several new systems along with it.

e-Way Bills

GST introduced a centralised e-way bill system launched on 1st April 2018 for inter-state movement and 15th April 2018 for intra-state movement. Manufacturers, traders, and transporters can generate e-way bills on a common portal. Tax authorities also benefit through reduced check-post time and better control over tax evasion.

E-invoicing

The e-invoicing system was made applicable from 1st October 2020 in a phased manner. From 1st August 2023, it applies to the businesses with an annual aggregate turnover exceeding Rs. 5 crore in any preceding financial year since 2017-2018. These businesses must obtain a unique Invoice Reference Number (IRN) for every BB invoice by uploading it on GSTN’s Invoice Registration Portal (IRP). 

The IRP verifies and authenticates the invoice using a digital signature and QR code. E-invoicing enables interoperability of invoices, reduces data entry errors, passes invoice information directly to the GST portal and e-way bill portal, and eliminates the need for manual data entry while filing GSTR-1.

GST 2.0 Latest Amendments

India’s GST framework has undergone its most significant overhaul since the original rollout in 2017. At the 56th GST Council meeting held on 3rd September 2025, major next-generation GST reforms were approved and are now referred to as GST 2.0. The key highlight is a simplified slab structure - 12% and 28% slabs have been largely eliminated, with goods redistributed to the 5% or 18% brackets.  A new 40% rate applies to sin and luxury goods. These changes came into effect from 22nd September 2025, through notifications issued by the CBIC on 17th  September 2025. Continue reading about the key changes introduced from the 56th GST Council meeting.

GST Compliance Calendar

Staying on top of GST due dates is critical to avoid penalties, maintain uninterrupted input tax credit, and ensure smooth business operations. Here is a quick overview of the key filing deadlines:

22nd for South India (Category 1 states); 24th for North India (Category 2 states).

Late filing of GSTR-3B attracts a penalty of Rs. 50 per day (Rs. 20 per day for nil returns), subject to a cap, along with interest at 18% per annum on delayed tax payment. Repeated default can also block e-way bill generation.

Common GST Mistakes

Even businesses that have been GST registered for years make errors that result in penalties, ITC reversals, or scrutiny notices. Here are the most common ones to watch out for:

1. Claiming ITC without verifying GSTR-2B - ITC is valid only if it appears in the auto-generated GSTR-2B form. Claiming ITC based on the invoices alone is no longer valid. Reconcile all purchase invoices with GSTR-2B every month.
2. Wrong or missing HSN/SAC codes - Since FY 2022-23, the CBIC has made 4-digit HSN codes mandatory for all B2B transactions and 6-digit codes for businesses with turnover of over Rs. 5 crore. Using generic or incorrect codes can lead to ITC denial and penalties.
3. Mismatch between GSTR-1 and GSTR-3B - A discrepancy between outward supply details in GSTR-1 and tax payment in GSTR-3B is a frequent and serious error that can lead to GST department notices, ITC mismatch for customers, and additional tax liability.
4. Not filing nil returns - If there are no sales in a period, a nil GSTR-3B must still be filed. Missing nil returns attract a late fee and can trigger a chain reaction blocking subsequent filings.
5. Applying outdated GST rates - The 12% slab has been abolished under the GST 2.0 reforms, effective from 22nd September 2025. Businesses. Still applying 12% GST on any invoice is non-compliant and exposes businesses to penalties. Businesses should verify the specific new rate applicable to their HSN codes.  
6. Claiming ineligible ITC - Many businesses wrongly claim ITC on blocked credits, such as personal expenses, motor vehicles (except for certain exceptions), goods lost or destroyed, and free samples. Claiming ineligible ITC attracts penalties along with reversal and interest. Refer to Section 17(5) of the CGST Act before claiming ITC.
7. Non-compliance under the Reverse Charge Mechanism (RCM) - Many businesses fail to pay GST under RCM, particularly for legal services, GTA services, and the import of services. Non-compliance results in a tax demand and interest liability.