GST basics

In short

GST is a single, destination-based, multi-stage indirect tax on the supply of goods and services in India, levied in place of a long list of central and state taxes from 1 July 2017 under the 101st Constitutional Amendment Act, 2016. It is a value-added tax: tax is charged at every stage of the chain but each registered business sets off the tax on its inputs, so only value addition is effectively taxed and tax-on-tax (cascading) is removed. India runs a dual GST - the Centre and the State levy on the same intra-state supply (CGST + SGST/UTGST), while inter-state supplies and imports bear IGST collected by the Centre and settled to the consuming state. It is a core scoring chapter in B.Com Taxation / Indirect Tax papers and is tested in interviews for accounts executive, GST executive, audit assistant, banking credit and ERP/accounting roles at firms, NBFCs, CA/CS practices and corporates.

Explained

Constitutional and legal framework

• Article 246A gives the Union and every State concurrent power to make GST laws; only Parliament can legislate on inter-state supply.
• Article 269A - IGST on inter-state supply and imports is levied and collected by the Centre and apportioned between Centre and States.
• Article 279A - the GST Council: chaired by the Union Finance Minister, with the MoS (Revenue) and one minister from each state; decisions need a 3/4 majority of weighted votes (Centre 1/3, all States together 2/3), quorum 50%. It recommends rates, exemptions, thresholds and model laws.
• Article 366(12A) defines GST as a tax on supply of goods or services or both, except alcoholic liquor for human consumption.
• The Acts: CGST Act 2017, IGST Act 2017, UTGST Act 2017, GST (Compensation to States) Act 2017, and a separate SGST Act for each state (state Acts largely mirror the CGST Act).
• GSTN is the IT backbone (common portal for registration, returns, payment, e-way bill and e-invoice).
• Taxes subsumed: central excise, service tax, CVD and SAD, CST, state VAT, entry tax, octroi, luxury tax, entertainment tax (other than local-body), purchase tax, taxes on lottery/betting, and various cesses.
• Outside GST: basic customs duty, stamp duty, property tax, electricity duty, road tax; alcoholic liquor (constitutionally excluded); petroleum crude, petrol, diesel, ATF and natural gas (within the ambit of GST law, but GST is not yet levied on them - no rate has been notified, so VAT and central excise continue until the Council notifies a date); tobacco bears GST plus central excise.

Why GST, and its structure

• Cascading removed: pre-GST, excise formed part of the VAT base and service tax credit could not be set off against VAT, so tax stuck to cost. GST allows a continuous credit chain.
• Destination-based consumption tax: revenue accrues to the state where the goods or services are consumed, not produced - achieved through place-of-supply rules and IGST settlement.
• Dual GST on one taxable event:
  • Intra-state supply → CGST + SGST (or UTGST in a Union Territory without legislature), each at half the notified rate.
  • Inter-state supply, import, SEZ supply, export → IGST at the full rate.
• Benefits: one nationwide tax and common portal, no state-border check posts, wider credit chain, lower cascading, formalisation through invoice matching, easier inter-state trade.
• Limitations: multiple rates and classification disputes, compliance load on small business (registration per state, periodic returns), working-capital blockage when credit or refunds are delayed, petroleum and real estate largely outside the chain, and the absence of a GST appellate tribunal bench in every state for a long period.

Supply - the taxable event (Sec 7, CGST Act)

• There is no "manufacture", "sale" or "provision of service" any more: GST is levied on supply.
• Sec 7(1)(a): all forms of supply - sale, transfer, barter, exchange, licence, rental, lease, disposal - for consideration in the course or furtherance of business.
• Sec 7(1)(b): import of services for consideration, whether or not in the course of business.
• Schedule I - supply even without consideration: permanent transfer of business assets on which ITC was availed; supplies between related persons or distinct persons (branches in two states with separate registrations) in the course of business - but gifts up to ₹50,000 per employee per year are excluded; principal-agent supplies; import of services from a related person.
• Schedule II - classification as goods or services: transfer of title in goods = goods; renting of immovable property, works contract, restaurant/catering supply of food, temporary transfer of intellectual property = services; transfer of goods on hire purchase = goods.
• Schedule III - negative list (not supply at all): services by an employee to employer in the course of employment; services by a court or tribunal; duties of MPs/MLAs and constitutional post holders; funeral services; sale of land and sale of a completed building; actionable claims other than specified actionable claims (lottery, betting, gambling, casinos, horse racing and online money gaming); high-sea sales.
• Composite supply: two or more supplies naturally bundled with one principal supply - taxed at the principal supply's rate (goods + insurance + freight sold together → rate of the goods).
• Mixed supply: separate items sold for a single price, not naturally bundled - taxed at the highest rate among them (a festive hamper of sweets and aerated drinks).
• Exempt vs nil vs zero-rated vs non-GST: exempt = notified exemption, no ITC; nil-rated = rate is 0% in the schedule; zero-rated (Sec 16, IGST Act) = exports and SEZ supplies, taxable at 0% with ITC and refund (either export under LUT/bond without payment, or pay IGST and claim refund); non-GST = outside GST altogether (alcohol, petrol).

Levy, rates, charge mechanism and registration

• Forward charge: the supplier collects and pays GST. Reverse charge (Sec 9(3)/9(4) CGST, 5(3)/5(4) IGST): the recipient pays - e.g. goods transport agency service, legal services by an advocate, sponsorship, director's services, import of services, notified purchases from unregistered persons; RCM must be paid in cash, not from credit.
• Rate structure: the four-slab structure of 5%, 12%, 18%, 28% (plus compensation cess on sin and luxury goods, and 0.25%/3% on rough diamonds and gold/silver) operated from 2017. Following the 56th GST Council meeting, a two-rate structure of 5% and 18% with a 40% demerit rate on sin and luxury items such as aerated drinks, luxury vehicles and large motorcycles took effect from 22 September 2025, with many items (including individual life and health insurance) moved to exempt or 5%; pan masala, gutkha, cigarettes, bidi and other tobacco products stayed at 28% plus compensation cess and shift to 40% only once the cess-backed loans are discharged. Rates change by notification - quote the schedule applicable to the exam/assessment year and verify the current notification before relying on a figure.
• Compensation cess was levied under the Compensation to States Act to fund the five-year revenue guarantee to states; with the 2025 restructuring it was subsumed into the 40% rate for most goods and retained on tobacco-type items pending discharge of the cess-backed loans.
• Classification: goods use HSN codes (Customs Tariff), services use SAC codes; HSN digits to be shown on invoices depend on turnover (4 digits up to ₹5 crore, 6 digits above, B2C relaxations apply).
• Registration (Sec 22): required when aggregate turnover exceeds ₹40 lakh for exclusive suppliers of goods, ₹20 lakh for services (₹20 lakh / ₹10 lakh for special category states such as Manipur, Mizoram, Nagaland and Tripura). Registration is state-wise and PAN-based.
• Compulsory registration regardless of turnover (Sec 24): inter-state taxable supply, casual taxable person, non-resident taxable person, persons liable under RCM, e-commerce operators and those supplying through them, agents, TDS deductors, OIDAR suppliers.
• GSTIN is 15 characters: 2-digit state code + 10-character PAN + 1 entity code + letter "Z" + 1 check digit.
• Composition scheme (Sec 10): for turnover up to ₹1.5 crore (₹75 lakh in specified north-eastern states/Uttarakhand) - 1% for traders and manufacturers, 5% for restaurants not serving alcohol; a separate scheme under Sec 10(2A) allows 6% for service providers up to ₹50 lakh. The dealer cannot collect GST, cannot claim ITC, cannot make inter-state outward supplies, must issue a bill of supply, pays quarterly (CMP-08) and files annual GSTR-4.
• Compliance in outline: tax invoice before/at removal of goods and within 30 days for services; monthly or quarterly returns and annual return; e-invoicing (IRN from the IRP) for businesses above the notified turnover (₹5 crore); e-way bill for consignments above ₹50,000; electronic cash, credit and liability ledgers on the portal; interest at 18% p.a. on late payment.

Place, time and value of supply

• Place of supply decides CGST+SGST vs IGST. Goods (Sec 10, IGST Act): normally where the goods are delivered/where movement terminates; bill-to-ship-to → the place of the third person's registration; no movement → location of goods at delivery.
• Services (Sec 12, both in India): B2B default = location of the registered recipient; B2C default = location of recipient on record, else supplier's location. Specific rules: immovable property, hotel and event services = location of the property/event; restaurant, personal grooming, fitness, training, admission = place of performance; passenger transport = place of embarkation; telecom = billing/installation address.
• Sec 13 (supplier or recipient outside India): default is the recipient's location, with performance-based exceptions.
• Time of supply (Sec 12/13 CGST Act) - when tax becomes payable:
  • Goods (forward charge): date of invoice or the last date on which it should have been issued; GST is not payable on advances for goods (Notification 66/2017).
  • Services (forward charge): earlier of invoice date (if issued within 30 days) or date of receipt of payment - advances for services are taxable.
  • Reverse charge - goods: earliest of receipt of goods, payment, or 31st day from the supplier's invoice. Services: earlier of payment or the 61st day from invoice.
• Value of supply (Sec 15): the transaction value where supplier and recipient are unrelated and price is the sole consideration.
  • Include: any taxes/cesses other than GST; amounts the recipient pays on the supplier's behalf; incidental expenses - packing, commission, freight, installation charged by the supplier; interest, late fee or penalty for delayed payment; subsidies linked to price except those from central/state government.
  • Exclude: discounts given before or at the time of supply and shown on the invoice; post-supply discounts only if pre-agreed in the contract, linked to the invoice, and the ITC is reversed by the recipient.
  • Where value cannot be determined, Valuation Rules 27-35 apply (open market value, like-kind value, cost + 10%, residual best judgement).
• Input tax credit in outline (Sec 16): a registered person may set off tax on inward supplies used in business against output tax, subject to possessing a tax invoice, receipt of goods/services, tax actually paid by the supplier, and the supply appearing in the auto-generated statement; ITC is blocked on items in Sec 17(5). Output tax less eligible ITC is paid in cash.

Key points

• GST - a single destination-based value-added tax on supply of goods and services, effective 1 July 2017.
• 101st Amendment Act, 2016 - inserted Articles 246A, 269A and 279A to enable concurrent GST powers.
• Dual GST - CGST + SGST/UTGST on intra-state supply; IGST on inter-state supply, imports and exports.
• GST Council - Article 279A body; recommendations by 3/4 weighted majority (Centre 1/3, States 2/3).
• Supply - the taxable event; needs consideration and business purpose, except Schedule I cases.
• Schedule III - the negative list: employment services, sale of land, sale of a completed building, court services.
• Composite supply - rate of the principal supply; mixed supply - the highest applicable rate.
• Zero-rated - exports and SEZ supplies, 0% with ITC/refund; exempt - no tax and no ITC.
• Registration threshold - ₹40 lakh (goods) / ₹20 lakh (services); ₹20 lakh / ₹10 lakh in special category states; state-wise, PAN-based.
• Composition scheme - up to ₹1.5 crore; 1% trader/manufacturer, 5% restaurant, 6% for services up to ₹50 lakh; no ITC, no tax collection, no inter-state outward supply.
• Reverse charge - recipient pays, in cash only; applies to GTA, advocate, sponsorship, director and imported services.
• Place of supply - decides whether the supply is intra-state or inter-state; B2B services default to the recipient's location.
• Time of supply - advances are taxable for services but not for goods.
• Value of supply (Sec 15) - includes freight, packing, non-government subsidies and interest for delay; excludes invoice-level discounts.
• GSTIN - 15 characters: state code + PAN + entity code + Z + checksum.
• Rates - 5%/12%/18%/28% till 21 September 2025; 5% and 18% with a 40% demerit rate from 22 September 2025 (tobacco products still 28% + cess for now); verify the current notification.
• Outside GST - alcoholic liquor, five petroleum products (for now), basic customs duty, stamp duty, electricity duty.
• Cross-utilisation - IGST credit may be used against IGST, then CGST, then SGST; CGST credit cannot be set off against SGST.

Formulas and examples

Example 1 - intra-state versus inter-state on the same invoice value (rate 18%). A manufacturer in Delhi supplies machinery of taxable value ₹2,00,000.

• To a buyer in Delhi (intra-state): CGST 9% = ₹18,000; SGST 9% = ₹18,000; total tax ₹36,000; invoice ₹2,36,000.
• To a buyer in Haryana (inter-state): IGST 18% = ₹36,000; invoice ₹2,36,000.
• The burden on the buyer is identical; only the heads of tax and the revenue-sharing differ. The IGST is collected by the Centre and apportioned to Haryana, the state of consumption.

Example 2 - extracting tax from an inclusive price, and mixed supply. A retailer's shelf price is ₹1,180 inclusive of GST.

• At 18%: taxable value = 1,180 × 100/118 = ₹1,000; GST = ₹180 (CGST ₹90 + SGST ₹90).
• At 5%: taxable value = 1,180 × 100/105 = ₹1,123.81; GST = ₹56.19 (check: 1,123.81 × 1.05 = 1,180.00).
• The same retailer sells a hamper for a single price of ₹1,180 containing sweets (5%) and aerated drinks (40%). This is a mixed supply, so the whole ₹1,180 is taxed at the highest rate of 40%: taxable value = 1,180 × 100/140 = ₹842.86, GST = ₹337.14. Sold as separate line items, each would bear its own rate.

Example 3 - value of supply under Sec 15 (intra-state, 18%).

• GST at 18% = ₹97,200 → CGST ₹48,600 + SGST ₹48,600; invoice total = ₹6,37,200.
• A government subsidy of the same amount would not be added. Interest of ₹4,000 later recovered for delayed payment is also part of value; if collected inclusive of tax, GST = 4,000 × 18/118 = ₹610.17, payable in the month of receipt.

Example 4 - composition scheme versus regular registration. A Maharashtra trader has intra-state turnover of ₹1,20,00,000; purchases ₹1,00,00,000 plus GST ₹18,00,000 (18%); outward rate 18%.

• The composition tax looks smaller, but ₹18,00,000 of input tax sticks as cost - a total burden of ₹19,20,000 against ₹3,60,000. Composition suits low-margin B2C businesses with mostly untaxed or small input costs and values simplicity; it is unsuitable for B2B sellers whose buyers need credit.

Example 5 - how GST removes cascading (three-stage chain, 18%).

• Total tax reaching the government = 1,800 + 360 + 540 = ₹2,700, exactly 18% of the final consumer price of ₹15,000; the consumer pays ₹17,700.
• Under a cascading regime, each stage would charge tax on a base that already contained tax, so the final tax collected would exceed ₹2,700 - and the extra would be invisible in the price.

Where it is used

• Accounts and finance departments of every registered business: raising compliant tax invoices, deciding CGST+SGST versus IGST, classifying goods by HSN and services by SAC, booking tax under the correct ledgers in Tally, SAP, Oracle or Zoho.
• CA, CS and tax consultancy firms: registration and amendment applications, classification and valuation opinions, reverse-charge and place-of-supply reviews, departmental audits, show-cause notices and appeals.
• Logistics, e-commerce and retail: e-way bills and e-invoicing, bill-to-ship-to transactions, stock transfers between state branches taxed as supplies between distinct persons, marketplace operator obligations.
• Manufacturing and infrastructure: works-contract classification as a service, composite supply pricing of goods with freight and installation, project cash-flow planning around GST on advances.
• Banking, insurance and NBFCs: GST on fees, commission and processing charges, state-wise place of supply for branch customers, ITC restrictions in the financial sector; GST returns are standard documents in MSME credit appraisal.
• Government and public finance: GST collections (monthly gross collection figures published by the Ministry of Finance) are a headline macro indicator, and GST Council decisions drive state revenue planning.

Interview questions

• Q: What is the taxable event under GST? A: Supply of goods or services or both, as defined in Sec 7 of the CGST Act - not manufacture, sale or provision of service as under the earlier laws.
• Q: Why does India have a dual GST instead of a single national GST? A: Because India is a federation: Article 246A gives the Union and the States concurrent taxing power, so both levy on the same intra-state supply as CGST and SGST while the Centre levies IGST on inter-state supply.
• Q: How do you decide whether to charge CGST+SGST or IGST? A: Compare the location of the supplier with the place of supply: if they fall in the same state it is intra-state (CGST+SGST), otherwise inter-state (IGST), and imports and SEZ supplies are always treated as inter-state.
• Q: Difference between exempt supply and zero-rated supply? A: An exempt supply bears no tax and the related ITC is not available; a zero-rated supply (export or SEZ supply) is taxed at 0% but ITC is fully available and refundable.
• Q: Composite supply or mixed supply - and why does it matter? A: A composite supply is a natural bundle taxed at the principal supply's rate; a mixed supply is an artificial bundle for a single price taxed at the highest rate of any component, so misclassification changes the tax.
• Q: Is GST payable on an advance received? A: Yes for services (time of supply is the earlier of invoice or payment), but not for goods under forward charge following Notification 66/2017; for goods, tax arises on the invoice date.
• Q: What is reverse charge and can it be paid using ITC? A: The recipient discharges the tax instead of the supplier, for notified supplies such as GTA, advocate and imported services; it must be paid in cash, and the credit can be claimed afterwards if otherwise eligible.
• Q: Does a branch transfer from Mumbai to Bengaluru attract GST? A: Yes - separately registered branches are distinct persons, so the stock transfer is a supply under Schedule I and attracts IGST even without consideration; the receiving branch takes the credit.
• Q: Is salary paid to an employee liable to GST? A: No - services by an employee to the employer in the course of employment are in Schedule III, outside the scope of supply; but a director's non-employment services are taxable under reverse charge.
• Q: Are freight and packing charges in an invoice taxed separately? A: No - Sec 15 includes incidental expenses in the value of supply, so they are taxed at the rate applicable to the principal supply, not at the rate for transport services.
• Q: A trader on the composition scheme wants to supply to a buyer in another state. Can they? A: No - a composition dealer cannot make inter-state outward supplies of goods (inter-state purchases are allowed); they must opt out and register as a regular taxpayer.
• Q: Which taxes were not subsumed into GST? A: Basic customs duty, stamp duty, property tax, electricity duty and road tax; alcoholic liquor stays constitutionally outside, and the five petroleum products stay out until the GST Council notifies a date.

Common mistakes

• Treating the location of the supplier as the deciding factor; the intra/inter-state test compares supplier's location with the place of supply.
• Writing CGST and SGST at the full rate each instead of half the notified rate (18% means 9% + 9%, not 18% + 18%).
• Using the inclusive price as the taxable value - 18% of ₹1,180 is ₹212.40, whereas the correct extraction gives ₹180.
• Confusing exempt with zero-rated, and so claiming or denying ITC incorrectly; also calling a nil-rated supply a non-GST supply, or calling the five petroleum products "zero-rated" when GST is simply not yet levied on them.
• Charging tax on advances for goods, or omitting it on advances for services.
• Omitting Sec 15 inclusions - freight, packing, installation, non-government subsidy, interest for delay - or deducting a post-supply discount that was not pre-agreed and invoice-linked.
• Quoting the old four-slab rate list as current, or stating a specific item's rate from memory; rates and exemptions change by notification and must be verified.
• Assuming the composition dealer can collect tax from customers or claim ITC, and ignoring the input tax that becomes an irrecoverable cost.

Related topics

GST: input tax credit and returns in practice · Customs duty basics · Income tax basics · TDS and tax filing basics · Business income and presumptive taxation · Corporate tax basics