Look at any restaurant bill or online invoice and you'll find a line reading "18% GST" or "5% GST". Before 2017 that single line would have been four or five separate taxes, some of them charged on top of each other, most of them invisible to you. Understanding what replaced them explains a lot about how prices are set in India — and if you run a business, it decides how much tax you actually hand over each month.
GST is a single indirect tax on the supply of goods and services, charged at every stage of the supply chain but ultimately paid by the final consumer, with each business in the chain claiming credit for the tax it already paid on its own purchases.
The bottom line
What it replaced: excise duty, VAT, service tax, octroi and most other central and state indirect taxes, rolled into one levy on 1 July 2017 under the 101st Constitutional Amendment.
What you pay now: mainly 5% or 18% since the September 2025 rate overhaul, with 40% on luxury and sin goods and 0% on most essentials.
What it does not cover: petroleum products and alcohol for human consumption, which are still taxed separately by the states.
What GST actually is
GST is a destination-based consumption tax. The phrase matters more than it sounds: the tax is collected by the state where the goods or services are consumed, not the state where they were made. A shirt stitched in Tamil Nadu and bought in Assam produces revenue for Assam.
It arrived on 1 July 2017, enabled by the 101st Constitutional Amendment Act, 2016. That amendment did two things worth knowing. Article 246A gave the Centre and the states concurrent power to tax goods and services, which no earlier arrangement allowed. Article 279A created the GST Council, the body of central and state finance ministers that decides rates and rules to this day. The operative laws are the CGST Act, the SGST and UTGST Acts, and the IGST Act, 2017.
Why it was worth the disruption
The old system taxed the same value more than once. A manufacturer paid excise on production, a wholesaler paid VAT on the sale, and the VAT was calculated on a price that already included the excise. Tax on tax, at every handover, all of it buried in the final price. Economists call it the cascading effect. Shoppers just called it expensive.
GST breaks the chain with input tax credit. A business pays GST on what it buys, collects GST on what it sells, and deposits only the difference. Tax lands on the value each business adds and nothing more.
The dual model: CGST, SGST and IGST
India runs a dual GST, because both the Centre and the states needed a share. On a sale within a state, two taxes apply together at half the headline rate each: CGST goes to the Centre, SGST or UTGST goes to the state. On a sale across state lines, and on imports, a single IGST applies at the full rate and is later split between the Centre and the destination state.
The total you pay is identical either way. An 18% item costs the same whether you buy it in your own state or from a seller three states away. Only the plumbing behind the invoice differs.
The rate slabs after the 2025 overhaul
On 22 September 2025 the GST Council replaced the four-tier structure of 5%, 12%, 18% and 28% with two principal slabs. Most of what had sat at 12% moved down to 5%, and much of the 28% band moved down to 18%.
- 5% — essentials and merit goods, including a large number of daily-use items that came down from 12%.
- 18% — the standard rate for most goods and services.
- 40% — a de-merit rate reserved for luxury and sin goods: tobacco, pan masala, aerated drinks, high-end cars, online gaming.
- 0% — most food staples, and a set of items exempted outright in the same reform, individual health and life insurance policies among them.
- Two niche rates survived the simplification: 3% on gold and silver, and 0.25% on rough diamonds.
Beyond cheaper essentials, the reform fixed several long-standing inverted duty situations, where a manufacturer was paying more tax on inputs than it could charge on the finished product and accumulating credit it could never use.
Input tax credit, with numbers
Take a furniture maker. She buys timber and pays ₹1,000 GST on it. She builds a table, sells it, and collects ₹1,800 GST from her customer.
She does not send ₹1,800 to the government. She claims credit for the ₹1,000 already paid upstream and deposits ₹800 — the tax on the value she herself added by turning timber into a table. Her customer bears the whole ₹1,800, but it reached the treasury in stages, each business paying only for its own contribution. Under the old regime the ₹1,000 would have been stuck in the price, taxed again at the next stage.
Credit is conditional, though. It flows only if your supplier has actually declared and paid the tax. Buy from someone who files late or not at all and the credit can be denied to you, which is why larger buyers now check their suppliers' filing records before placing orders. The rules on claiming and reversing ITC are where most GST disputes start.
What a registered business has to do
The obligations run in a predictable cycle. Register once turnover crosses the threshold and receive a GSTIN, the fifteen-character identification number that appears on every invoice — who needs to register, and when is a longer question than it looks. Charge the correct rate on every taxable sale, which means classifying goods under the right HSN code and services under the right SAC code. Issue invoices that show the tax separately. Track the credit on purchases.
Then file. Most businesses file GSTR-1 for outward sales and GSTR-3B as a summary with the payment, monthly or quarterly depending on turnover, and larger taxpayers add an annual GSTR-9. Each return has its own deadline and its own late fee.
Who it applies to, and who gets relief
GST applies to anyone making a taxable supply above the registration thresholds. Some categories must register from the first rupee regardless of turnover, including businesses selling across state lines and e-commerce operators.
Small taxpayers can opt for the Composition Scheme instead, paying a low flat rate on turnover with far less paperwork. The trade-offs are real: a composition dealer cannot claim input tax credit, cannot sell inter-state, and cannot collect GST from customers, so the tax comes out of the margin. It suits a local retailer with local customers and hurts anyone with business-to-business buyers who want credit.
Exports are zero-rated. No GST is charged on the export itself, and the exporter can still claim credit or a refund on inputs, so the tax does not travel abroad in the price.
Where it still causes trouble
Compliance is demanding for a small team. Returns, reconciliations and credit matching take real hours every month, and the penalty for getting them wrong is money rather than a warning. Credit denied because of a supplier's default is the complaint we hear most often, and the remedy is commercial rather than legal — vet your vendors.
Rules also move. GST 2.0 changed rate assumptions that businesses had built into their billing software over eight years, and every such change means updating masters, reprinting price lists and answering customers who noticed the difference.
Common mistakes
- Treating GST as a tax on profit. It is a tax on supply, and it is due whether or not the sale made you money.
- Applying the wrong HSN or SAC code, which shows up later as short payment plus interest.
- Losing credit by buying from suppliers who do not file, then discovering it at reconciliation.
- Choosing the Composition Scheme for its simplicity without checking whether your customers need credit from you.
- Missing return deadlines. Late fees accrue per day, per return, and interest runs on the tax.
Frequently asked questions
Who actually pays GST? The final consumer bears it. Businesses in between collect it and remit it, claiming credit for the tax they paid on their own inputs, so each one contributes only on the value it added.
What are the current GST rates? Mainly 5% and 18% since 22 September 2025, with 40% on luxury and sin goods, 0% on most essentials, and niche rates of 3% on gold and silver and 0.25% on rough diamonds.
What is the difference between CGST, SGST and IGST? CGST and SGST apply together on sales within a state, splitting the rate between the Centre and the state. IGST applies as a single tax on inter-state sales and imports, and is shared afterwards.
Is GST charged on exports? No. Exports are zero-rated, and the exporter can claim input credit or a refund on the tax paid on inputs.
Why are petrol and alcohol still taxed differently? They were deliberately kept outside GST when it was introduced, and continue to attract state excise and VAT. Bringing them in requires a GST Council decision the states have so far not agreed on.