What is GST?
Complete Guide for India 2026

GST (Goods and Services Tax) is India’s unified indirect tax system that replaced a complex web of central and state taxes (excise duty, VAT, service tax, entry tax, etc.) on July 1, 2017. GST is a consumption-based tax levied at every stage of the supply chain — from manufacturer to distributor to retailer to consumer. The key feature is Input Tax Credit (ITC): each business in the chain can deduct the GST it paid on purchases from the GST it collects on sales, remitting only the net difference to the government. This eliminates the cascading effect of tax-on-tax that existed under the old system. The final consumer bears the full GST burden without any ITC benefit.

GST in India has three components based on where the transaction occurs. CGST (Central GST) and SGST (State GST) apply simultaneously on intra-state transactions — same state buyer and seller. The total rate is split equally between centre and state: for 18% GST rate, 9% is CGST and 9% is SGST. IGST (Integrated GST) applies on inter-state transactions — buyer and seller in different states. The full rate is collected as IGST by the centre and then apportioned to the destination state. Example: selling goods within Maharashtra — charge 9% CGST + 9% SGST. Selling to a buyer in Karnataka — charge 18% IGST. This structure preserves state revenue rights while enabling a unified national market.

The GST Council implemented a major two-tier restructuring in September 2025, simplifying India’s rate structure. The new framework: essential goods and services — 5% GST (food items, medicines, mass transportation); standard goods and services — 12% or 18% GST (most manufactured goods, professional services, restaurants); luxury and sin goods — 28% GST (automobiles, tobacco, aerated drinks, luxury hotels). The Council merged several rates and eliminated the 12% slab for many products, moving them to either 5% or 18%. Many services previously at 18% were reduced to 12% to ease business compliance burden. The zero-rated (0%) category covers exports and essential agricultural products.

GST registration is mandatory when: annual aggregate turnover exceeds Rs 40 lakh (goods) or Rs 20 lakh (services) in a financial year; for special category states (northeastern states, Himachal, Jammu), threshold is Rs 20 lakh (goods) and Rs 10 lakh (services); you supply goods or services inter-state regardless of turnover; you are an e-commerce operator or seller on platforms like Amazon, Flipkart; you make taxable supply of goods as a casual taxable person; or you are required to pay tax under reverse charge mechanism. Voluntary registration below the threshold is also allowed and provides ITC benefit on purchases.

Input Tax Credit (ITC) allows a registered GST business to reduce the GST it must pay to the government by the amount of GST it has already paid on its own purchases (inputs, capital goods, and services). Example: You manufacture and sell a product for Rs 1,000 + 18% GST = Rs 1,180. You purchased raw materials for Rs 500 + 18% GST = Rs 590. GST collected from customer: Rs 180. GST paid on inputs: Rs 90. ITC = Rs 90. GST payable to government = Rs 180 – Rs 90 = Rs 90. This chain of ITC at every stage ensures GST is paid only on the value added at each stage — not on the cumulative price, eliminating cascading tax effect.

The pre-GST tax system had 17+ central and state taxes including central excise duty, service tax, VAT, CST, entertainment tax, entry tax, and luxury tax. These had no mechanism for cross-credit — a manufacturer paid excise duty, then the distributor paid VAT on a price that included excise duty (tax on tax). GST replaced all of these with a single, unified, destination-based consumption tax with seamless ITC across the value chain. Benefits achieved by GST: elimination of cascading tax effect; uniform national market (no state border tax barriers); improved tax compliance through invoice-matching system; and reduced logistics costs due to simplified checkpoint system across states.