GST (Goods and Services Tax) is a single tax on the supply of goods and services across India. Each business in the chain collects GST on its sales and deducts the GST it already paid on its purchases, so the tax is ultimately borne by the final consumer. It replaced a long list of central and state taxes on 1 July 2017.
This guide explains how GST works, its types (CGST, SGST, UTGST and IGST), the rates after the September 2025 rationalisation, who must register and what a GSTIN is. Everything reflects the law as of 24 September 2026.
What GST means and where it came from
GST is a destination-based tax: it goes to the state where goods or services are consumed, not the state where they are produced. It is charged on “supply”, which covers sale, transfer, barter, lease and similar transactions made in the course of business.
Before GST, a business dealt with central excise, service tax, state VAT, central sales tax, entry tax and several other levies, each with its own return. GST folded these into one system with one registration, one set of returns and credit that flows across state borders.
The legal base is the Constitution (One Hundred and First Amendment) Act, 2016, which gave Parliament and state legislatures simultaneous power to levy GST and created the GST Council. GST itself took effect on 1 July 2017, under the CGST Act, the IGST Act, the UTGST Act and each state’s own SGST Act.
How GST works: input tax credit explained
GST taxes only the value added at each stage, because every registered business claims credit for the GST charged on its inputs. This credit is called input tax credit (ITC). It is the feature that stops tax being charged on tax.
Here is a simple example at an 18% rate:
| Stage | Sale value | GST charged (18%) | ITC claimed | GST paid in cash |
|---|---|---|---|---|
| Manufacturer sells to wholesaler | ₹10,000 | ₹1,800 | ₹0 | ₹1,800 |
| Wholesaler sells to retailer | ₹12,000 | ₹2,160 | ₹1,800 | ₹360 |
| Retailer sells to consumer | ₹15,000 | ₹2,700 | ₹2,160 | ₹540 |
The government receives ₹2,700 in total (₹1,800 + ₹360 + ₹540), which is exactly 18% of the final price of ₹15,000. The consumer bears the whole tax; the businesses only collect and pass it on.
ITC is not automatic. A buyer can generally claim it only when the supplier has reported the invoice and it appears in the buyer’s GSTR-2B statement. Some items, such as certain motor vehicles and food for staff, are blocked. This link between the supplier’s filing and the buyer’s credit is why accurate returns matter so much.
Types of GST: CGST, SGST, UTGST and IGST
Which GST applies depends on whether a supply stays within one state or crosses a state border. India uses a “dual GST”: the Centre and the states tax the same transaction together.
| Type | Levied by | When it applies |
|---|---|---|
| CGST (Central GST) | Central government | Supplies within one state or union territory, charged alongside SGST or UTGST |
| SGST (State GST) | State government | Supplies within one state; Delhi, Puducherry and Jammu and Kashmir also levy their own SGST |
| UTGST (Union Territory GST) | Central government, for the UT | Supplies within union territories without a legislature, such as Chandigarh or Ladakh |
| IGST (Integrated GST) | Central government | Inter-state supplies, imports and supplies to or by SEZ units |
In practice, a Laxmi Nagar shop selling to a customer in Delhi charges CGST plus Delhi SGST, split equally. If the same shop ships goods to a buyer in Noida, it charges IGST at the full rate, because the goods cross from Delhi into Uttar Pradesh. The IGST is later settled between the Centre and the consuming state.
IGST vs CGST vs SGST: interstate vs intrastate, with four examples
The IGST vs CGST vs SGST question is answered by where the supplier and the place of supply are. If both are in the same state or union territory, the supply is intrastate and CGST plus SGST (or UTGST) apply, each at half the GST rate. If they are in different states or union territories, or one is a state and the other a union territory, the supply is interstate and IGST applies at the full rate (Section 7 of the IGST Act). The examples use a sale of goods worth ₹10,000 at 18%.
| Example | Intrastate or interstate | Tax charged | Total GST |
|---|---|---|---|
| Delhi shop sells to a Delhi customer | Intrastate | CGST 9% (₹900) plus SGST 9% (₹900) | ₹1,800 |
| Delhi shop sells to a buyer in Noida, Uttar Pradesh | Interstate | IGST 18% | ₹1,800 |
| Delhi shop sells to a buyer in Chandigarh (a union territory) | Interstate | IGST 18% | ₹1,800 |
| Delhi shop sells goods taxed at 5% to a Delhi customer | Intrastate | CGST 2.5% (₹250) plus SGST 2.5% (₹250) | ₹500 |
Notice that the total tax is the same whichever way the supply goes. What changes is which government receives it first, and which ledger the buyer’s input credit is booked to.
GST journal entries with examples
A GST journal entry records the tax in its own accounts, never inside Purchases or Sales. These examples use the same ₹10,000 intrastate transaction at 18%, with a credit supplier and a credit customer.
| Transaction | Debit | Credit |
|---|---|---|
| Purchase on credit | Purchases ₹10,000; Input CGST ₹900; Input SGST ₹900 | Supplier ₹11,800 |
| Sale on credit | Customer ₹11,800 | Sales ₹10,000; Output CGST ₹900; Output SGST ₹900 |
| Interstate purchase on credit | Purchases ₹10,000; Input IGST ₹1,800 | Supplier ₹11,800 |
| Month-end set-off of CGST | Output CGST (up to the input credit available) | Input CGST |
Any balance of output tax left after set-off is paid to the government and recorded as a payment. Our journal entries with solutions page has the GST set-off entry worked through, and the same entries are posted in Tally through the GST ledgers.
GST rates in India as of September 2026
Since 22 September 2025, most goods and services fall into two main rates: a standard rate of 18% and a merit rate of 5%. A special de-merit rate of 40% applies to a few items. This followed the 56th GST Council meeting, which replaced the earlier four-slab structure of 5%, 12%, 18% and 28% (PIB, 3 September 2025).
| Rate | Examples from the Council’s decisions |
|---|---|
| Nil | UHT milk, pre-packaged and labelled paneer, Indian breads such as roti and paratha |
| 5% (merit rate) | Hair oil, toilet soap, shampoo, toothpaste, bicycles, most medical supplies, tractors and farm machinery |
| 18% (standard rate) | Most other goods and services, including air conditioners, TVs, small cars, two-wheelers up to 350 cc and all auto parts |
| 40% (de-merit rate) | Larger cars, motorcycles above 350 cc and, from 1 February 2026, pan masala, cigarettes and other tobacco products |
Tobacco products and pan masala moved to the new rates later than everything else. The Council kept them on the old rates plus compensation cess until the cess account’s loans were repaid. From 1 February 2026, they attract 40% GST (bidis 18%), and the compensation cess on them was withdrawn. Tobacco products now also carry additional excise duty, and a Health Security se National Security Cess was introduced on pan masala manufacturing. That cess has been challenged in court, so check its current status (Akashvani News, 1 January 2026; GST Council newsletter, December 2025).
Rates are set item by item using HSN codes, so always check the current rate notification for a specific product rather than relying on a general category.
Is GST registration compulsory for your business?
A business must register once its aggregate turnover crosses the threshold for its state, or earlier if it falls in a compulsory category. For a supplier based in Delhi, the limit is ₹40 lakh a year for businesses supplying only goods and ₹20 lakh for services or mixed supplies. Some states use lower limits.
Certain businesses must register regardless of turnover, including most inter-state suppliers of goods, e-commerce operators and people liable to pay tax under reverse charge. Registration is free on the GST portal. Our GST registration guide covers the thresholds, documents and the new three-day route for small businesses.
What is a GSTIN?
A GSTIN is the 15-character GST identification number given to every registered business. It is PAN-based and state-specific, so a business with branches in three states holds three GSTINs.
- Digits 1 and 2: the state code (07 is Delhi).
- Characters 3 to 12: the PAN of the business or proprietor.
- Character 13: the entity number for registrations under the same PAN in that state.
- Character 14: “Z” by default.
- Character 15: a check digit.
Anyone can verify a GSTIN with the “Search Taxpayer” tool on gst.gov.in. Checking a supplier’s GSTIN before paying them protects your input tax credit.
GST invoices and e-invoicing
A registered business must issue a tax invoice showing its GSTIN, the buyer’s GSTIN for B2B sales, the place of supply, HSN or SAC codes, the taxable value and the CGST, SGST or IGST charged. The invoice is the foundation of the whole system: the seller reports it and the buyer claims credit on it.
Businesses whose aggregate turnover exceeds ₹5 crore in any financial year must also generate e-invoices for B2B supplies, registering each invoice on the government’s Invoice Registration Portal. This threshold has applied since 1 August 2023 under Notification 10/2023-Central Tax.
GST returns in brief
A regular registered business files two core returns: GSTR-1 for sales and GSTR-3B for the summary of tax payable, credit claimed and tax paid. Both are filed monthly, or quarterly for smaller businesses that opt for the QRMP scheme. Most businesses above the exemption limit also file an annual return, GSTR-9.
Return filing has changed a lot since 2024. The tax payable in GSTR-3B is now locked to what was reported in GSTR-1, and buyers accept or reject supplier invoices in the Invoice Management System before claiming credit. Our GST return filing guide walks through GSTR-1, GSTR-3B, due dates and these changes step by step.
The composition scheme for small businesses
Small businesses can opt for the composition scheme, paying tax at a low fixed percentage of turnover and filing simpler returns. The turnover limit is ₹1.5 crore in the preceding year for goods suppliers (lower in some special category states) and ₹50 lakh for service providers and mixed suppliers (PIB, 7 March 2019).
The trade-off is real. A composition dealer cannot charge GST on invoices, cannot claim input tax credit and generally cannot make inter-state supplies of goods. It suits small retailers selling to consumers, not businesses whose buyers want to claim credit.
The GST Council: who decides rates and rules
The GST Council, set up under Article 279A of the Constitution, recommends GST rates, exemptions, thresholds and changes to the law. It is chaired by the Union Finance Minister and includes the Union Minister of State for Finance and a minister from each state.
The Council’s recommendations take legal effect only when the Centre and states issue notifications. That is why practitioners track two things after every Council meeting: the press release that announces decisions and the CBIC notifications that make them binding, often weeks later.
Why learning GST is a practical career skill
Every registered business needs someone to raise correct invoices, reconcile purchase credit and file returns on time. That work is done by in-house accountants, CA firm staff and enrolled GST Practitioners who file for several clients.
If you are considering this path, read how to become a GST Practitioner under Rule 83 and what shapes GST practitioner salary and career growth. IPA – Institute of Professional Accountants in Laxmi Nagar runs a practical GST course in Delhi (2 months, placement assistance) built around hands-on filing on practice data. To compare institutes first, use our checklist for choosing a GST return filing course.
How we teach this at IPA
IPA’s GST course starts from the concepts in this guide, CGST and SGST, and then moves onto the GST portal: registration and amendments, return filing, input tax credit, payment and challans, and audit and notices. The 2-month course runs in the classroom or live online and uses realistic business data, so the screens are familiar when you meet them at work.
Frequently asked questions
What is the full form of GST?
GST stands for Goods and Services Tax. In India it is levied under the CGST Act, the IGST Act, the UTGST Act and each state’s SGST Act, all in force since 1 July 2017.
What are the current GST rates in India?
As of September 2026, the main rates are 5% (merit rate) and 18% (standard rate). A 40% rate applies to a few items such as larger cars and tobacco products, and essentials like UHT milk and Indian breads are nil-rated. The two-rate structure took effect on 22 September 2025.
Is GST charged on top of the MRP?
No. For packaged goods sold to consumers, the MRP printed on the pack already includes GST. A shop cannot add GST on top of the MRP.
Who pays GST, the buyer or the seller?
The buyer bears the tax, because it is added to the price. The registered seller collects it and pays it to the government after deducting the input tax credit on its own purchases. Under reverse charge, the buyer pays the tax directly.
What is the difference between CGST, SGST and IGST?
CGST and SGST are charged together, in equal halves, on sales within one state. IGST is charged at the full rate on sales between states and on imports, and is collected by the Centre.
Do I need to register for GST as a freelancer?
A freelancer supplying services within India generally needs to register once aggregate turnover crosses ₹20 lakh in a year (₹10 lakh in Manipur, Mizoram, Nagaland and Tripura). Export of services and other special cases have their own rules, so check before you cross the limit.