How GST Works in India? Explained with Example

Let's understand how GST works in India with simple explanations and examples.

What is GST?

GST, or Goods and Services Tax, is an indirect tax charged on the supply of goods and services in India. It is a destination-based tax, meaning the tax revenue generally goes to the state where the goods or services are consumed.

GST is collected at different stages of the supply chain, but businesses can generally claim credit for GST already paid on eligible purchases. This prevents the same tax from being charged repeatedly on the same value addition.

What is the Purpose of Bringing GST to India?

Before GST, India had several indirect taxes administered by the Centre and States. GST was introduced to simplify this system and create a more integrated tax structure.

The major objectives included:

• Creating a common national market
• Reducing multiple indirect taxes
• Reducing the cascading effect of taxation
• Improving tax compliance
• Simplifying business transactions across states
• Increasing transparency through digital compliance
• Making Input Tax Credit available across the supply chain

The GST Council recommends important GST policies, including tax rates, exemptions, thresholds and other framework-related matters.

Which Indirect Taxes Have Been Replaced by GST?

GST subsumed several major indirect taxes, including:

• Central Excise Duty
• Service Tax
• Additional Customs Duty
• Special Additional Duty of Customs
• State VAT/Sales Tax
• Central Sales Tax
• Luxury Tax
• Entry Tax
• Entertainment Tax in many cases
• Various state-level cesses and surcharges

However, certain taxes and products remain outside the GST framework.

What is the Structure and Framework of GST in India?

GST follows a dual structure because both the Central and State governments have taxation powers.

The major components are:

1. CGST – Central Goods and Services Tax
2. SGST – State Goods and Services Tax
3. IGST – Integrated Goods and Services Tax
4. UTGST – Union Territory Goods and Services Tax

For an intra-state transaction, CGST and SGST/UTGST are generally charged together. For an inter-state transaction, IGST is generally charged.

Applicability of GST in India

GST generally applies to taxable supplies of goods and services made in India, subject to the provisions, exemptions and registration rules under GST law.

GST registration depends on factors such as turnover, nature of supply and specific mandatory-registration provisions. The commonly used threshold is ₹20 lakh for many service suppliers and ₹40 lakh for suppliers exclusively engaged in goods in eligible states, subject to applicable state-specific rules and exceptions.

Certain activities can require registration even when turnover is below the general threshold, so businesses should check the applicable provisions before deciding whether registration is necessary.

Who is Exempt from GST?

Businesses dealing exclusively in exempt supplies generally do not have GST registration liability merely because their turnover crosses the normal threshold. CBIC also states that an agriculturist, to the extent of supply of produce out of cultivation of land, is not liable for registration.

GST exemptions can apply to specific goods, services, persons or transactions. Therefore, exemption should always be checked against the latest applicable notification.

What is SGST (State Goods and Services Tax)?

SGST is the portion of GST collected by the state government on an intra-state supply.

For example, if a business in West Bengal sells taxable goods to a customer in West Bengal, both CGST and SGST may apply.

What is CGST (Central Goods and Services Tax)?

CGST is the Central Government's component of GST on an intra-state supply.

For example, if the GST rate on a particular product is 18%, an intra-state transaction may generally involve:

• CGST = 9%
• SGST = 9%

The combined tax remains 18%.

What is UTGST (Union Territory Goods and Services Tax)?

UTGST applies to eligible intra-state supplies made within a Union Territory where the UTGST framework applies.

It works alongside CGST in a manner similar to CGST + SGST for an intra-state transaction.

What is IGST (Integrated Goods and Services Tax)?

IGST is generally charged on inter-state supplies of goods and services and on imports, subject to the applicable GST provisions.

For example, if a registered business in West Bengal sells goods to a registered customer in Maharashtra, IGST would generally apply instead of CGST + SGST.

Key Differences Between CGST, SGST, and IGST

Goods and Services Not Covered Under GST

Not every product and transaction falls within the GST system.

For example, alcoholic liquor for human consumption remains outside GST. Certain petroleum products are also presently outside the GST levy, while some transactions are governed by special provisions.

This is why businesses should not assume that every sale automatically attracts GST.

What are the GST Tax Rates in India?

GST rates depend on the specific goods or services and their classification.

Following the 56th GST Council meeting, a broad 5% and 18% structure, along with a special 40% rate for certain luxury and sin goods, was recommended, with most revised rates for goods and services becoming effective from 22 September 2025. Certain specified tobacco products were treated separately.

Because GST rates can change through notifications and Council recommendations, businesses should always verify the current rate applicable to a particular HSN/SAC classification.

Documents Required for GST Registration

Common documents required for GST registration may include:

• PAN
• Aadhaar or applicable identity/address documents
• Mobile number and email ID
• Proof of business constitution
• Photograph of the proprietor/partners/directors, where applicable
• Proof of principal place of business
• Rent/lease agreement or ownership-related documents, where applicable
• Electricity bill or other acceptable address proof
• Authorisation letter/resolution for the authorised signatory

The GST registration documentation requirements vary depending on the type of taxpayer and business structure. The GST portal's official checklist includes documents such as proof of the principal place of business and proof of appointment of an authorised signatory.

How GST Eliminates the Cascading Tax Effect

The cascading effect occurs when tax is effectively charged on a value that already contains another tax.

GST addresses this through Input Tax Credit (ITC).

Let's understand with an example.

Suppose a manufacturer purchases raw materials for ₹10,000 and GST at 18% is charged.

GST paid:

₹10,000 × 18% = ₹1,800

The manufacturer then sells the finished product for ₹15,000.

GST on the sale:

₹15,000 × 18% = ₹2,700

Instead of paying the entire ₹2,700 again, the manufacturer can generally claim eligible ITC of ₹1,800.

Therefore:

Output GST = ₹2,700

Less: Eligible ITC = ₹1,800

Net GST payable = ₹900

The business effectively pays tax on the value it added rather than paying GST repeatedly on the same tax-inclusive chain.

How Does Input Tax Credit (ITC) Set-Off Work Under GST?

Input Tax Credit allows an eligible registered taxpayer to use GST paid on eligible business purchases against GST payable on outward taxable supplies, subject to conditions and restrictions.

For example:

A trader purchases goods for ₹50,000 + 18% GST.

GST paid on purchase:

₹9,000

The trader sells the goods for ₹70,000 + 18% GST.

GST collected on sale:

₹12,600

If the ₹9,000 input tax credit is eligible and all applicable conditions are satisfied:

Output GST = ₹12,600

Less ITC = ₹9,000

Net GST payable = ₹3,600

This mechanism is one of the most important features of GST because it helps prevent tax-on-tax and supports a credit-based tax chain.

Conclusion

GST has fundamentally changed the way indirect taxation works in India. Instead of dealing with multiple major central and state indirect taxes, businesses operate within a common GST framework involving CGST, SGST, IGST and UTGST.

Understanding what GST is, its applicability, GST rates, registration, Input Tax Credit and tax set-off is essential for business owners as well as accounting and taxation professionals.

For students and freshers planning a career in accounting, practical GST knowledge can be especially valuable. Learning GST alongside accounting software, Income Tax and corporate accounting can help build job-ready skills for accounting and taxation roles.

If you want to develop practical accounting and taxation skills, explore:

• Certified Corporate Accounting
• SAP FICO (Finance & Controlling)
• Taxation (Income Tax & GST)

Frequently Asked Questions (FAQs)

1. What is GST in simple words?

GST is an indirect tax charged on the supply of goods and services. It replaced several major indirect taxes and introduced a common tax framework across India.

2. What is the difference between CGST and SGST?

CGST is the Central Government's share of tax on an intra-state supply, while SGST is the State Government's share.

3. When is IGST charged?

IGST is generally charged on inter-state supplies and imports, subject to the applicable GST provisions.

4. What is Input Tax Credit in GST?

Input Tax Credit allows eligible registered businesses to claim credit for GST paid on eligible purchases and use it against GST payable on taxable outward supplies, subject to applicable conditions.

5. What are the main GST rates?

GST rates depend on the classification of goods or services. The current framework includes major rates such as 5% and 18%, with a special 40% rate for certain specified luxury and sin goods following the 2025 reforms.

6. Is every business required to register for GST?

No. Registration depends on turnover, the nature of supplies and specific mandatory-registration provisions. Businesses should check the latest applicable GST rules before making a decision.

7. Can GST be claimed back on every purchase?

No. ITC is available only when the legal conditions and restrictions for claiming credit are satisfied. Businesses should maintain proper tax invoices and records and follow GST compliance requirements.