What is GST in India, Meaning, Objectives, Types, Process, Advantages, Importance, and Calculation

June 21, 2025

What is GST in India?

The Goods and Services Tax (GST) in India is a comprehensive, destination-based indirect tax that subsumes almost all central and state taxes such as excise duty, service tax, value-added tax (VAT), octroi, and entry tax into a single unified levy. Introduced on 1 July 2017 through the One Hundred and First Amendment to the Constitution, GST replaced a complex web of cascading taxes with a simpler, transparent system where tax is levied only on the value addition at each stage of the supply chain.

Under the GST regime, businesses collect tax on their outward supplies (sales) and claim credit for the tax paid on inward supplies (purchases). The final consumer bears the ultimate tax cost, while businesses act as intermediaries, remitting the net tax to the government.

Types of GST in India

There are three main types of GST in India, each designed to address different transaction scenarios:

Central GST (CGST): Levied by the Central Government on intra-state supplies of goods and services.
State GST (SGST): Levied by the State Governments on intra-state supplies, collected alongside CGST.
Integrated GST (IGST): Levied by the Central Government on inter-state supplies and imports; distributed between the Centre and destination state.

These taxes ensure that revenue is equitably shared between the Centre and States, maintaining a federal structure while simplifying compliance.

How Does GST Work? The Process

Registration: Businesses with aggregate turnover above a prescribed threshold must register on the GST portal and obtain a GSTIN (15-digit GST identification number).
Tax Collection: While supplying goods or services, suppliers charge GST in the invoice at the applicable rate.
Input Tax Credit (ITC): Registered taxpayers claim credit for GST paid on purchases, which they can offset against GST collected on sales.
Return Filing: Businesses file periodic returns (monthly, quarterly, and annual), detailing outward supplies (GSTR-1), inward supplies (GSTR-2B), and payment of tax liabilities (GSTR-3B).
Payment: Tax payment is made online through the GST portal using net liability after adjusting ITC.
Reconciliation & Assessment: The tax authorities reconcile returns, conduct audits if required, and enforce compliance measures.

This streamlined process reduces tax cascading, enhances compliance, and improves ease of doing business.

Objectives of GST

Eliminate Cascade Effect: Remove “tax on tax” by allowing seamless input tax credits.
Uniform Tax Structure: Create a single domestic market with uniform tax rates and definitions.
Improve Compliance: Encourage digital invoicing and electronic return filing to enhance transparency.
Enhance Competitiveness: Reduce overall tax burden on goods/services to make Indian products competitive globally.
Boost Revenue: Broaden the tax base by bringing unorganized sectors into the formal economy.

Importance of GST

GST plays a pivotal role in India’s economy by:

Simplifying Taxation: Businesses deal with one law, one tax, and one portal.
Reducing Costs: Lower logistics and compliance costs through the abolition of multiple taxes and checkpoints.
Increasing Transparency: Digital processes minimize human intervention and corruption.
Encouraging Growth: Uniform taxation boosts inter-state trade and helps accelerate GDP growth.
Enhancing Revenue Efficiency: Wider insurance of tax compliance leads to a more stable revenue stream for governments.

Advantages of GST

Ease of Doing Business: Single registration, return, and payment mechanism.
Lower Logistics Costs: Removal of state border checkposts speeds up transportation.
Better Working Capital: Faster refund of input tax credits improves liquidity.
Reduced Tax Evasion: E-way bills and e-invoicing systems create an audit trail.
Export Competitiveness: Zero rating on exports makes Indian goods more competitive abroad.

Examples of GST in India

Manufacturing: A car maker pays CGST and SGST on input raw materials, claims ITC, and then charges IGST for interstate sales.
Services: A software company in Karnataka charges IGST for servicing a client in Maharashtra.
E-commerce: An online retailer collects GST at source (TCS mechanism) on every sale and remits it to the government.

These examples demonstrate GST’s flexibility across sectors and transaction types.

Components of GST

CGST: Central share on intra-state supplies.
SGST: State share on intra-state supplies.
IGST: Levied on inter-state supplies and imports.
Compensation Cess: Additional levy on certain luxury or sin goods (e.g., tobacco, automobiles) to compensate states for revenue loss during the transition.

How to Calculate GST?

To calculate GST on a transaction:

Determine the taxable value (price before tax).
Identify the applicable GST rate (one of the statutory slabs).
Apply the rate to the taxable value.
Add the resulting tax amount to the base price to arrive at the invoice value.

GST Calculation Formula

GST Amount = Taxable Value × (GST Rate ÷ 100)

Invoice Value = Taxable Value + GST Amount

For intra-state sales, split the GST Amount equally between CGST and SGST; for inter-state sales, charge the entire amount as IGST.

GST Rates Slabs in India

GST divides goods and services into five main tax slabs:

0%: Essential goods (e.g., fresh produce, bread).
5%: Mass consumption items (e.g., edible oils, sugar).
12%: Mid-segment goods (e.g., processed foods).
18%: Standard rate for most goods/services (e.g., soaps, restaurants).
28%: Luxury items (e.g., high-end cars, tobacco).

There are also special rates: 0.25% on rough precious stones, 3% on gold, and additional cess up to 22% on certain products.

GST Rates in India

The rate slabs correspond to broad categories:

0%: Education, healthcare, unprocessed agricultural products.
5%: FMCG staples, small restaurants.
12%: Cell phones, computers.
18%: Financial services, branded garments.
28% + Cess: Automobiles, aerated beverages, tobacco.

These rates are periodically reviewed by the GST Council to align with economic priorities.

Which Taxes will be Included into GST?

GST subsumes most indirect taxes:

Central: Excise Duty, Service Tax, Additional Customs Duty.
State: VAT, Entertainment Tax, Entry Tax, Luxury Tax, Purchase Tax.
Local: Octroi, Toll Tax.

Some items remain outside GST (e.g., petroleum products, alcohol for human consumption) and continue to be taxed separately.

Technological Optimization of GST

GST Portal: Centralized platform for registration, return filing, and payments.
E-Invoice System: Mandatory for businesses above a turnover threshold to generate authenticated invoices.
E-Way Bill: Electronic consignment note for goods transport beyond 10 km.
Mobile Apps: Track filings, payments, and refunds on the go.
Data Analytics: AI and machine learning tools for real-time fraud detection.

These technologies enhance efficiency, reduce errors, and promote compliance.

What are the New Compliances Under GST?

QRMP Scheme: Quarterly return filing with monthly payment for small taxpayers (turnover up to ₹5 crore).
E-Invoicing: Phased rollout requiring large taxpayers to generate invoices on a government portal.
Invoice Furnishing Facility (IFF): Under QRMP, small taxpayers upload outward supplies in first two months of a quarter.
Dynamic Return Formats: Introduction of new simplified returns (e.g., Sahaj and Sugam) though currently under review.

These measures aim to simplify compliance and reduce the burden on small businesses.

History of GST

2000: Kelkar Committee recommends a comprehensive indirect tax.
2011: Constitution Amendment Bill introduced in Lok Sabha.
2016: One Hundred and First Amendment Act passed by Parliament.
1 July 2017: GST rolled out nationwide; 1 July declared as GST Day.

This marked the culmination of a 17-year reform journey to unify indirect taxation.

Features of GST

Comprehensive: Covers goods and services.
Multi-stage: Tax at each supply stage, with credit mechanism.
Destination-based: Tax collected by the consuming state.
Self-policing: E-invoicing and matching mechanism.
Uniform Rate: Same tax rate across the country for similar supplies.

Definition of GST

GST is defined as a single, comprehensive tax levied on the supply of goods and services, right from the manufacturer to the consumer.

Meaning of GST

The meaning of GST encapsulates the replacement of multiple indirect taxes with a unified regime that is transparent, technology-driven, and aligned with global best practices.

GST Registration Fees

There is no government fee for GST registration when applying online through the official GST portal. Businesses may incur professional fees if they engage consultants or Chartered Accountants, typically ranging from ₹1,000 to ₹5,000.

GST Registration Procedure

Visit www.gst.gov.in and select Services > Registration > New Registration.
In Part A, enter PAN, mobile number, and email; verify via OTP.
Receive an Application Reference Number (ARN).
Complete Part B: provide business details, promoter details, and bank account.
Upload required documents digitally and submit.
GST officer verifies; upon approval, GSTIN and registration certificate (Form GST REG-06) are issued.

Documents Required for GST Registration

PAN Card of proprietor/partners/directors.
Aadhaar Card or proof of identity.
Proof of Business Address (rent agreement, utility bill).
Bank Account Details (cancelled cheque/passbook copy).
Digital Signature Certificate (if required).
Photographs of promoters.
Letter of Authorization for authorized signatory.

What is GST Return Filing?

GST return filing is the periodic submission of details of sales (outward supplies), purchases (inward supplies), input tax credit, and tax liability to the GST portal. Returns enable calculation of net tax payable after offsetting credits.

What are the Main Components of GST Returns Filing?

GSTR-1: Details of outward supplies (monthly/quarterly).
GSTR-2B: Auto-populated ITC statement for inward supplies.
GSTR-3B: Summary return with tax liability and payment (monthly/quarterly).
Annual Return (GSTR-9): Comprehensive annual statement.

When to File GST Returns?

GSTR-3B: By 20th of the next month (for regular taxpayers) or relevant quarterly due dates (for QRMP).
GSTR-1: By 11th of the next month (or quarterly for small taxpayers).
GSTR-9: By 31 December following the financial year.

How can You Make Payments Under GST?

Online via GST Portal: Net banking, credit/debit cards, NEFT/RTGS.
Over the Counter: Designated bank branches (using challan generated on portal).
Advance Tax: Deposited against electronic cash ledger for further offsets.

Summary

GST is a unified, destination-based tax introduced on 1 July 2017 in India.
Three types: CGST, SGST, and IGST, ensuring revenue sharing.
Simplifies taxation by subsuming multiple indirect levies and allowing seamless input tax credit.
Five main rate slabs: 0%, 5%, 12%, 18%, 28%.
No government fee for registration; process is fully online.
Returns include GSTR-1, GSTR-2B, GSTR-3B, and GSTR-9 with monthly/quarterly filing options.
New compliances: QRMP scheme, e-invoicing, and Invoice Furnishing Facility.
Technological tools: GST portal, e-way bill, and analytics improve compliance.
GST has streamlined India’s indirect tax structure, boosting transparency and ease of doing business.