GST in India is a unified indirect tax that replaced more than a dozen central and state levies on July 1, 2017, applying to almost every sale of goods and services through five rate slabs from 0% to 28%. It runs on a dual model where the central and state governments tax the same transaction together, and any business whose annual turnover crosses ₹20 lakh generally has to register, file returns, and pay tax through the GST portal.
What follows is the working picture: how the tax splits between governments, what rates apply, who must register, how input tax credit works, when returns are due, and what happens if you get it wrong.
How the Dual GST Structure Works
Both the central and state governments collect tax on the same transaction. The label on the tax depends on where the buyer and seller are located.
When the buyer and seller are in the same state, the transaction attracts CGST (paid to the centre) and SGST (paid to the state) in equal halves. An 18% rate breaks into 9% CGST plus 9% SGST. When a union territory without its own legislature is involved, UTGST replaces SGST under the UTGST Act, which applies to the Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli and Daman and Diu, Ladakh, and Chandigarh.
Interstate transactions work differently. When the buyer and seller are in different states or territories, the transaction attracts IGST at the full combined rate. The central government collects the whole amount and then settles the state’s share with the state where the goods or services were actually consumed. This destination-based settlement is what stops the same sale from being taxed twice when it crosses state lines.
GST Rate Slabs
The GST Council has sorted all goods and services into five main tiers.
- 0% (nil rated) covers essentials like fresh fruits, vegetables, milk, unbranded cereals, bread, salt, books, and newspapers.
- 5% applies to common-use items including packaged food products, economy rail and air travel, fertilizers, and small restaurants that don’t serve alcohol.
- 12% covers processed food, business-class air tickets, certain medicines, and apparel above specified price thresholds.
- 18% is the default rate and covers most goods and services, including electronics, financial services, air-conditioned restaurant meals, and IT services. This is the slab most businesses deal with day to day.
- 28% is reserved for luxury and demerit goods such as automobiles, air conditioners, cement, and tobacco products.
Some items in the 28% bracket also attract a compensation cess on top of the base rate. The cess originally funded payments to states that lost revenue during the transition. As of late 2025, it has been discontinued for most goods but continues on tobacco and related products until the central government settles pandemic-era borrowings.
Who Has to Register
Section 22 of the CGST Act sets the baseline registration threshold at aggregate annual turnover of ₹20 lakh. In special category states, including Manipur, Mizoram, Nagaland, Tripura, Meghalaya, Arunachal Pradesh, Sikkim, Uttarakhand, and Puducherry, the threshold drops to ₹10 lakh. If you sell only goods (no services) from a regular-category state, the threshold rises to ₹40 lakh under a notification several states have adopted.
Some businesses have to register no matter how small their turnover. These include anyone making interstate taxable supplies, casual taxable persons, non-resident taxable persons, agents of a supplier, e-commerce operators, and anyone liable to pay tax under the reverse charge mechanism.
Skip registration when you should have registered and the penalty is 10% of the tax owed or ₹10,000, whichever is higher.
How Registration Works
Registration is entirely online through the GST portal. You start by entering your PAN and contact details. The portal sends a one-time password to your mobile number and email for verification, then issues a Temporary Reference Number that lets you complete the application across multiple sessions.
The documents you need depend on your business structure, but the standard set includes:
- Identity and authorization documents: PAN of the business or proprietor, Aadhaar and photographs of all promoters or partners, and a letter of authorization for the signatory.
- Business proof: certificate of incorporation, partnership deed, or registration certificate, depending on entity type.
- Address proof for your principal place of business: rental agreement or property tax receipt, along with a recent utility bill or municipal record if the property is owned.
- Bank details: a cancelled cheque or the first page of a bank passbook showing the account linked to the business.
Uploads go in JPEG or PDF. Photographs of stakeholders are capped at 100 KB. Partnership deeds, rental agreements, and other supporting documents can go up to 1 MB. You verify the application using a Digital Signature Certificate or an Electronic Verification Code, and the system issues an Application Reference Number for tracking.
If the application clears the portal’s risk-based checks, registration can be granted automatically within three working days. Applications flagged for manual review go to a tax officer who may ask for clarification before approving or rejecting.
Input Tax Credit
Input tax credit is what stops GST from taxing the same value twice as goods move through the supply chain. When you buy raw materials, services, or capital goods for your business and pay GST on them, you can subtract that tax from the GST you owe on your own sales. You pay only the difference to the government.
Section 16 of the CGST Act sets four conditions for claiming ITC:
- You hold a valid tax invoice or debit note from a registered supplier.
- You have actually received the goods or services.
- The supplier has actually deposited the tax charged on the invoice with the government.
- You have filed your own GST return for the relevant period.
Break any link in this chain and the credit gets denied. The third condition catches buyers most often: if your supplier collects GST from you but doesn’t remit it to the government, your credit can be reversed even though you paid in good faith. Matching your purchase records against your suppliers’ filings in GSTR-2B before claiming credit is the reliable way to catch mismatches early.
Blocked Credits
Section 17(5) of the CGST Act lists categories where ITC is blocked outright, no matter how legitimate the business use. The major ones include motor vehicles for transporting up to 13 passengers (unless you’re in the business of transporting passengers or teaching people to drive), food and beverages, outdoor catering, health and fitness club memberships, cosmetic and plastic surgery, life and health insurance premiums (unless you’re an insurer), construction of immovable property for your own use, and goods used for personal consumption or given as gifts and free samples. Spending on corporate social responsibility activities under the Companies Act is also blocked.
A common trap: if you renovate your office, the GST on construction materials and contractor services cannot be claimed because it falls under immovable property construction on your own account.
Return Filing Deadlines
Compliance runs on a cycle of periodic returns. The two central returns for regular taxpayers are GSTR-1 (details of outward supplies) and GSTR-3B (summary return with tax payment).
- GSTR-1 for monthly filers with turnover above ₹1.5 crore is due by the 11th of the following month.
- GSTR-1 for quarterly filers with turnover up to ₹1.5 crore under the QRMP scheme is due by the 13th of the month following the quarter.
- GSTR-3B for monthly filers is due by the 20th of the following month.
- GSTR-9, the annual return, is mandatory for businesses with aggregate turnover above ₹2 crore and is due by December 31 of the following financial year. For FY 2025–26, the deadline is December 31, 2026.
Quarterly filers under the QRMP (Quarterly Return Monthly Payment) scheme can use the Invoice Furnishing Facility to report individual B2B invoices in the first two months of each quarter, due by the 13th of the following month. Tax payment for those months still happens monthly through an auto-generated or self-assessed challan by the 25th.
The Composition Scheme for Small Businesses
If your annual turnover stays below ₹1.5 crore (₹75 lakh in some northeastern states and Himachal Pradesh), the composition scheme offers a simpler alternative. Instead of charging GST on every invoice and filing monthly returns, you pay a flat percentage of turnover each quarter:
- Manufacturers pay 1% (0.5% CGST plus 0.5% SGST).
- Restaurants not serving alcohol pay 5% (2.5% CGST plus 2.5% SGST).
- Other service providers pay 6% (3% CGST plus 3% SGST).
The tradeoffs are real. Composition dealers cannot collect tax from their customers, so the tax comes out of their margins. They cannot claim any input tax credit. They cannot make interstate sales. And they cannot sell through e-commerce platforms that collect tax at source. A business that buys heavily taxed inputs or sells across state lines can end up worse off under composition than under the regular route.
E-Invoicing and Reverse Charge
Two rules catch registrants off guard often enough to deserve their own note.
Businesses with aggregate annual turnover exceeding ₹5 crore must generate e-invoices for all B2B transactions and exports. Each invoice is reported to the Invoice Registration Portal, which validates the data and returns a signed invoice with a unique Invoice Reference Number and QR code. Starting April 1, 2025, taxpayers must report e-invoices to the portal within 30 days of the invoice date. Missing that window doesn’t invalidate the invoice for GST purposes, but it creates audit risk and can delay your buyers’ ability to claim input tax credit on the transaction.
The reverse charge mechanism flips the usual rule that the supplier collects tax and remits it. Under reverse charge, the buyer pays GST directly to the government. Section 9(3) covers category-based reverse charge, where certain supplies are notified regardless of who the parties are: legal services from advocates, services from goods transport agencies, services by company directors to their company, sponsorship services to corporate entities, and purchases of raw cotton, cashew nuts, and silk yarn from unregistered dealers, among others. Section 9(4) covers status-based reverse charge, where a registered buyer purchasing taxable goods or services from an unregistered supplier must pay GST directly. That second rule pulls unregistered small suppliers into the tax net through their registered customers.
Penalties and Interest
Penalties escalate depending on whether you’re late, wrong, or deliberately evasive.
For late filing of returns, Section 47 of the CGST Act imposes a late fee of ₹100 per day for each day the return remains unfiled, capped at ₹5,000 per return. A matching fee applies under the relevant SGST or UTGST Act, so the daily charge effectively doubles. The GST Council has periodically reduced these fees through notifications, especially for nil returns and small taxpayers, but the statutory ceiling remains in place.
For late payment of tax, Section 50 charges interest at up to 18% per annum on the unpaid amount, calculated from the day after the due date until the date of payment. If you wrongly claim and use input tax credit you weren’t entitled to, the rate jumps to 24% per annum. Interest accrues automatically and must be paid along with the outstanding tax.
Deliberate evasion triggers criminal consequences under Section 132, scaling with the amount involved:
- Tax evasion exceeding ₹5 crore: imprisonment up to five years with fine.
- Tax evasion between ₹2 crore and ₹5 crore: imprisonment up to three years with fine.
- Tax evasion between ₹1 crore and ₹2 crore: imprisonment up to one year with fine.
Offences above ₹5 crore are cognizable and non-bailable, so authorities can arrest without a warrant. Repeat offenders at any level face enhanced terms. These criminal provisions sit alongside civil penalties and interest, and a serious case can bring financial and criminal liability at the same time.