What Is GST India Explained — The 2017 Indirect Tax That Replaced 17 Earlier Levies

This is a research-led definitional explainer of the Goods and Services Tax (GST) in India as administered by the GST Council and the Central Board of Indirect Taxes and Customs (CBIC). This post is not GST filing advice. GST compliance, registration eligibility, Input Tax Credit claims, return filing (GSTR-1, GSTR-3B, GSTR-9), and the choice between regular and composition schemes all depend on business-specific circumstances that only a qualified Chartered Accountant or GST practitioner familiar with your situation can correctly assess. Consult a CA before any GST-related decision for your business.

GST is the largest indirect-tax reform in independent India's history. Before its introduction on 1 July 2017, businesses operating across states navigated a maze of 17 different central and state taxes — VAT (different rates in each state), central excise, service tax, octroi, entry tax, luxury tax, and others — with separate registrations, returns, and compliance procedures for each. GST collapsed this into a single unified tax with five main slabs, administered jointly by the centre and the states through the constitutional GST Council. The transition was structurally complex but produced a simpler ongoing regime for both businesses and consumers.

This post covers what GST actually is, the constitutional framework that enables its centre-state administration, the rate slab structure with examples of goods in each, the CGST/SGST/IGST split mechanism, Input Tax Credit, registration thresholds, and the composition scheme for small businesses.

What GST actually is

GST (Goods and Services Tax) is India's comprehensive destination-based indirect tax on the supply of goods and services. It was introduced on 1 July 2017 by the 101st Constitutional Amendment Act, 2016 (and the related Central Goods and Services Tax Act, 2017, State GST Acts in each state, Integrated GST Act, and Union Territory GST Act).

Three structural properties define GST:

1. Comprehensive — covers virtually all supply of goods and services across the country, replacing the earlier patchwork of separate taxes. Exceptions: petrol, diesel, aviation turbine fuel, natural gas, alcohol for human consumption, and electricity remain outside the GST regime and continue to be taxed under earlier state-level mechanisms.

2. Destination-based — the tax is levied where the goods or services are consumed, not where they are produced. A car manufactured in Tamil Nadu and sold to a buyer in Maharashtra results in GST revenue ultimately going to Maharashtra (the consuming state). This contrasts with the older origin-based system that often favoured producing states.

3. Multi-stage with credit set-off — GST is levied at each stage of the supply chain (manufacturer → wholesaler → retailer → consumer), but Input Tax Credit ensures the actual tax burden falls on the final consumer. Businesses in the middle of the chain collect output GST, claim ITC on input GST, and deposit only the net amount.

The taxes GST replaced:

Central taxes subsumed	State taxes subsumed
Central Excise Duty	State VAT / Sales Tax
Service Tax	Central Sales Tax (CST)
Additional Excise Duty	Entry Tax / Octroi
Special Additional Duty (SAD)	Luxury Tax
Countervailing Duty (CVD)	Entertainment Tax (not levied by local bodies)
Various surcharges and cesses	Purchase Tax, Taxes on lotteries, betting

Approximately 17 different taxes were subsumed — the exact count varies depending on how surcharges and cesses are categorised, but the simplification is structural.

The GST Council — joint centre-state administration

The GST Council is the constitutional body that governs GST policy and rates. Established under Article 279A of the Constitution, the Council has 33 members:

• Union Finance Minister (Chairperson)
• Union Minister of State for Finance
• Finance Minister or other nominated Minister from each of the 28 states and 3 Union Territories with legislatures

Decisions of the Council require a 75% majority of the weighted vote, with the centre having one-third weight and the states collectively having two-thirds. This structure was designed so that neither the centre nor the states can unilaterally change GST rates or rules — every decision requires consensus across the federation.

The Council meets approximately every 3-6 months and announces rate changes, procedural revisions, and policy decisions through press releases that subsequently become binding via CBIC notifications and amendments to the GST Acts.

The five GST rate slabs

GST uses a tiered rate structure with goods and services slotted into one of five primary slabs based on their classification:

0% (Exempt / Nil-rated)

Essential items and basic services. Examples:

• Fresh milk, eggs, fresh fruits and vegetables
• Unprocessed cereals (wheat, rice in unbranded form)
• Books, newspapers, journals
• Healthcare services (hospital admissions, doctor consultations)
• Educational services (school, college tuition)
• Public transport (metro, local trains)

5%

Mass-consumption goods and services:

• Edible oil, sugar, tea, coffee (packed), spices
• Packed food items (frozen vegetables, branded packaged grains above certain pricing)
• Footwear under ₹1,000
• Railway tickets (non-AC), economy-class air travel
• Restaurant services in non-AC restaurants below specified turnover
• Apparel below ₹1,000

12%

Processed and intermediate goods:

• Processed food items, butter, cheese, ghee
• Mobile phones (changed from 18% to 12% in 2020 Council meeting)
• Ayurvedic and homeopathic medicines
• Fertilisers
• Business-class air travel
• Hotel accommodation between ₹1,001 and ₹7,500 per night

18% (the largest slab — most goods and services)

The default slab for most goods and services:

• Soap, toothpaste, hair oil, deodorants
• Capital goods, machinery, industrial equipment
• Telecom services
• Banking and financial services (most retail banking)
• Insurance premiums (most categories)
• Restaurants with AC and bar
• Hotel accommodation between ₹7,501 and ₹12,000 per night
• Most digital and IT services

28% (Luxury / Sin / De-merit)

High-end and demerit goods:

• Cars (passenger vehicles, with additional Compensation Cess ranging 1-22%)
• Motorbikes above 350cc
• Aerated drinks, soft drinks
• Tobacco products (with high Compensation Cess)
• Cement
• Large household appliances (washing machines above 30L, etc.)
• Hotel accommodation above ₹12,001 per night
• Casinos, gambling, online gaming

A Compensation Cess is additionally levied on specific 28% items (luxury cars, tobacco, aerated drinks). This cess was introduced to compensate states for revenue losses during the initial five-year GST transition; the period has been extended multiple times.

CGST, SGST, and IGST — the federal split

A single GST rate (say 18%) is internally split between the centre and the state(s) depending on whether the supply is intra-state or inter-state.

Intra-state supply — CGST + SGST

When goods or services move within the same state (Maharashtra manufacturer → Maharashtra customer), the GST is split:

Tax	Levied by	Share of 18%
CGST (Central GST)	Centre	9%
SGST (State GST)	State	9%
Total		18%

Both halves are collected on the same invoice by the supplier and deposited separately into the centre's and state's accounts. The split applies to every GST rate slab — a 5% intra-state supply is 2.5% CGST + 2.5% SGST.

Inter-state supply — IGST

When goods or services move between states (Tamil Nadu manufacturer → Maharashtra customer), the entire GST is collected as Integrated GST:

Tax	Levied by	Share of 18%
IGST (Integrated GST)	Centre	18%

The centre subsequently apportions the IGST collected to the destination state, ensuring the consuming state still gets its share but through a centralised collection mechanism.

Imports into India are treated as inter-state supplies and attract IGST plus Basic Customs Duty. The IGST on imports is paid to the centre and apportioned to the destination state where the imported goods are consumed.

Input Tax Credit — the no-cascading mechanism

Input Tax Credit (ITC) is the mechanism that prevents GST from becoming a "tax on tax" cascading system. Under ITC, a business registered under GST can claim credit for the GST it paid on its inputs (raw materials, services purchased, business expenses) against the GST it collects on its outputs (sales).

Worked example — single-stage:

A manufacturer:

• Buys raw materials worth ₹1,00,000 + 18% GST → pays ₹18,000 input GST
• Sells finished goods worth ₹2,00,000 + 18% GST → collects ₹36,000 output GST
• ITC available: ₹18,000 (the input GST paid)
• Net GST deposited to government: ₹36,000 − ₹18,000 = ₹18,000

The net ₹18,000 is the tax on the value added (₹1,00,000 of value-add) at the standard 18% rate.

ITC eligibility rules are detailed and include:

• The input must be used for business (personal-use inputs disallowed)
• The supplier must have filed their GSTR-1 return reflecting the supply
• The recipient must have a valid GST registration
• The input invoice must contain specific details (GSTIN, HSN/SAC codes, etc.)
• Specific time limits (typically claimable within the financial year)
• Certain categories of inputs are ineligible (motor vehicles for personal use, food and beverages, employee benefits in some cases, etc.)

The ITC matching process — where the recipient's claim must match the supplier's reported supply — is the source of most GST compliance complexity for businesses.

Registration thresholds

Not every business needs to register for GST. Registration is mandatory above turnover thresholds set by the GST Council:

Type of supply	Threshold (most states)	Threshold (special category states*)
Goods	₹40 lakh aggregate annual turnover	₹20 lakh
Services	₹20 lakh aggregate annual turnover	₹10 lakh
Mixed (goods + services)	₹20 lakh	₹10 lakh

(*Special category states include the Northeast, Himachal Pradesh, Uttarakhand, J&K, Manipur, Mizoram, Nagaland, Tripura, Sikkim, Arunachal Pradesh.)

Businesses below these thresholds are not required to register but may voluntarily register to claim Input Tax Credit on their purchases. Above the thresholds, registration is mandatory and unregistered supply attracts penalties.

The Composition Scheme

For small businesses below ₹1.5 crore annual turnover (₹75 lakh in special category states), the Composition Scheme under Section 10 of the CGST Act offers a simplified flat-rate GST compliance:

Business type	Composition rate
Manufacturers (goods)	1%
Restaurants (non-alcoholic)	5%
Service providers	6%
Traders (goods)	1%

Trade-offs of the Composition Scheme:

• No Input Tax Credit available — composition dealers cannot claim ITC on their purchases
• Cannot collect GST from customers — composition dealers absorb the GST as a cost
• Cannot make inter-state supplies — only intra-state sales permitted
• Simpler returns — quarterly CMP-08 instead of monthly GSTR-1 and GSTR-3B
• No e-invoicing requirement for most cases

Whether the Composition Scheme is suitable for any specific small business depends on margin structure, customer mix (B2C vs B2B), and growth trajectory. Consult a CA before opting in.

What this post deliberately does not cover

Four out-of-scope topics:

1. "How do I file GST returns for my business?" — GSTR-1, GSTR-3B, GSTR-9, and the annual reconciliation process require professional handling. Consult a CA or qualified GST practitioner.

2. "What's the correct HSN/SAC code for my product/service?" — Classification under HSN (Harmonized System of Nomenclature) for goods or SAC (Services Accounting Codes) for services is technical and product-specific. Misclassification creates compliance and refund issues.

3. "Should my business opt for the Composition Scheme?" — Trade-off analysis requires specific facts about your customer mix, margin structure, and growth plans.

4. "How does GST apply to my specific industry?" — Sector-specific rules exist for real estate, e-commerce, exports, SEZ supplies, e-invoicing, and many other areas. Each requires sector-specialist CA input.

The structural takeaway: GST is India's unified indirect tax since July 2017, with a 5-slab rate structure, dual-component centre-state architecture (CGST + SGST for intra-state, IGST for inter-state), Input Tax Credit to prevent cascading, and turnover-based registration thresholds. For any specific business or compliance question, a Chartered Accountant or qualified GST practitioner is the right professional.

Sources

• GST Council, Constitutional Framework and Decisions — gstcouncil.gov.in
• Central Board of Indirect Taxes and Customs (CBIC), GST Notifications, Circulars, FAQs — cbic.gov.in
• Ministry of Finance, Central Goods and Services Tax Act 2017, IGST Act 2017, UTGST Act 2017 — indiabudget.gov.in
• Ministry of Law and Justice, Constitution (One Hundred and First Amendment) Act, 2016 — legislative.gov.in
• GSTN — Goods and Services Tax Network — Portal and Returns Filing — gst.gov.in
• Press Information Bureau, GST Council Meeting Press Releases — pib.gov.in