VAT and Sales Tax in India

What is India's GST and what did it replace?

India's Goods and Services Tax (GST) came into force on 1 July 2017 under the Central Goods and Services Tax Act 2017 and parallel State GST Acts enacted by each state legislature. GST replaced a fragmented cascade of indirect taxes that had operated across central and state levels: central excise duty, service tax, central sales tax (CST), value-added tax (VAT) levied by individual states, entertainment tax, octroi, and a series of cesses. The constitutional basis was provided by the Constitution (One Hundred and First Amendment) Act 2016. The GST Council -- a joint federal body chaired by the Union Finance Minister with state finance ministers as members -- governs rate setting and structural changes under Article 279A of the Constitution. The Central Board of Indirect Taxes and Customs (CBIC), operating under the Ministry of Finance, administers the day-to-day operation of the law, issues notifications, and runs the CBIC-GST portal at cbic-gst.gov.in. The broader business environment for India is covered in the India country overview. For the GST Council's own historical account, see gstcouncil.gov.in.

What are the GST rate slabs after the September 2025 reform?

The 56th GST Council meeting (3 September 2025) approved a fundamental rationalization of the rate structure -- marketed as GST 2.0 -- which took effect on 22 September 2025 following CBIC notifications numbered 9/2025 to 17/2025-Central Tax (Rate) and matching Integrated Tax (Rate) notifications, all dated 17 September 2025. The previous six-slab structure (0%, 3%, 5%, 12%, 18%, 28%) was collapsed. The 12% slab was abolished: approximately 99% of the items previously in that slab moved down to 5%. The 28% slab was abolished: approximately 90% of the items previously in that slab moved down to 18%. A new de-merit slab of 40% was created for luxury and sin goods, replacing the prior 28% GST-plus-compensation-cess arrangement for most such categories. The 3% precious-metals slab (gold, silver) was retained. Health and life insurance premiums were moved to 0% (exempt). The effective slab structure from 22 September 2025 is therefore:

Fiscal impact: the CBIC estimated a revenue loss of approximately INR 48,000 crore on an FY 2023-24 consumption base, offset in part by the higher 40% de-merit rate and elimination of the compensation cess for most categories.

How do CGST, SGST, and IGST work?

India's GST operates a dual-levy model reflecting the country's federal structure. Intra-state supply -- where the supplier and the recipient are in the same state -- attracts Central GST (CGST), levied by the central government, plus State GST (SGST) levied by the state government, each at half the applicable slab rate. A transaction at 18% within Maharashtra therefore generates 9% CGST revenue for the Union and 9% SGST revenue for the Maharashtra government. In Union Territories (Delhi, Chandigarh, Lakshadweep, etc.) the state component is replaced by Union Territory GST (UTGST), which operates identically. Inter-state supply -- where the supplier and recipient are in different states -- attracts Integrated GST (IGST) at the full slab rate, collected entirely by the central government and subsequently apportioned to the consuming state through the IGST Settlement mechanism. The destination-based design is the key structural departure from the pre-2017 regime: under the old CST, tax accrued to the originating state. Under IGST, it flows to consumption. Input Tax Credit (ITC) flows freely across the three components: CGST credit offsets CGST and IGST output liability (in that priority); SGST/UTGST credit offsets SGST/UTGST and IGST; IGST credit offsets IGST, then CGST, then SGST. Cross-utilization between CGST and SGST is not permitted, preserving the constitutional separation of central and state tax sovereignty. PwC's India GST commentary (2026) identifies the IGST inter-state mechanism as substantively positive for multi-state B2B operations -- cascading CST no longer locks credits inside state boundaries.

Who must register for GST, and what are the thresholds?

Mandatory GST registration thresholds are set under Sections 22-25 of the CGST Act 2017. For suppliers of goods: annual aggregate turnover above INR 40 lakh (INR 4 million) in a regular-category state triggers mandatory registration; the threshold is INR 20 lakh (INR 2 million) in special-category states (Manipur, Mizoram, Nagaland, Tripura, Uttarakhand, Himachal Pradesh, and most north-eastern states, as notified by the GST Council). For suppliers of services: the threshold is INR 20 lakh in regular-category states and INR 10 lakh in special-category states. Aggregate turnover is calculated to include taxable supplies, exempt supplies, and exports -- a wider base than taxable-only revenue. Certain categories must register regardless of turnover: inter-state suppliers, e-commerce operators, casual taxable persons, non-resident taxable persons, and businesses where GST applies under the reverse-charge mechanism. Voluntary registration below the mandatory threshold is permitted and often taken by B2B operators seeking to issue tax invoices and claim ITC on their own purchases. The India self-employment overview at /global/jurisdictions/country/in covers the interaction between GST registration and income-tax reporting for independent professionals.

What is the Composition Scheme?

The Composition Scheme under Section 10 of the CGST Act 2017 offers simplified GST compliance for smaller businesses. Goods suppliers (traders and manufacturers) with annual aggregate turnover up to INR 1.5 crore (INR 75 lakh in special-category states) may opt in. Service suppliers with turnover up to INR 50 lakh per year may also elect the scheme under the post-2018 amendment framework. Tax rates under the scheme are substantially lower than standard GST: 1% (0.5% CGST plus 0.5% SGST) for goods traders and manufacturers; 5% for restaurants without alcohol service; 6% (3% CGST plus 3% SGST) for service suppliers. The trade-off is significant: Composition registrants cannot issue tax invoices, cannot collect GST from customers (the levy is borne from gross revenue), cannot claim input tax credit, and cannot make inter-state outward supplies. Filing is simplified to a quarterly statement (Form CMP-08) and an annual return (Form GSTR-4), rather than the monthly GSTR-1 and GSTR-3B cycle applicable to regular taxpayers. Businesses that cross the turnover ceiling in a financial year must exit the scheme immediately and transition to regular GST registration. A qualified chartered accountant can model whether the ITC foregone under the Composition Scheme exceeds the compliance-cost saving for a specific business profile.

How does Input Tax Credit work under GST?

Input Tax Credit (ITC) is the mechanism through which registered businesses recover GST paid on purchases (inputs) against their GST collected on sales (output liability). A manufacturer paying INR 18,000 GST on raw materials and collecting INR 45,000 GST on finished goods remits only INR 27,000 net -- the ITC offsets the input tax. Eligibility conditions under Section 16 of the CGST Act include: possession of a valid tax invoice or debit note, actual receipt of the goods or services, confirmation that the supplier has filed returns and paid the output tax, and the recipient filing GSTR-3B. Since April 2025, ITC claims must reconcile with GSTR-2B (the auto-populated ITC ledger derived from suppliers' GSTR-1 filings). The Invoice Management System (IMS), operational from October 2024, allows recipients to accept or reject invoices before they crystallize in GSTR-2B. ITC is blocked for certain categories: personal use items, motor vehicles not used in business, club memberships, health and life insurance (unless the business is in the insurance or hospitality trade), and construction of immovable property. Where a supplier issues a credit note, the recipient must reverse the corresponding ITC already availed (Section 34 CGST Act amendment, effective 2025). ITC must be claimed by the earlier of 30 November following the financial year or the date of filing the annual return.

What GSTR returns must a registered business file?

The GST returns framework under Chapter IX of the CGST Act requires most registered taxpayers to file a combination of periodic and annual returns. GSTR-1 reports outward supplies (sales): monthly for businesses with aggregate turnover above INR 5 crore (due by the 11th of the following month); quarterly under the QRMP (Quarterly Return Monthly Payment) scheme for businesses below INR 5 crore. GSTR-3B is a monthly self-declared summary return covering output tax, ITC, and net tax payable; it serves as the payment vehicle and is due by the 20th of the following month (or 22nd/24th for QRMP filers on a staggered schedule). GSTR-9 is the annual return, mandatory for businesses with aggregate turnover above INR 2 crore, due 31 December following the close of the financial year. For FY 2024-25, GSTR-9 and GSTR-9C (reconciliation statement) were due 31 December 2025. CBIC Notifications 13/2025 and 15/2025 introduced IMS-based ITC auto-population and tighter reconciliation tables in the revised GSTR-9 format. Composition Scheme registrants file quarterly CMP-08 statements and annual GSTR-4 instead. Late filing attracts INR 100 per day per CGST component plus INR 100 per day per SGST component (INR 200 combined per day), capped at INR 10,000. Readers should engage a Chartered Accountant (CA) registered with the Institute of Chartered Accountants of India (ICAI) or another qualified tax professional for matters involving GST classification, ITC structuring, or multi-state supply chains.