Library / Goods and Services Tax: The Professional's Master Guide

1. GST at a Glance

Goods and Services Tax (GST) is a tax on the supply of goods and services, collected in stages along the chain and borne in the end by the consumer. It came into force on 1 July 2017 and replaced a large set of Central and State indirect taxes. This chapter sets out why the change was made, how the dual structure works, how the credit chain removes tax on tax, what is still outside GST, and the main milestones up to 2026.

1.1 Why GST replaced the old indirect taxes

Before July 2017 a manufacturer in India dealt with central excise duty on manufacture, State VAT on intra-State sales, Central Sales Tax (CST) on inter-State sales, service tax on services, entry tax or octroi at State and city borders, and a number of State levies such as luxury tax and entertainment tax. Each tax had its own law, its own return and its own officers. Three problems followed from this.

Cascading. Credit did not flow across taxes. A trader could not set off excise duty or CST paid on purchases against his VAT. Service tax paid on rent or advertising could not be set off against VAT. The unrelieved tax became part of cost, and VAT was then charged on that cost, so tax was charged on tax.
Multiple taxes and a fragmented market. CST at 2% on inter-State sales was not creditable in the buyer's State, so businesses set up depots in each State only to avoid it. The same product was taxed at different rates in different States.
Check posts. Entry tax and State border checks held up trucks for hours. Logistics costs were high and delivery times were uncertain.

GST addresses each of these. It is one tax on supply with a common base, credit is allowed across goods and services, inter-State supplies carry a creditable tax (IGST), and entry tax and border check posts have gone. Movement of goods is tracked through the e-way bill system instead of physical checks.

Illustration 1: Tax on tax under the old system

Patel Pumps, a manufacturer in Gujarat, sells a pump to a wholesaler in Rajasthan for Rs. 1,00,000 before GST. Excise duty is taken at 12.5% and CST at 2% for this example.

Step 1: Excise duty = 12.5% of Rs. 1,00,000 = Rs. 12,500. Value after excise = Rs. 1,12,500.

Step 2: CST at 2% on Rs. 1,12,500 = Rs. 2,250. Wholesaler pays Rs. 1,14,750. He cannot take credit of excise or CST against his Rajasthan VAT, so his cost is Rs. 1,14,750.

Step 3: Wholesaler sells to a retailer for Rs. 1,30,000 (margin Rs. 15,250) plus VAT at 5% = Rs. 6,500.

Step 4: Retailer sells to a consumer for Rs. 1,43,500 plus VAT at 5% = Rs. 7,175. He takes VAT credit of Rs. 6,500 and pays Rs. 675.

Result: Total tax collected = Rs. 12,500 + Rs. 2,250 + Rs. 6,500 + Rs. 675 = Rs. 21,925. Of the VAT charged at the wholesale stage, Rs. 737.50 (5% of the embedded excise and CST of Rs. 14,750) is tax charged on tax. This is the cascading effect GST was designed to remove.

1.2 Dual GST: CGST, SGST, UTGST and IGST

India has a federal structure. Both the Centre and the States needed the power to tax the same transaction, so GST was designed as a dual tax. Every intra-State supply carries two taxes at the same time: Central tax (CGST) and State tax (SGST), or Union territory tax (UTGST) in a Union territory without a legislature. An inter-State supply and an import carry Integrated tax (IGST), levied and collected by the Centre and later shared with the destination State.

The laws are the Central Goods and Services Tax Act, 2017 (CGST Act), a separate SGST Act in each State, the Union Territory Goods and Services Tax Act, 2017, the Integrated Goods and Services Tax Act, 2017 (IGST Act), and the Goods and Services Tax (Compensation to States) Act, 2017. The CGST and SGST Acts are almost identical, and most provisions of the CGST Act apply to IGST through section 20 of the IGST Act. For that reason this guide refers to the CGST Act unless the point is specific to IGST.

Illustration 2: Which tax applies

Mehta and Co., registered in Ahmedabad, supplies goods taxable at 18% worth Rs. 50,000 in each of the following cases.

(a) To a buyer in Surat (Gujarat): intra-State. CGST 9% = Rs. 4,500 and SGST 9% = Rs. 4,500.

(b) To a buyer in Pune (Maharashtra): inter-State. IGST 18% = Rs. 9,000.

(c) From its registered branch in Chandigarh to a buyer in Chandigarh: intra-Union territory. CGST 9% = Rs. 4,500 and UTGST 9% = Rs. 4,500.

(d) Goods of the same value imported by Mehta and Co. from Japan: IGST at 18% collected by customs at the time of import, on the assessable value plus customs duties.

(e) To a buyer in Dubai under a Letter of Undertaking (LUT): export, a zero-rated supply. No tax is charged and ITC on inputs remains available (or refundable).

1.3 A destination-based consumption tax

GST is a tax on consumption. The revenue is meant to go to the State where the goods or services are consumed, not the State where they are produced. This is achieved through IGST. When goods move from Gujarat to Maharashtra, IGST is charged. The Maharashtra buyer takes credit of that IGST and uses it to pay tax on his own sales in Maharashtra. Through the IGST settlement, the Centre transfers to Maharashtra the SGST share of the tax finally paid on consumption there. The place of supply rules in the IGST Act (covered in a later Part) decide which State is the destination.

1.4 How the credit chain works

Each registered person in the chain charges tax on the full value of his sale but pays to the Government only the difference between the tax charged (output tax) and the tax paid on his purchases (input tax credit or ITC). The Government therefore collects tax at each stage only on the value added at that stage. The consumer, who cannot take credit, bears the whole tax. The total collected equals the rate applied to the final price.

Illustration 3: Credit chain from manufacturer to consumer

Sharma Textiles Pvt. Ltd., Ahmedabad, buys raw material for Rs. 60,000 plus GST at 18% (Rs. 10,800). It sells finished goods to a wholesaler in Ahmedabad for Rs. 1,00,000. The wholesaler sells to a retailer in Mumbai for Rs. 1,20,000. The retailer sells to a consumer in Mumbai for Rs. 1,50,000. All goods are taxed at 18%.

Step 1 (manufacturer): Output tax on Rs. 1,00,000 = CGST Rs. 9,000 + SGST Rs. 9,000 = Rs. 18,000. Less ITC Rs. 10,800. Net tax paid = Rs. 7,200.

Step 2 (wholesaler, inter-State sale): IGST on Rs. 1,20,000 = Rs. 21,600. ITC of CGST Rs. 9,000 and SGST Rs. 9,000 is used against IGST. Net tax paid = Rs. 3,600.

Step 3 (retailer, intra-State sale in Maharashtra): CGST Rs. 13,500 + SGST Rs. 13,500 = Rs. 27,000. ITC of IGST Rs. 21,600. Net tax paid = Rs. 5,400.

Step 4 (check): Total tax paid in the chain = Rs. 10,800 (raw material supplier) + Rs. 7,200 + Rs. 3,600 + Rs. 5,400 = Rs. 27,000, which is 18% of the final price of Rs. 1,50,000. The consumer bears Rs. 27,000. No tax is charged on tax, and Maharashtra, the consuming State, ends up with the State share.

Key point

The chain works only if every link is intact. If any supplier in the chain does not report the invoice or does not pay the tax, the next buyer's credit is at risk (section 16(2)(aa) and (c) of the CGST Act). Most GST disputes in practice are about a broken link, not about rates.

1.5 Taxes subsumed in GST

The table lists the main taxes that GST replaced.

Central taxes subsumed	State taxes subsumed
Central excise duty and additional excise duties	State VAT and sales tax
Excise duty under the Medicinal and Toilet Preparations Act	Central Sales Tax (levied by the Centre, collected by States)
Service tax	Entertainment tax (other than that levied by local bodies)
Additional customs duty (CVD) and special additional duty (SAD)	Entry tax (all forms) and octroi
Central surcharges and cesses relating to supply of goods and services	Purchase tax, luxury tax, taxes on lottery, betting and gambling, taxes on advertisements, State cesses and surcharges on supply

Basic customs duty on imports was not subsumed and continues under the Customs Act, 1962. Stamp duty, electricity duty, vehicle tax and property tax are also outside GST.

1.6 What remains outside GST

Three categories need attention because they affect credit and turnover calculations in almost every business.

Alcoholic liquor for human consumption is outside GST by the Constitution itself (Article 366(12A)). States levy excise duty and VAT on it.
Five petroleum products (petroleum crude, high speed diesel, motor spirit or petrol, natural gas and aviation turbine fuel) are within GST in law, but tax on them applies only from a date the GST Council recommends (section 9(2) of the CGST Act). No date has been recommended so far, so they continue under central excise and State VAT.
Electricity is exempt under GST and is subject to State electricity duty. Transmission and distribution of electricity by a distribution or transmission utility is also exempt.

Because these items are outside GST, the tax paid on buying diesel, petrol or electricity is a cost and cannot be taken as ITC. Supplies of these items are treated as non-taxable or exempt supplies and must be counted when ITC on common inputs is apportioned.

Illustration 4: A bill with GST and non-GST items

A standalone restaurant with a bar in Pune (not in a hotel with room tariff above Rs. 7,500) raises one bill: food Rs. 4,000 and beer Rs. 3,000. The State VAT on liquor is assumed at 20% for this example.

Step 1: GST on food at 5% (restaurant service without ITC) = Rs. 200 (CGST Rs. 100 + SGST Rs. 100).

Step 2: Beer is alcoholic liquor for human consumption and outside GST. VAT under the State law at 20% = Rs. 600.

Step 3: Total bill = Rs. 4,000 + Rs. 200 + Rs. 3,000 + Rs. 600 = Rs. 7,800. The liquor sale of Rs. 3,000 is a non-taxable supply. It counts in aggregate turnover and is treated as exempt when common credit is apportioned.

1.7 GSTN and the common portal

GST is administered almost entirely online. The Goods and Services Tax Network (GSTN), a not-for-profit company now owned by the Centre and the States, runs the common portal. Registration, returns, payment of tax, refunds, notices, replies and appeals are all handled on the portal, along with linked systems for e-invoicing (the Invoice Registration Portal), e-way bills and the Invoice Management System (IMS). Tax officers of the Centre and the States work on back-end systems linked to the same data. In practice, most compliance and most disputes start from a mismatch that the portal throws up.

1.8 Key milestones from 2017 to 2026

The table shows the main changes that a practitioner should keep in view when handling any year from 2017-18 onwards.

Date	Milestone
1 July 2017	GST launched. Taxes listed above subsumed.
1 April 2018	E-way bill made mandatory for inter-State movement of goods; intra-State rolled out in phases by June 2018.
2020	GSTR-2B introduced as a monthly static statement of ITC available.
1 October 2020	E-invoicing begins for large taxpayers; threshold lowered in stages to aggregate turnover above Rs. 5 crore from 1 August 2023.
1 January 2021	QRMP scheme for small taxpayers; rule 86B cash payment rule.
1 January 2022	Section 16(2)(aa): ITC allowed only if the invoice is reported by the supplier and appears in GSTR-2B.
1 October 2023	Online gaming, casinos and horse racing taxed on full face value; specified actionable claims introduced.
July 2024	GSTR-1A introduced to amend the current period's outward details before filing GSTR-3B.
1 October 2024	Invoice Management System (IMS) goes live.
FY 2024-25 onwards	Section 74A governs demands in place of sections 73 and 74.
1 April 2025	ISD registration mandatory for distribution of common input services; no new anti-profiteering complaints accepted.
July 2025 tax period	GSTR-3B Table 3 liability hard locked; three-year bar on filing old returns enforced on the portal.
22 September 2025	GST 2.0 rate rationalisation (5%, 18% and 40%); compensation cess removed on goods other than tobacco.
24 September 2025	GSTAT e-filing of appeals begins.
1 October 2025	Most Finance Act, 2025 amendments come into force.
1 February 2026	Compensation cess ends on tobacco and pan masala; these move to 40% GST (bidis 18%).
30 March 2026	Finance Act, 2026 enacted; place of supply of intermediary services moves to location of recipient.

Chapter summary

• GST replaced central excise, service tax, VAT, CST, entry tax and several other levies, removing tax on tax and internal trade barriers.

• It is a dual tax: CGST plus SGST (or UTGST) on intra-State supplies, and IGST on inter-State supplies and imports.

• It is a destination-based consumption tax; the revenue follows consumption through the IGST settlement.

• Each registered person pays tax only on value added, through the input tax credit chain; the chain breaks if a supplier defaults.

• Alcohol for human consumption is outside GST; the five petroleum products are within the law but not yet taxed; electricity is exempt. Tax paid on these is a cost.

• GSTN runs the common portal; almost all compliance and most disputes begin there.