【India】Decoding Indirect Tax In India- Part 1: GST FAQS And Insights

This article decodes India’s core indirect tax—the Goods and Services Tax (GST), covering its dual administration framework, the GST 2.0 rate reform in September 2025, the Input Tax Credit (ITC) mechanism, GST registration and compliance requirements, as well as preferential policies for small businesses, tax treatment of imports and exports, practical challenges and penalties.

As a destination-based tax system, India’s GST has unified the previously fragmented indirect taxes, supports small and medium-sized enterprises through simplified filing and special schemes, and clarifies cross-border rules of zero-rated exports and IGST levied on imports, serving as a core tax compliance basis for businesses operating in India.

1. What is GST, and how is it jointly administered between the Central and State Governments in India?

   Before July 2017, businesses in India had to navigate a range of indirect taxes, including Central Excise Duty, Service Tax, Value Added Tax, Entry Tax, and several others, each levied by different authorities at varying rates across different states in India. Taxes were imposed at multiple stages of the supply chain, often leading to a cascading effect that made goods and services more expensive for the end consumer.

   
   

   GST was introduced on 1 July 2017 to replace this fragmented system with a single, unified tax on the supply of goods and services across India. The regime is governed by a set of parallel statutes, principally the Central Goods and Services Tax Act, 2017, the Integrated Goods and Services Tax Act, 2017, the various State Goods and Services Tax Acts, and the Union Territory Goods and Services Tax Act, 2017, operating together under a dual GST framework. It applies throughout the commercial chain, from manufacturing to final consumption. Certain items, including petroleum products and alcohol for human consumption remain outside the GST regime and continue to be taxed under earlier laws.

   
   

   GST is a destination-based tax where revenue belongs to the state where the goods or services are actually consumed, not where they were produced. India adopted a dual GST model where both levels of government tax the same transaction simultaneously.

   
   

   I. Intra-state Application: For intra-state supplies, Central GST (“CGST”) and State GST (“SGST”) are levied together on the same invoice, with revenue shared between the Centre and the relevant State. In Union Territories, this role is performed by Union Territory GST, while Delhi and Puducherry continue to levy SGST. In practice, the applicable rate is split equally, for example, an 18% GST rate is applied as 9% CGST and 9% SGST.

   
   

   II. Inter-state Application: For inter-state supplies, Integrated GST (“IGST”) is levied by the Central Government as a single tax, which is subsequently apportioned to the destination state. This structure simplifies compliance for businesses while ensuring that tax revenue is allocated to the jurisdiction where consumption takes place.

   
   

2. What are the prevailing GST rates in India, and how are goods and services classified within these categories?

   India’s GST rates and policy are determined by the GST Council, comprising the Union Finance Minister and State Finance Ministers, ensuring joint decision-making. GST follows a multi-rate structure balancing revenue need with affordability and policy goals.

   
   

   From 2017 to September 2025, GST operated a five-tier system (0%, 5%, 12%, 18%, 28%) with a compensation cess on luxury and demerit goods. A major reform took place in September 2025, namely GST 2.0, which simplified the tax structure by abolishing the 12% slab and replacing the 28% and cess regime with a single 40% rate, while phasing out the cess.

   
   

   Classification of goods and services is central to the GST rate framework, as it determines which tax slab applies to a particular supply. This is done using the Harmonised System of Nomenclature (“HSN”) for goods and Services Accounting Code for services. These codes must be disclosed on invoices and govern not only the applicable rate but also eligibility for Input Tax Credit (“ITC”).

   
   

   As of April 2026, GTS operates under four principal rates slabs:

GST Rate	Nature and Applicability	Illustrative Goods and Services
0%	Nil-ratedand exempted supplies	Fresh and unprocessed food (like grains, vegetables, milk, eggs), healthcare, education, and certain government functions.
5%	Essential goods and services	Packaged food staples, tea, coffee, edible oils, life-saving medicines, economy hotels, economy domestic air travel, transport services, footwear, textiles, handicrafts, drones, and gym services.
18%	Standard rate and primary slab	Most goods and services including legal, consulting, construction, electronics, financial services, and insurance.
40%	Luxury and demerit goods	Luxury cars, high-end motorcycles, aerated beverages, and tobacco products.

A few special rates continue alongside these slabs. For instance, gold and gold jewellery attract 3% GST, while rough diamonds and certain precious stones are taxed at 0.25%.

3. What is the ITC mechanism under GST, and what conditions must businesses fulfil to avail this credit?

   As discussed earlier, GST is structured so that only the value added at each stage of the supply chain is taxed. ITC is the mechanism that makes this possible.

   
   

   When a business purchases goods or services, it pays GST to its supplier. ITC allows that business to deduct the GST it has already paid from the GST it collects on its own sales, remitting only the difference to the government. Without ITC, every business in the chain would pay full GST on purchases and charge full GST on sales, causing tax to accumulate at every stage. ITC eliminates that problem entirely. For example, a manufacturer pays GST on raw materials, then sells finished goods and collects GST from its buyer. It deducts what it already paid from what it has collected and remits only the difference. The buyer does the same. By the time goods reach the final consumer, who cannot claim ITC, the government has collected tax only on the final sale value, contributed in portions at each stage of the chain.

   
   

   ITC is not automatic. A business must satisfy all of the following conditions to claim ITC:

   
   

   I. GST Registration: Only a business with GST registration can claim ITC. Unregistered businesses cannot claim credit regardless of how much GST they have paid on purchases.

   
   

   II. Valid Tax Invoice: The business must hold a properly issued tax invoice from a GST-registered supplier.

   
   

   III. Actual Receipt of Goods or Services: Credit cannot be claimed on purchases not yet received.

   
   

   IV. Supplier Compliance: The supplier must have filed its own GST returns and paid the tax to the government. If a supplier collects GST but fails to remit it, the buyer’s credit is at risk, making supplier compliance a genuine commercial concern.

   
   

   V. Payment within 180 Days: The buyer must pay the supplier the full invoice amount, including GST, within 180 days of the invoice date. Failure to do so triggers a reversal of the credit and interest becomes payable, though the credit can be reclaimed once payment is eventually made.

   
   

   VI. Claim before the Deadline: ITC must be claimed before 30 November of the financial year following the purchase. This deadline is firm and credit not claimed in time is permanently lost.

   
   

   VII. What ITC Cannot be Claimed On: Certain categories of expenditure are expressly excluded from ITC regardless of whether all the above conditions are met. These include motor vehicles for personal use, food and beverages, club memberships, construction of property for own use, and goods given as gifts or free samples. Further, where a business uses purchases partly for taxable activities and partly for exempt activities, for example, a company that both sells taxable products and earns exempt rental income, ITC must be claimed only in proportion to the taxable use. The exempt portion must be reversed.

   
   

4. When are businesses required to register under the GST regime, and what are the key processes and compliance obligations involved?

   GST registration is the entry point to the entire GST system. Once registered, a business has the legal right to collect GST from its customers and to claim ITC on its purchases. Without registration, neither is possible. Registration is required in the following situations:

   
   

   I. Turnover Threshold: For businesses engaged exclusively in supplying goods, the operative registration threshold in most states is annual turnover exceeding INR 40 lakhs (approx. USD 43,000). This higher threshold does not apply in certain smaller states including Manipur, Mizoram, Nagaland, and Tripura, nor to suppliers of ice cream and tobacco products. All of them fall under the standard threshold of INR 20 lakhs (approx. USD 21,500). For service providers, the threshold is INR 20 lakhs (approx. USD 21,500) in most states, reduced to INR 10 lakhs (approx. USD 10,750) in designated special category states. Turnover is calculated nationwide across all of a business’s operations, not state by state.

   
   

   II. Mandatory Registration Regardless of Turnover: Certain businesses must register irrespective of their turnover, and these include any business making sales across state borders, foreign businesses supplying services into India, businesses selling through e-commerce platforms, and businesses required to pay GST on behalf of their supplier under the reverse charge mechanism.

   
   

   III. Voluntary Registration: A business below the threshold may register voluntarily and this is common where customers are themselves GST-registered and require a proper tax invoice to claim their own ITC.

   
   

   The GST registration process involves the following:

   I. Timeline: A business that becomes liable to register must apply within 30 days of crossing the threshold. Businesses that operate temporarily in a state where they are not permanently established, known as casual taxable persons, must apply at least 5 days before commencing supplies there.

   
   

   II. State-specific Registration: GST registration is state-specific. A business operating in multiple states must register separately in each one. A business may also obtain separate registrations for different business verticals within the same state, if it chooses to do so.

   
   

   III. Mode of Registration: GST registration is done entirely online through India’s GST Portal, requiring proof of identity, address, and bank details, along with a Permanent Account Number and biometric verification of the business’s owners. Once a complete application is submitted, registration is granted within 7 working days.

   
   

   IV. GST Registration for Special Economic Zones (“SEZs”): Businesses operating within SEZs must obtain a distinct GST registration for their SEZ operations, separate from any registration they hold for business conducted outside the SEZ. This separation is mandatory regardless of whether the same entity operates both inside and outside an SEZ.

   
   

   The following are the key compliance obligations after registration:

   I. Invoicing: Every sale must be supported by a GST-compliant tax invoice specifying the business’s GST number, the applicable tax rate, and the tax amount charged.

   
   

   II. Filing Returns: Registered businesses file monthly or quarterly returns detailing their sales, purchases, and net tax payable, along with an annual return. Tax payments fall due by the 20^th of the following month.

   
   

   III. E-way Bills: For the movement of goods above a prescribed value, an electronic permit called an e-way bill must be generated before goods are dispatched.

   
   

   IV. Record Keeping: Businesses must maintain accounts and supporting records for 6 years from the date of the relevant annual return.

   
   

5. Are there special GST provisions available for small businesses and startups?

   The GST framework recognises that a small trader and a large multinational cannot be held to the same compliance standard. There are two principal schemes that ease the burden on smaller businesses and startups.

   
   

   I. The Composition Scheme: This is a simplified regime where eligible businesses pay GST at a flat rate on total turnover rather than on every individual transaction. This is available to goods suppliers and restaurants with annual turnover up to INR 1.5 crore (approx. USD 16,100), reduced to INR 75 lakhs (approx. USD 8,065) in special category states. Service providers may also opt in if their turnover does not exceed INR 50 lakhs a (approx. USD 5,375). Manufacturers and traders pay 1% of turnover. Restaurants not serving alcohol pay 5%. Service providers pay 6%. However, they cannot charge GST on invoices, cannot claim ITC, and cannot make inter-state sales. Lastly, composition taxpayers are required to file a simple quarterly statement plus an annual return instead of the regular monthly cycle. The Composition Scheme offers simplicity but breaks the ITC chain, i.e., a startup’s customers cannot recover GST on purchases from it. For startups selling to other businesses, this is a significant commercial disadvantage, and registering under the regular regime is usually preferable. However, for startups selling directly to consumers within a single state, the Composition Scheme can deliver real savings.

   
   

   II. The Quarterly Return Monthly Payment Scheme (“QRMP Scheme”): Available to businesses with annual turnover up to INR 5 crore (approx. USD 53,763), the QRMP Scheme allows quarterly filing of returns while tax is paid monthly. It reduces paperwork without disrupting cash flow. A facility also exists to upload invoices mid-quarter, ensuring customers can claim their ITC without waiting for the quarterly return.

   
   

   III. Other Reliefs: Businesses with annual turnover below INR 2 crore (approx. USD 21,505) are exempt from filing the annual return, and those below INR 5 crores (approx. USD 53,763) are exempt from the reconciliation statement that larger businesses must file alongside it. Where a business has no sales in a given period, a nil return can be filed by short message service rather than through the full portal. E-invoicing obligations equally do not apply to businesses below the INR 5 crore (approx. USD 53,763) threshold.

   
   

6. How are exports and imports of goods and services treated under the GST framework?

   Cross-border transactions follow a clear principle under GST, i.e., exports are relieved of tax entirely, while imports are brought within the GST net at the point of entry.

   
   

   I. Exports: Exports of goods and services, and supplies to SEZ units and developers, are treated as zero-rated supplies. This is different from an exemption. A zero-rated supplier pays no GST on its sales but retains the right to claim ITC on its purchases, with any unutilised credit available as a cash refund from the government. An exempt supplier, by contrast, neither charges GST nor recovers the tax embedded in its costs. Exporters have two practical routes:

   i. Export Under a Letter of Undertaking (“LUT”): The exporter files a simple undertaking at the start of the financial year and exports without paying IGST upfront. Accumulated ITC is then claimed as a refund. This is the preferred route as it avoids locking up working capital. However, goods must be physically exported within 3 months of the invoice date, and payment for services must be received in foreign currency within 1 year. Missing these deadlines triggers interest and potential withdrawal of the LUT facility.

   ii. Export with Upfront IGST payment: The exporter pays IGST at the time of export and claims a cash refund afterwards. The refund is largely processed automatically through the customs system. This route delivers a faster refund but requires capital upfront.

   
   

   II. Imports of Goods: Imports are treated as inter-state supplies and IGST is levied at the customs stage on the total landed value which includes the basic customs duty (“BCD”) and applicable surcharges at the same rate as the domestic equivalent. The IGST paid on imports is available as ITC, provided the importer is GST-registered and the goods are used for business purposes.

   
   

   III. Imports of Services: Imported services are taxed in India under the reverse charge mechanism, i.e., the Indian recipient pays the GST directly to the government rather than the foreign supplier collecting it. The recipient may simultaneously claim ITC on the same amount, making it largely a cash-flow neutral exercise for registered businesses.

   
   

7. What practical challenges do businesses face under the GST regime, and what are the penalties for non-compliance?

   Despite significantly simplifying India’s indirect tax landscape, GST brings its own operational demands. Businesses, particularly foreign-owned or newly established ones, commonly encounter the following challenges:

   
   

   I. Registration Delays: Although the portal promises registration within 7 working days, the process in practice often takes 3 to 4 weeks. Minor document discrepancies, including but not limited to, a mismatched address between a utility bill and a rental agreement, or a missing floor number can trigger rejection without guidance on how to correct it.

   
   

   II. Supplier Compliance Risk: ITC is only available where the supplier has filed its own returns and paid the tax. If a supplier defaults, the buyer’s credit is at risk regardless of whether the underlying transaction was genuine. This makes vendor selection and ongoing compliance monitoring a genuine commercial concern.

   
   

   III. Reverse Charge Oversights: Certain transactions, including imported services, legal fees paid to advocates, and director sitting fees, attract GST under the reverse charge mechanism, meaning the recipient pays the tax directly rather than the supplier collecting it. These are frequently missed by finance teams, leading to underpayment.

   
   

   IV. Frequent Rate Changes: GST rates and exemptions are updated regularly through GST Council recommendations and government notifications. Keeping internal systems and customer pricing aligned with the latest position is an ongoing operational burden.

   
   

   V. E-way Bill Compliance: Goods in transit must be accompanied by a valid electronic permit. Errors in the permit or expiry during transit can result in goods being detained by tax authorities.

   
   

   VI. Classification Disputes: Assigning the correct GST rate is often challenging, as many goods and services fall between rate slabs. Misclassification can expose businesses to differential tax, interest, and penalties, often retrospectively, and this has been a frequent source of GST litigation.

   
   

   The penalty framework under the GST regime distinguishes between procedural lapses, bona fide errors, and fraudulent conduct.

Penalty / Consequence and Application	Quantum / Extent
General Penalty for Tax Evasion: Applies where a business has short-paid or not paid tax, claimed wrongful ITC, or issued invoices without actual supply, without fraudulent intent.	Higher of INR 10,000 (approx. USD 107) or 10% of the tax due. Where the default is corrected voluntarily before a formal notice is issued, no penalty applies, only the unpaid tax and interest are due.
Fraud Penalty: Applies where non-compliance involves false invoicing, suppression of turnover, wilful misstatement, or fraudulent ITC claims.	Penalty equal to the full amount of tax evaded. Reduced to 15% if tax, interest, and reduced penalty are paid before a formal notice is issued; reduced to 25% if paid within 30 days of the notice.
Criminal Prosecution: Applies in serious cases of evasion exceeding prescribed thresholds, including issuance of invoices without actual supply and fraudulent ITC claims.	Imprisonment of up to 5 years and fine, depending on the quantum of evasion.
Late Filing of Returns: Applies where periodic returns are not filed by the due date.	Fixed daily late fee per return, subject to prescribed caps. A reduced daily fee applies where the return is a nil return.
Interest on Unpaid Tax: Applies where tax due for a period is not paid by the prescribed due date.	18% per annum on the outstanding tax amount. Where ITC has been wrongly claimed and utilised, interest rises to 24% per annum.
Detention of Goods in Transit: Applies where goods are transported in contravention of the provisions of the GST framework, including where goods are moved without a valid e-way bill, or where the e-way bill contains material errors or has expired during transit.	Penalty equal to 200% of the tax payable on the detained goods. For exempt goods, the lesser of 2% of the value of the goods or INR 25,000 (approx. USD 269).