How GST works in India
Goods and Services Tax replaced a stack of central and state indirect taxes — VAT, service tax, excise duty, octroi and others — with one destination-based tax when it came into force on 1 July 2017. Destination-based means the tax accrues to the state where the goods or services are consumed, not where they were produced.
GST is charged at each stage of the supply chain, but businesses reclaim the tax they paid on their own inputs through input tax credit. The net effect is that tax is paid only on the value added at each stage, and the full burden lands on the final consumer.
The three components
Which components apply depends on whether the supply crosses a state border:
- CGST — Central GST, collected by the central government.
- SGST — State GST, collected by the state where consumption happens.
- IGST — Integrated GST, collected centrally on inter-state supplies and imports, then apportioned to the destination state.
On an intra-state supply the rate splits equally: 18% GST becomes 9% CGST plus 9% SGST. On an inter-state supply the entire 18% is charged as IGST. The total the customer pays is identical either way — only the split changes.
The GST formulas
Adding GST to a base price
Total price = Base price + GST amount
Removing GST from an inclusive price
This is where people most often go wrong. You cannot simply subtract 18% from a GST-inclusive price, because the 18% was calculated on the smaller base, not on the total. The correct formula is:
GST amount = Total price − Base price
- Total
- The GST-inclusive price you were charged
- Base
- The taxable value before GST
Concretely: on a ₹11,800 inclusive price at 18%, the base is 11,800 ÷ 1.18 = ₹10,000 and the GST is ₹1,800. Subtracting 18% of ₹11,800 would have given ₹9,676 — wrong by ₹324.
GST rate slabs
India uses a multi-rate structure. The slab a product falls into is set by its HSN code for goods or SAC code for services.
| Rate | Typically covers |
|---|---|
| 0% | Fresh fruit and vegetables, milk, unbranded flour and cereals, books, healthcare and education services |
| 5% | Packaged food, edible oils, tea and coffee, life-saving drugs, economy air travel, small restaurants |
| 12% | Processed foods, butter and cheese, mobile phones, business-class air travel, non-AC hotels |
| 18% | Most goods and services — electronics, financial services, telecom, IT services, AC restaurants |
| 28% | Luxury and demerit goods — cars, tobacco, aerated drinks, high-end appliances, five-star hotels |
A compensation cess applies above 28% on a narrow list of demerit goods. Cess rates range from 1% on small petrol cars to 22% on large SUVs, and reach 204% on certain tobacco products. Enter it in the advanced options above if it applies.
Worked examples
Frequently asked questions
How do I remove GST from an inclusive price?
Divide the total by (1 + rate ÷ 100). For 18% GST, divide by 1.18. For 5%, divide by 1.05. For 28%, divide by 1.28. The GST amount is then the total minus that base figure.
Subtracting the percentage directly from the inclusive price is the classic error. At 18% it overstates the tax by about 15%.
What is the difference between CGST, SGST and IGST?
They are three ways of collecting the same total. On a supply within one state, GST is split equally into CGST (to the centre) and SGST (to the state). On a supply between states, the entire amount is charged as IGST, collected centrally and then transferred to the destination state.
UTGST replaces SGST in union territories without a legislature. The customer pays exactly the same either way — the split only determines who receives the money.
Who has to register for GST?
Registration is mandatory once annual turnover exceeds ₹40 lakh for goods or ₹20 lakh for services in most states. Special-category states use lower thresholds of ₹20 lakh and ₹10 lakh respectively.
Some businesses must register regardless of turnover, including anyone making inter-state taxable supplies, e-commerce operators, and those liable under reverse charge. Voluntary registration is allowed and is often worthwhile, since it lets you claim input tax credit.
What is input tax credit?
Input tax credit lets a registered business offset the GST it paid on purchases against the GST it collects on sales, so it remits only the difference.
If you collect ₹1,800 of GST on sales and paid ₹1,000 of GST on your inputs, you remit ₹800. To claim it you need a valid tax invoice, the goods or services must have been received, and your supplier must have filed their return and paid the tax.
Is GST charged on the discounted price or the original price?
On the discounted price, provided the discount is shown on the invoice at the time of supply. A ₹10,000 item with a ₹1,000 invoice discount attracts 18% GST on ₹9,000, so ₹1,620.
Post-sale discounts are treated differently — they reduce the taxable value only if they were agreed before the supply and can be linked to specific invoices.
What is the compensation cess?
An additional levy on top of 28% GST applied to a short list of luxury and demerit goods, introduced to compensate states for revenue lost in the transition to GST.
Rates vary widely: 1% to 22% on motor vehicles depending on engine size and length, 12% on aerated drinks, and up to 204% on some tobacco products. It is calculated on the same taxable value as GST, not on the GST-inclusive amount.