What is GST? A Simple Guide
GST (Goods and Services Tax) is a value-added tax: a consumption tax charged at every step of a supply chain, but where each business only pays tax on the value it adds. The final cost falls on the end consumer. India introduced GST in July 2017, replacing a patchwork of central and state indirect taxes such as excise duty, service tax and VAT.
How a value-added tax works
Under GST, a registered business charges tax on its sales (output tax) and pays tax on its purchases (input tax). It deposits only the difference with the government. The tax it paid on purchases is claimed back as input tax credit (ITC). Without ITC, tax would pile up at every stage and be taxed again on later sales, which is the cascading problem the old system had.
Here is an illustrative chain using a flat 18% rate (chosen only for round numbers):
| Seller | Sells for (before tax) | Output GST | Input GST paid | Pays to government |
|---|---|---|---|---|
| Raw material supplier | ₹400 | ₹72 | ₹0 | ₹72 |
| Manufacturer | ₹1,000 | ₹180 | ₹72 | ₹108 |
| Wholesaler | ₹1,400 | ₹252 | ₹180 | ₹72 |
| Retailer | ₹2,000 | ₹360 | ₹252 | ₹108 |
The government collects ₹72 + ₹108 + ₹72 + ₹108 = ₹360 in total, which is exactly 18% of the final ₹2,000. The consumer pays ₹2,360, and the businesses are no worse off, since each recovers its input tax. That is the point of the system: tax is levied on value added, and total tax equals the rate times the final price.
ITC has conditions. In India, for example, the purchase must be for business use, supported by a valid tax invoice, and reflected in the supplier's filed returns. Certain items are blocked from credit, so check the current rules before relying on it. Small businesses below the registration threshold, and sellers of exempt goods, generally cannot charge GST or claim credit, which is why thresholds and exemptions matter when you decide how to price.
CGST, SGST and IGST
India is a federation, and GST is shared between the Centre and the states. The tax charged depends on where the supplier is and where the supply is made:
- CGST (Central GST) and SGST (State GST) apply to a sale within one state. The rate is split equally, so an 18% GST is 9% CGST plus 9% SGST. Union territories without a legislature use UTGST in place of SGST.
- IGST (Integrated GST) applies to sales between states and to imports. The full rate is charged as one component, so an 18% GST is 18% IGST, which is then apportioned between the Centre and the destination state.
The total burden is the same either way. The split only decides which government receives the money and which ledger carries the credit.
GST rates change, so check the source
GST in India is levied in tiers, with lower rates on essentials, higher rates on luxury and sin goods, and some items exempt or at zero. The tier structure was restructured with effect from 22 September 2025. The old 5/12/18/28% slabs became three main rates:
- 5% for essentials and many everyday goods.
- 18% as the standard rate for most goods and services.
- 40% for luxury and sin goods. Tobacco and pan masala moved to this rate on 1 February 2026.
Alongside these sit 0% (nil-rated and exempt items) and special rates of 3% on gold, silver and jewellery and 0.25% on rough diamonds and precious stones. Rates for specific goods and services have been revised many times since the 2017 launch, so before invoicing or pricing, confirm the rate for your product or its HSN/SAC code on the official CBIC GST portal or in the latest GST Council notifications.
Adding and removing GST
With any rate, the maths is simple:
- Add GST: price × (1 + rate ÷ 100). At an illustrative 18%, ₹1,000 becomes ₹1,180.
- Remove GST: inclusive price ÷ (1 + rate ÷ 100). ₹1,180 ÷ 1.18 = ₹1,000, so ₹180 of it is GST.
A common mistake is subtracting 18% from the inclusive price (₹1,180 − 18% = ₹967.60), which gives the wrong base. The GST calculator does both directions and shows the base, tax and total separately, which is the layout a tax invoice needs.
GST in other countries
Many countries use the same idea under the name GST or VAT. As of 2025, the headline rates are roughly: Australia 10%, Canada 5% federal (plus provincial taxes in some provinces, such as HST or PST, which vary), New Zealand 15%, and Singapore 9% (raised from 8% in January 2024). Each has its own registration thresholds, exempt categories and rules for exports, so treat these as reference points and check the national tax authority for current details.