What Is GST? How One Tax Replaced a Dozen Others in India

GST, or Goods and Services Tax, is a single, unified indirect tax levied on the supply of most goods and services in India, replacing a patchwork of separate central and state taxes, including excise duty, service tax, VAT, and several others, that existed before it took effect on July 1, 2017. Unlike income tax, which is a direct tax on what you earn, GST is an indirect tax on what you spend: it’s built into the price of most things you buy, and the seller collects it from you and passes it on to the government.

GST is administered jointly by the central and state governments under the GST Council, which decides rates and rules through periodic meetings, and the tax is structured as a “destination-based” system, meaning the tax revenue goes to the state where the goods or services are actually consumed, not where they’re produced.

How GST is structured

GST applies at each stage of the supply chain, but businesses can claim credit for the GST they already paid on their own purchases (called Input Tax Credit), so the tax doesn’t compound at every stage the way older cascading taxes did. Ultimately, the end consumer bears the final tax burden, since it’s built into the retail price by the time a product or service reaches them.

Following a major rate rationalization by the GST Council effective from September 2025 (commonly referred to as “GST 2.0”), the structure was simplified from four main slabs down to a leaner system: a 5% rate covering most everyday essentials and mass-consumption goods, an 18% standard rate covering the bulk of other goods and services, a 0% (nil) rate for select essential items, and a higher 40% rate reserved for sin goods and select luxury items (such as tobacco, pan masala, and certain luxury vehicles). Because the GST Council revises rates and category placements periodically, always confirm the current rate for a specific item or service on the official GST portal rather than assuming a rate from a previous year still applies.

CGST, SGST, and IGST

For a transaction within a single state, GST is split into two components collected simultaneously: Central GST (CGST), which goes to the central government, and State GST (SGST), which goes to the state government, together adding up to the applicable GST rate. For a transaction between two different states (inter-state supply), a single Integrated GST (IGST) applies instead, collected by the central government and later apportioned to the destination state. This structure exists specifically to preserve the “destination-based” principle, ensuring tax revenue lands with the state where the goods or services are actually consumed.

Who needs to register for GST

Businesses whose annual turnover crosses specified thresholds, which differ by state and by whether the business supplies goods or services, are required to register for GST and collect it on their supplies. Smaller businesses below the threshold can register voluntarily, which allows them to claim Input Tax Credit on their own purchases, something unregistered businesses can’t do. There’s also a simplified Composition Scheme for small businesses with turnover under a specified limit, offering a lower, fixed tax rate in exchange for giving up the ability to claim input credit.

GST versus income tax, in one line

Income tax is charged on what you earn; GST is charged on what you spend. A salaried employee with zero additional income can still pay a meaningful amount of GST every month simply through routine purchases, since it’s embedded in nearly everything bought or consumed, which is part of why GST is often described as a regressive tax relative to income, it takes a proportionally larger bite out of lower incomes than higher ones, even though the rate is nominally the same for everyone buying the same item.

Bottom Line

GST consolidated a fragmented, multi-layered indirect tax system into a single nationwide tax, collected in stages but ultimately borne by the end consumer, with the specific rate depending on the category of good or service and revised periodically by the GST Council. Understanding the CGST/SGST/IGST split and the current slab structure is mostly useful for businesses, but every consumer already pays it, whether or not the receipt spells it out clearly.

This article is for general information and isn’t personalized tax advice. Confirm current GST rates for specific goods or services on the official GST portal, since they’re revised periodically.

Sources

• Goods and Services Tax (GST) – Government of India
• GST Council – Press Releases