Goods and Services Tax (GST)

By Manu Rao | Updated March 2026

What Is GST?

Goods and Services Tax (GST) is India's indirect tax on the supply of goods and services. It replaced over a dozen separate taxes — excise duty, service tax, VAT, CST, entry tax, luxury tax, and others — with a single unified structure. GST came into effect on July 1, 2017, under the Constitution (101st Amendment) Act 2016.

For any business operating in India — whether owned by Indians, NRIs, or foreigners — GST is the primary indirect tax you will deal with. Every invoice your company issues, every purchase it makes, and every service it receives comes with a GST component.

Legal Framework

GST is governed by multiple laws operating in parallel:

• Central Goods and Services Tax Act 2017 (CGST Act) — Covers the central government's share of GST on intra-state transactions
• State Goods and Services Tax Act (SGST Act) — Each state has its own SGST Act for the state share
• Integrated Goods and Services Tax Act 2017 (IGST Act) — Covers inter-state transactions and imports
• Union Territory Goods and Services Tax Act 2017 (UTGST Act) — For union territories without legislatures
• GST (Compensation to States) Act 2017 — Compensation cess on certain luxury and sin goods (sunsetted in 2022, cess continues for loan repayment)

The GST Council, chaired by the Union Finance Minister with all state finance ministers as members, decides GST rates, exemptions, and procedural rules.

GST Rate Structure

GST operates on a 4-tier rate structure plus special categories:

A compensation cess applies on top of the 28% rate for items like SUVs (22% cess), tobacco products, and coal.

How GST Works — The Input Tax Credit Mechanism

The defining feature of GST is Input Tax Credit (ITC). When your company pays GST on purchases (inputs), you can claim that amount as a credit against the GST you collect on sales (outputs). You only remit the difference to the government.

For example: Your company buys raw materials for INR 1,00,000 + 18% GST (INR 18,000). You sell finished goods for INR 2,00,000 + 18% GST (INR 36,000). Your GST liability is INR 36,000 minus INR 18,000 ITC = INR 18,000 payable.

This chain breaks only when ITC is blocked under Section 17(5) — for motor vehicles for personal use, food and beverages, club memberships, and certain other specified items.

GST for Foreign-Owned Companies

Foreign entrepreneurs setting up businesses in India encounter GST differently from domestic operators in several ways:

• Import of goods — When your Indian company imports machinery, raw materials, or inventory from abroad, IGST applies at the point of customs clearance. This IGST is fully available as ITC. Basic Customs Duty is paid separately and is not creditable.
• Import of services — If your Indian subsidiary receives services from the foreign parent (management fees, brand licensing, IT support), it triggers GST under the reverse charge mechanism. The Indian company must self-assess and pay IGST on the import value.
• Export benefits — Exports from India are zero-rated under GST. Your company can either export under Letter of Undertaking (LUT) without paying IGST, or pay IGST and claim a refund. Most exporters prefer the LUT route.
• Foreign currency invoicing — Services billed in foreign currency to clients outside India qualify as exports of services under Section 2(6) of IGST Act, provided payment is received in convertible foreign exchange.
• GST registration threshold — Foreign companies making taxable supplies in India must register regardless of turnover if they are required to pay tax under reverse charge.

Types of GST on a Transaction

• CGST + SGST — Charged on intra-state supplies (within the same state). Split equally. An 18% GST means 9% CGST + 9% SGST.
• IGST — Charged on inter-state supplies and imports. The full 18% goes as IGST.

A company in Delhi selling to a client in Delhi charges CGST + SGST. The same company selling to a client in Mumbai charges IGST.

GST Returns and Filing Frequency

The QRMP (Quarterly Return Monthly Payment) scheme allows businesses with turnover up to INR 5 crores to file returns quarterly instead of monthly.

Penalties for Non-Compliance

• Late filing of GSTR-3B — INR 50/day (INR 20/day for nil returns), capped at INR 10,000 per return period
• Non-registration — Penalty equal to the tax due or INR 10,000, whichever is higher (Section 122)
• Fraudulent ITC claims — Penalty equal to the tax amount plus interest at 24% per annum. Criminal prosecution possible under Section 132 for amounts exceeding INR 5 crores.
• Late payment of tax — Interest at 18% per annum on the outstanding amount

Common Mistakes by Foreign-Owned Companies

• Not paying reverse charge on imported services — When the foreign parent provides management or consulting services, the Indian company must self-assess and pay GST under reverse charge. Many companies miss this.
• Claiming ITC on blocked items — Section 17(5) blocks ITC on motor vehicles, food catering, and several other categories. Foreign companies unfamiliar with these rules often claim credits that get reversed during audits.
• Missing the LUT filing for exports — To export without paying IGST, you must file a Letter of Undertaking before the financial year starts. Filing it mid-year means IGST paid earlier cannot be recovered under the LUT route.
• HSN code errors — Using incorrect HSN (Harmonized System of Nomenclature) codes on invoices leads to ITC mismatches on the GST portal. The correct HSN code determines the applicable rate.
• Not reconciling GSTR-2B with purchase records — The auto-populated GSTR-2B shows ITC available based on suppliers' filings. If your supplier has not filed GSTR-1, your ITC gets restricted under Rule 36(4).

Practical Example

A Japanese company sets up a wholly-owned subsidiary in Chennai to manufacture auto components. The subsidiary imports machinery from Japan — paying Basic Customs Duty + IGST at the time of clearance. It claims the IGST as ITC. Monthly, the company files GSTR-1 reporting all sales (both domestic and exports) and GSTR-3B to pay net GST. The company exports 70% of production to Japan and the US under LUT — zero-rated, no IGST charged. For the remaining 30% sold domestically, it charges 18% GST. At year-end, the company files GSTR-9. The parent company charges a management fee of USD 50,000/year — the Indian subsidiary pays IGST of 18% on this under reverse charge and claims it as ITC.

Related Terms

• GST Registration — The process of obtaining a GSTIN
• Income Tax Return — Direct tax filing (separate from GST)
• Compliance Calendar — All GST due dates in one view

Need help with GST compliance for your India business? Beacon Filing handles registration, returns, and audits for foreign-owned companies.