Last updated: July 2026. Updated for the two-rate GST structure (GST 2.0) that replaced the old 5%/12%/18%/28% slabs on 22 September 2025.
What is GST? Understanding India's Unified Tax System
The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax that was introduced in India on 1st July 2017. It replaced a complex web of indirect taxes including VAT, Service Tax, Central Excise, and several other state and central levies.
GST is governed by the GST Council, a constitutional body chaired by the Union Finance Minister, with state finance ministers as members. The Council recommends GST rates, exemptions, and policy changes.
How Does GST Work?
GST follows a multi-stage collection process where tax is levied at each point of sale. However, the key feature is Input Tax Credit (ITC), which allows businesses to claim credit for tax already paid on inputs, eliminating the cascading effect (tax on tax) that existed under the old regime.
Example of GST in Practice
Consider a manufacturer who buys raw materials worth ₹1,00,000 with 18% GST (₹18,000). When selling the finished product for ₹1,50,000 with 18% GST (₹27,000), the manufacturer only pays ₹9,000 to the government (₹27,000 − ₹18,000 ITC).
Types of GST in India
India follows a dual GST model where both the Central and State governments levy tax simultaneously on goods and services.
| Type | Full Form | When Applicable |
|---|---|---|
| CGST | Central GST | Intra-state supply (Central share) |
| SGST | State GST | Intra-state supply (State share) |
| IGST | Integrated GST | Inter-state supply or imports |
| UTGST | Union Territory GST | Supply within Union Territories |
GST Rate Structure: The Two-Rate System (GST 2.0)
From 22 September 2025, India moved from four main slabs (5%, 12%, 18%, 28%) to a simplified two-rate structure, based on the recommendations of the 56th GST Council meeting held on 3 September 2025. The 12% and 28% slabs were abolished.
- 5% (merit rate) – Essentials and daily-use items: most packaged foods, medicines and diagnostic kits, soaps and toothpaste, footwear and apparel in lower price bands, agricultural machinery, hotel rooms up to ₹7,500/day, salons and gyms
- 18% (standard rate) – Most other goods and services: IT and professional services, telecom, financial services, electronics, cement, small cars, appliances
- 40% (demerit rate) – Pan masala and tobacco products, aerated and other sugary drinks, luxury cars, yachts and private aircraft, betting, casinos, and online money gaming
Items like fresh vegetables, milk, and unprocessed grains remain exempt (0%), and the reform newly exempted individual health and life insurance policies. Special rates continue for precious items (0.25% on rough diamonds, 3% on gold, silver, and jewellery). Tobacco and pan masala transitionally stayed at 28% plus compensation cess, and moved to the 40% rate with MRP-based valuation from 1 February 2026.
The new rates were notified through Notification No. 9/2025-Central Tax (Rate) for goods and Notifications No. 15/2025 and 16/2025-Central Tax (Rate) for services, all dated 17 September 2025 and effective 22 September 2025. See the official 56th GST Council press release and the CBIC tax information portal for the notification texts.
Benefits of GST for Businesses
- Elimination of cascading taxes – ITC ensures tax is only on value addition
- Unified national market – No inter-state tax barriers for goods movement
- Simplified compliance – One tax replaces multiple indirect taxes
- Transparent pricing – Consumers see exactly how much tax they pay
- Digital infrastructure – GSTN portal enables online filing and tracking
Who Needs to Register for GST?
Registration is mandatory for businesses with annual turnover exceeding:
- ₹40 lakhs for goods suppliers (₹20 lakhs for special category states)
- ₹20 lakhs for service providers (₹10 lakhs for special category states)
E-commerce operators, inter-state suppliers, and those under reverse charge must register regardless of turnover.
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This article is for general information based on tax law current at the time of review and is not a substitute for professional advice. Verify figures against the official Income Tax and GST portals, and consult a qualified professional for your specific situation.