GST - Structure, Rates and ITC for UPSC

Goods and Services Tax (GST) is a comprehensive, destination‑based indirect tax on the supply of goods and services in India. Introduced on 1 July 2017 via the 101st constitutional amendment, it subsumed most central and state indirect taxes such as value added tax (VAT), service tax, central excise, octroi and entry tax. GST aims to create a unified national market by reducing the cascading of taxes, promoting ease of doing business and ensuring that tax is collected where consumption takes place rather than where production occurs. Under the dual model adopted by India, both the Union and state governments levy GST concurrently on the same supply, but revenue accrues to the destination state.

Why GST Was Introduced

Before 2017, India’s indirect tax system was highly fragmented. Multiple levies—central excise, service tax, state VAT, octroi, purchase tax and entry tax—were imposed at different points of the supply chain. These taxes had overlapping bases, varied rates and separate compliance requirements. Businesses often faced double taxation because input taxes paid on goods could not be fully offset against taxes on services, and vice versa. Interstate transactions attracted a central sales tax and checkpoints at state borders caused delays and higher logistics costs. The lack of a seamless credit chain resulted in tax cascading: taxes were levied on taxes, increasing the final price for consumers and eroding the competitiveness of Indian goods and services.

GST was envisaged to unify the domestic market by subsuming most indirect taxes into a single levy. By replacing origin‑based taxes with a destination‑based levy, GST ensures that tax revenue accrues to the consuming state. It eliminates the cascading effect through the ITC mechanism, thereby reducing costs for businesses. The move also sought to broaden the tax base, increase transparency through technology and improve tax compliance. Cooperative federalism lies at the heart of the GST regime—the GST Council, comprising the Union finance minister and state finance ministers, determines rates and reforms by consensus.

Structure of GST: Dual Model and Types of Levy

India adopted a dual GST model to respect the fiscal sovereignty of the Union and states. Under this model, both levels of government levy tax on the same transaction but the proceeds are distributed separately. The following components comprise the levy:

• Central GST (CGST) – Levied by the Union government on intra‑state supply of goods and services. The revenue accrues to the Centre.
• State GST (SGST) – Levied by states (or Union Territory GST for union territories without a legislature) on the same intra‑state supply. The revenue goes to the destination state.
• Integrated GST (IGST) – Levied by the Centre on inter‑state supplies and imports. The tax is collected by the Union and apportioned between the Centre and destination state. IGST ensures seamless crediting and transfer of tax across state boundaries.

In addition, certain goods such as tobacco and luxury vehicles attract a compensation cess. The proceeds of this cess are used to compensate states for any shortfall in revenue resulting from the GST rollout. Originally promised for five years until June 2022, the compensation mechanism has been extended up to March 2026 to repay loans raised during the pandemic and fully offset state revenue losses.

The GST is destination‑based: tax is collected where goods or services are consumed rather than where produced. A registered supplier charges GST on outward supplies and collects tax on behalf of the government. Registered recipients can claim credit for the tax paid on inputs and adjust it against their output tax liability, ensuring tax is levied only on value addition.

Taxes Subsumed into GST

The introduction of GST subsumed a wide range of central and state levies. At the central level, taxes such as excise duty, service tax, additional duties of customs, countervailing duty, and special additional duty of customs were merged. At the state level, VAT, entry tax, octroi, purchase tax, luxury tax, entertainment tax (except local body levies), and advertisements tax were subsumed. Customs duty on import of goods continues outside the GST framework, and basic customs duty remains a separate levy.

GST Rate Structure: From Multiple Slabs to Rationalisation

When GST was launched in 2017 it adopted a multi‑slab structure to accommodate diverse revenue needs and social priorities. There were five principal rate slabs: a nil rate (0 %) for unprocessed food and essential services, 5 % for common necessities, 12 % for standard items, 18 % as the standard rate for most goods and services and 28 % for luxury items and sin goods. Over time the GST Council rationalised rates by reducing items in the 28 % category and shifting many goods to lower slabs.

In September 2025 the 56th GST Council meeting unveiled GST 2.0, the most significant overhaul since inception. The Council decided to merge the 12 % and 28 % slabs and adopt a three‑tier structure to make compliance simpler and minimise classification disputes:

• Merit rate – 5 %: Applicable to essential goods and services including basic food items, healthcare equipment and education supplies.
• Standard rate – 18 %: Applicable to the majority of goods and services such as consumer durables, industrial products, restaurants and professional services.
• Demerit rate – 40 %: Applied selectively to sin goods and luxury items. Products such as tobacco, pan masala, aerated drinks, high‑end cars, motorcycles above 350 cc, personal aircraft and yachts fall under this slab. This rate includes the compensation cess component.

A zero or nil rate continues for unprocessed cereals, vegetables, milk, health and education services, and some life‑saving drugs. The Council also exempted health and life insurance premiums and reduced GST on dairy products, 33 life‑saving medicines and educational supplies. Small changes to specific categories include cutting rates on hair oil and toothpaste from 18 % to 5 %, and on tractors and agricultural machinery from 12 % or 18 % to 5 %. The rationalised structure aims to reduce the classification disputes inherent in a four‑slab system, encourage compliance and promote consumption.

Current GST Rate Slabs

A few goods and services continue under a residual 3 % or special rate outside these major slabs. Precious metals such as gold and silver attract 3 % GST plus varying cess. Real estate enjoys an effective rate of 1 % or 5 % without ITC for affordable and non‑affordable housing respectively. Certain categories of capital goods and renewable energy equipment benefit from preferential rates to encourage investment.

Items Outside the GST Net

Despite its wide coverage, GST does not apply to all goods or transactions. Four important exclusions remain outside the GST framework:

• Alcoholic liquor for human consumption: The Constitution explicitly excludes alcohol from the definition of goods and services tax. States continue to levy excise duty and VAT on alcohol to raise revenue and regulate social consumption. Including alcohol would require another constitutional amendment.
• Petroleum crude, motor spirit (petrol), high‑speed diesel, aviation turbine fuel and natural gas: The GST Council has not yet set a date for their inclusion. States depend heavily on VAT on petroleum products; these taxes account for 25–30 % of many state budgets. Concerns about revenue loss and price volatility have delayed inclusion. However, there is growing demand to at least bring natural gas and aviation turbine fuel under GST to enable input credit and reduce energy costs.
• Electricity: Power generation and distribution are outside GST, allowing states to continue levying electricity duty. Businesses cannot claim ITC on electricity used as an input, which leads to cascading.
• Basic customs duty: Import duties remain outside GST as they serve the purpose of protecting domestic industry and generating revenue. However, integrated GST is levied on imports in addition to customs duty, and importers can avail credit of IGST paid.

Additionally, property taxes, stamp duty on immovable property, toll fees and road taxes remain outside the GST scope and continue to be governed by respective laws.

The Input‑Tax Credit (ITC) Mechanism

The core innovation of GST is the input‑tax credit system, which prevents double taxation. When a registered business purchases goods or services, it pays GST on inputs (inward supplies). The business can claim this tax as a credit, and set it off against GST payable on its sales (outward supplies). Only the value added at each stage is taxed; the cumulative burden does not cascade. ITC ensures competitiveness and lowers consumer prices.

Eligibility and Conditions for Claiming ITC

To claim input credit, the following conditions must be fulfilled:

• The recipient must possess a tax invoice, debit note or prescribed document issued by a registered supplier.
• The recipient must have received the goods or services. In case of goods delivered in lots, ITC is available only upon receipt of the last lot.
• The tax charged on supply must be actually paid to the government, either in cash or by utilising the supplier’s credit. To ensure this, the government introduced invoice matching: ITC is allowed only when the supplier files GSTR‑1 and the details appear in the recipient’s auto‑drafted GSTR‑2B.
• The recipient must furnish a valid GST return (GSTR‑3B) within the stipulated deadline.
• ITC must be claimed within prescribed time limits—currently by the 30th November following the end of the financial year in which the invoice or debit note pertains. Unclaimed credit beyond this date lapses.

Blocked Credits and Restrictions

The law disallows ITC on certain goods and services to prevent misuse and maintain progressive taxation. Credits are blocked on motor vehicles (except for supply or passenger transport), membership of clubs, health and life insurance (unless mandated by law), food and beverages, beauty treatment, works contracts for constructing immovable property, goods lost or destroyed, and personal consumption. Moreover, ITC cannot be used to pay interest, penalties or late fees; it can only offset output GST liability.

Cross‑Utilisation Rules

Under GST the credit chain flows seamlessly across jurisdictions. IGST credit can be used to set off IGST, CGST or SGST liabilities in that order. CGST credit can be used against CGST and IGST liabilities but cannot be used to pay SGST. Conversely, SGST/UTGST credit can offset SGST/UTGST and IGST but not CGST. These rules maintain fiscal discipline between the Centre and states while allowing efficient credit flow.

Composition Scheme for Small Taxpayers

Recognising that frequent returns and invoice‑level matching can burden micro and small enterprises, the GST law provides a Composition Scheme. Dealers with annual turnover up to ₹1.5 crore (₹75 lakh in specified north‑eastern and hill states) can opt for this scheme. Instead of charging customers GST and claiming ITC, they pay tax at a flat percentage of turnover—currently 1 % for traders, 2 % for manufacturers and 5 % for specified service providers such as restaurants. Composition dealers cannot issue tax invoices or collect tax separately, and they lose the benefit of ITC. They also cannot make inter‑state supplies or supply goods through e‑commerce operators. The scheme simplifies compliance but may not suit businesses dealing extensively with taxable inputs or exports.

GST Compliance Framework

GST compliance rests on a robust IT infrastructure and self‑assessment. Registration, return filing, payment and refund processes occur on the Goods and Services Tax Network (GSTN) portal. Key aspects of compliance include:

Registration Thresholds

Businesses supplying taxable goods must register for GST if their aggregate turnover exceeds ₹40 lakh in a financial year. For services, the threshold is ₹20 lakh. In special category states (north‑eastern and hilly states) the respective limits are ₹20 lakh and ₹10 lakh. Voluntary registration is permitted irrespective of turnover, enabling businesses to avail ITC and operate across state borders.

Returns and Invoicing

Compliance requires timely filing of returns summarising outward and inward supplies, tax liability and input credits. Important returns include:

• GSTR‑1: Monthly or quarterly statement of outward supplies. It contains invoice‑wise details of sales; due by the 11th of the following month (or 13th for quarterly filers under the QRMP scheme).
• GSTR‑2B: Auto‑drafted statement generated for recipients based on their suppliers’ GSTR‑1 filings. It helps recipients reconcile and claim ITC.
• GSTR‑3B: Monthly self‑assessment return summarising tax liability and ITC. Payment of tax is made while filing GSTR‑3B, usually by the 20th of the following month.
• GSTR‑9: Annual return providing consolidated details of sales, purchases, ITC and tax paid. Large taxpayers also file a reconciliation statement in GSTR‑9C, certified by a chartered accountant.
• GSTR‑4: Annual return for composition dealers.

Since 2020 the government has steadily rolled out e‑invoicing to automate invoice reporting and reconciliation. Initially applicable to taxpayers with turnover above ₹500 crore, the threshold has been progressively reduced—₹100 crore, ₹50 crore and ₹10 crore. From August 2024 e‑invoicing became mandatory for businesses with annual turnover of ₹5 crore and above, significantly expanding its scope. E‑invoices generate a unique Invoice Reference Number (IRN) and QR code through the Invoice Registration Portal. This system reduces fake invoicing, enables real‑time reporting to tax authorities and improves accuracy in ITC matching.

E‑Way Bill System

To monitor movement of goods worth over ₹50,000 across state lines or within a state, the GST law requires an e‑way bill. Transporters, consignors or consignees generate the e‑way bill on a common portal, providing details of goods, origin, destination, vehicle number and transporter. The e‑way bill must be carried during transit and shown to authorities on demand. Validity is based on distance; for example, one day for up to 200 km. This mechanism curbs tax evasion and reduces check post delays.

Audit, Assessment and Penalties

The GST regime relies on self‑assessment but retains strong enforcement tools. Tax officers may conduct scrutiny of returns, audit businesses or inspect premises when discrepancies arise. Non‑compliance attracts interest (18 % per annum on unpaid tax), late fees for delayed returns and penalties up to 10 % of tax due or ₹10,000, whichever is higher. The system also provides for arrest and prosecution in cases of wilful fraud or tax evasion exceeding prescribed thresholds. A dispute may be appealed to the Commissioner (Appeals), the Appellate Authority, and ultimately the Goods and Services Tax Appellate Tribunal (GSTAT), established in 2024–25 to streamline dispute resolution.

GST Council and Policy Evolution

The GST Council is the apex decision‑making body for GST. Chaired by the Union Finance Minister, with the Union Minister of State (Finance) and state finance ministers as members, the Council ensures cooperative federalism. Decisions require a three‑fourths majority, giving states an effective veto. Since 2017 the Council has held over 56 meetings, adjusting rates, simplifying procedures and addressing industry concerns. Notable milestones include:

• Implementation of e‑way bill (2018) and e‑invoicing (2020 onwards), strengthening the digital backbone and reducing evasion.
• Reduction of items in the highest slab, shifting most goods to lower rates and cutting 28 % slab coverage from over 200 items to a handful of luxury and sin goods.
• Relief measures during the COVID‑19 pandemic: Deferment of return filing, interest waivers and the introduction of a special composition scheme for small taxpayers.
• Creation of the GST Compensation Cess fund and extension of compensation beyond the initial five‑year period. To finance states’ shortfalls during the pandemic, the Centre borrowed on behalf of states. The cess will now continue until March 2026 to repay these loans.
• Rate rationalisation and GST 2.0 in 2025: Consolidation into a three‑slab structure (5 %, 18 %, 40 %) and reduction of tax on essential goods.
• Operationalisation of the GST Appellate Tribunal in 2024–25, enabling faster resolution of disputes and reducing litigation.

These reforms demonstrate the Council’s agility and the spirit of consensus. However, inclusion of petroleum products, natural gas and electricity remains a pending agenda. States and industry bodies continue to lobby for these items to be brought under GST to reduce cascading and enable credit.

Impact of GST and Recent Trends

GST has produced mixed outcomes across the economy. Key achievements include:

• Formalisation of the economy: By harmonising taxes and using technology, GST has brought many informal businesses into the tax net. Active GST registrations surpassed 1.5 crore by mid‑2025.
• Rising revenue collections: Monthly GST collections averaged around ₹1.84 lakh crore in 2024–25, nearly double the average in 2017–18. April 2025 saw record collections of about ₹2.37 lakh crore, indicating robust consumption, improved compliance and effective enforcement. Gross GST revenue for FY 2024–25 reached around ₹22 lakh crore, reflecting year‑on‑year growth of over 9 %.
• Improved ease of doing business: Removal of interstate check posts, a common registration platform and a uniform tax rate have simplified logistics and reduced transaction costs. Input credits reduce the tax burden, making Indian goods more competitive.
• Technological advancements: The GSTN’s e‑invoicing, e‑way bill and data analytics improve transparency, detect fraud and facilitate targeted audits. Artificial intelligence and machine learning tools flag anomalies and help close compliance gaps.
• Cooperative federalism: Regular meetings of the GST Council have fostered constructive dialogue between the Centre and states, demonstrating that complex policy issues can be resolved through consensus.

At the same time, challenges persist. Multiple rate changes and frequent notifications create uncertainty for businesses. Compliance remains burdensome for small enterprises, despite simplification efforts. Classification disputes continue, particularly around distinguishing between goods and services or identifying the applicable rate. Refund delays, especially for exporters and inverted duty structures, strain working capital. While the average tax rate has declined for many items, the complexity of the law and administrative burden still deter some businesses from registering voluntarily. Inclusion of petroleum and alcohol remains contentious, limiting the seamless credit chain. Finally, the continued levy of compensation cess beyond the promised five years undermines the perception of policy stability.

Significance for UPSC Aspirants

For aspirants of the Civil Services Examination, understanding GST is essential because it touches upon economics, polity and federal relations. Key focus areas include the constitutional basis of GST, cooperative federalism through the GST Council, the role of technology in tax administration, the impact on revenue mobilisation and economic growth, and the challenges of balancing simplicity with revenue needs. Aspirants should be able to analyse both the benefits and limitations of GST and suggest reforms for a more efficient tax system.

UPSC Notes: Prelims and Mains

Prelims Pointers

• The Goods and Services Tax was introduced on 1 July 2017 through the 101st Constitutional Amendment.
• GST is levied on the supply of goods and services (sale, transfer, barter, licence, rental, lease or disposal) and is destination‑based.
• Central GST and State GST apply to intra‑state supplies; Integrated GST applies to inter‑state supplies and imports.
• The GST Council decides rates, exemptions and procedural rules; its chairperson is the Union Finance Minister.
• As of 2025 the structure has three main slabs—5 %, 18 % and 40 %—plus a nil rate; precious metals attract 3 %.
• Alcohol for human consumption, petroleum products (petrol, diesel, ATF, natural gas), electricity and basic customs duty remain outside GST.
• Composition Scheme is available to small dealers with turnover up to ₹1.5 crore (₹75 lakh for specified states); composition dealers cannot collect tax or claim ITC.
• E‑invoicing is mandatory for businesses with turnover of ₹5 crore and above; e‑way bills are required for goods valued above ₹50,000.
• GST compensation to states for revenue shortfall extends until March 2026; compensation cess continues mainly on tobacco, pan masala, coal and luxury vehicles.
• Monthly GST collections averaged around ₹1.84 lakh crore in FY 2024–25 and reached a record ₹2.37 lakh crore in April 2025.

Mains Insights

Candidates preparing for General Studies Paper III should be ready to discuss the following themes:

• Rationale and design of GST: Explain why India needed to reform its indirect tax system, the concept of a dual GST model, and how destination‑based taxation differs from origin‑based levies.
• Cooperative federalism: Evaluate the functioning of the GST Council. How has the Council balanced the interests of the Centre and states? Discuss major rate decisions and dispute resolution mechanisms.
• Rate rationalisation: Discuss the merits and challenges of moving from multiple slabs to a simpler structure. Should India converge towards a single or two‑slab system? Consider the trade‑off between revenue needs and simplicity.
• Technology and compliance: Analyse the role of GSTN, e‑invoicing, e‑way bills and data analytics in enhancing compliance and reducing evasion. What further reforms are needed to simplify compliance for small enterprises?
• Economic impact: Assess how GST has affected revenue mobilisation, inflation, logistics, exports and small businesses. Discuss evidence from eight years of implementation and comment on consumption trends. Compare India’s GST with global models such as the European Union’s VAT.
• Outstanding issues: Critically examine the reasons for keeping petroleum products and alcohol outside GST. Suggest a roadmap for their inclusion and discuss its implications for state finances and consumers.

Quick Facts

UPSC Previous Year Questions (Selected)

Understanding past questions helps gauge the scope of the exam. Some examples related to GST are:

1. Prelims 2017 – Consider the following statements about the Goods and Services Tax (GST) introduced in India: a. It is a destination‑based tax. b. Petroleum and alcohol are included under GST. c. It replaces multiple indirect taxes at the central and state level. Which of the above statements is/are correct? Answer: Statements (a) and (c) are correct; (b) is incorrect.
2. Mains 2018 (GS III) – GST has been termed a game‑changer for India’s tax system. Critically examine the impact of GST on economic growth, ease of doing business and federal relations. Suggest improvements to the existing regime.
3. Mains 2020 (GS II) – Discuss the significance of cooperative federalism in the functioning of the GST Council. How far has the Council succeeded in balancing the interests of the Centre and the states?
4. Mains 2023 (expected) – With reference to the GST rate rationalisation in 2025, evaluate whether consolidating slabs can improve compliance without hurting revenues. Suggest measures to further strengthen the GST framework.

Practice MCQs

Test your understanding with these multiple‑choice questions. Answers are provided after the questions.

1. Which of the following taxes was not subsumed under GST?
   a. Central excise duty b. Basic customs duty c. Service tax d. State value added tax (VAT)
2. GST is described as a destination‑based tax because:
   a. Tax is collected at the place of origin b. Tax accrues to the state where goods or services are consumed c. It applies only to inter‑state transactions d. None of the above
3. Under the GST law, input‑tax credit is available when:
   a. The recipient has received goods or services and possesses a valid tax invoice b. The supplier has uploaded invoice details and paid tax to the government c. The recipient files the relevant return within the time limit d. All of the above
4. In the case of inter‑state supply of goods, which component of GST is levied?
   a. Only CGST b. Only SGST c. IGST d. Both CGST and SGST
5. The compensation cess collected under GST is used to:
   a. Fund the Consolidated Fund of India b. Provide compensation to exporting units c. Compensate states for revenue loss due to GST implementation d. Finance infrastructure projects
6. Which of the following items currently attracts a 40 % GST rate?
   a. Electric two‑wheelers b. Toothpaste c. Tobacco products d. Milk powder
7. Which one of the following statements about the Composition Scheme is correct?
   a. Composition dealers can claim input‑tax credit on purchases b. They can make inter‑state outward supplies c. They pay tax at a fixed percentage of turnover and cannot collect tax from customers d. There is no turnover limit for opting into the scheme
8. E‑invoicing under GST is mandatory for all registered taxpayers from:
   a. The date of registration b. Aggregate turnover of ₹5 crore and above c. Aggregate turnover of ₹50 lakh and above d. Only those engaged in exports
9. Which of the following goods remain outside the scope of GST?
   a. Mobile phones b. Motor spirit (petrol) c. Air conditioners d. Packaged wheat flour
10. The GST Council’s decisions require a three‑fourths majority. This means:
    a. Every state has veto power b. The Centre alone can overrule states c. Votes of the Centre have one‑third weight, and votes of all states combined have two‑thirds weight d. Decisions must be unanimous

Answer Key: 1 (b), 2 (b), 3 (d), 4 (c), 5 (c), 6 (c), 7 (c), 8 (b), 9 (b), 10 (c).

Frequently Asked Questions

Why is GST called a destination‑based tax?
GST is levied where goods or services are consumed rather than where they are produced. Tax revenue thus accrues to the destination state, ensuring equitable distribution among consuming states and avoiding tax‑export bias.

Which taxes were subsumed into GST?
Central levies such as excise duty, service tax, countervailing duty and special additional duty, and state levies such as VAT, central sales tax, octroi, entry tax, luxury tax and entertainment tax were consolidated into GST. Customs duties on imports remain separate but IGST is levied in addition.

Do states still have the power to levy taxes?
Yes. While states cannot levy independent sales tax on goods included in GST, they continue to levy taxes on alcohol, petroleum products, electricity and stamp duty. States also share GST revenue through SGST and receive compensation for revenue shortfalls.

What is the threshold for mandatory GST registration?
Businesses supplying goods must register once their aggregate turnover exceeds ₹40 lakh in a financial year. For services the threshold is ₹20 lakh. Lower thresholds apply in north‑eastern and hill states.

What is reverse charge under GST?
Under the reverse charge mechanism the liability to pay tax shifts from the supplier to the recipient. It applies when a registered person procures goods or services from an unregistered person, imports specified services or purchases certain notified goods such as supplies from goods transport agencies. The recipient must pay GST directly to the government and can later claim ITC if eligible.

Will petroleum products and alcohol be included in GST soon?
Inclusion of petrol, diesel, aviation turbine fuel and natural gas requires a decision by the GST Council and consensus among states. Many states fear losing revenue, but a gradual inclusion starting with natural gas or ATF has been suggested. Alcohol for human consumption is constitutionally excluded; its inclusion would require another amendment and political consensus.

How does input‑tax credit benefit consumers?
ITC eliminates the cascading effect of taxes. When businesses claim credit for tax paid on inputs, only value addition is taxed. This reduces the effective tax burden and prevents tax‑on‑tax. Lower compliance costs translate to lower prices and improved competitiveness.

What happens if returns are not filed on time?
Late filing attracts interest and late fees. Delayed GSTR‑1 filing prevents recipients from claiming ITC and may result in supply disruptions. Repeated non‑compliance can lead to suspension or cancellation of registration and penalties up to 10 % of the tax due. Late filings also block the ability to generate e‑way bills and e‑invoices.