How GST works: supply, CGST/SGST/IGST, place of supply and who pays

GST touches almost every rupee your business earns or spends, yet many owners leave it entirely to the accountant. If you do not understand how the tax flows through a single sale, you cannot price correctly, protect your input tax credit or catch a costly error before it turns into a notice. This programme is education to help you run your business and work better with your CA, not tax advice for your specific facts, so confirm decisions with your professional and the current notifications on the GST portal.

What you need to know

GST is a tax on supply, collected in stages. Whenever a registered business supplies goods or services, it charges GST on the sale, called output tax. It can usually reduce that by the GST it paid on business purchases, called input tax credit or ITC. Each business in the chain effectively pays tax only on the value it adds, and the final consumer, who cannot claim credit, bears the full tax.

What counts as a supply. Sale, transfer, barter, exchange, licence, rental, lease or disposal for consideration in the course of business is a supply. A few transactions without consideration are also treated as supplies, such as moving stock between your own registrations in two different states, or certain supplies to related persons. That is why a stock transfer from your Gujarat godown to your Maharashtra branch needs a tax invoice even though nobody bought anything.

Three tax heads, one total rate.

• Intra-state supply (your location and the place of supply in the same state): CGST plus SGST, split equally. In union territories without a legislature, UTGST replaces SGST.
• Inter-state supply, imports and supplies to SEZ units: IGST.
• The total rate is the same either way; what changes is which government ledger receives the money.

Charging the wrong head is not a cosmetic error, as the worked example below shows.

Place of supply decides the head. For goods, the place of supply is usually where the movement of goods ends for delivery to the buyer. In bill-to ship-to deals, where you deliver to a third party on your buyer's instruction, the buyer who gave the instruction is generally treated as the recipient, and their location decides the place of supply. For services, the general rule is the location of the recipient if registered; for an unregistered customer, their address on record, and if there is none, your location. Special rules apply to services such as those linked to immovable property, events, restaurants, training and transport.

Rates are attached to codes, not to your business. Every good has an HSN code and every service a SAC code, and the rate is notified against the code. Rates have been restructured more than once, most recently in September 2025 when most items moved into fewer slabs. Never quote a rate from memory or from last year's invoice; check the currently notified rate for each code on the GST portal or with your CA.

Forward charge and reverse charge. Under forward charge, the normal case, the supplier charges GST and pays it to the government. Under reverse charge (RCM), for notified goods and services such as goods transport agency services, legal services from advocates and services imported from outside India, the buyer pays the tax directly. We cover RCM in detail in Module 3.

Who pays what. Your customer pays GST to you as part of the price. You hold that money in trust for the government and deposit it through your GSTR-3B return, after setting off eligible ITC from your electronic credit ledger. Anything not covered by credit is paid in cash through your electronic cash ledger.

Step-by-step method

1. List your ten most common sales (products or services) and your ten biggest purchase categories.
2. For each sale type, write down where the customer is registered or located and where goods are delivered or the service is performed.
3. Decide the place of supply for each and mark it intra-state (CGST plus SGST) or inter-state (IGST).
4. Mark any purchases that may fall under reverse charge, such as transport, legal fees, overseas software or rent from an unregistered landlord.
5. Pull ten invoices from last month and check that the tax head matches your place of supply decision.
6. Check that your accounting software has separate ledgers for output CGST, SGST and IGST, input CGST, SGST and IGST, and RCM payable.
7. Take any case you are unsure about to your CA, with the facts written down.

Common mistakes

• Deciding CGST plus SGST versus IGST by where the customer's head office is, instead of applying place of supply rules.
• Treating a stock transfer to your own branch in another state as a non-event.
• Using an old rate list after a rate change notification.
• Forgetting that reverse charge purchases need tax paid by you even though the supplier did not charge it.
• Treating GST collected as business money and spending it before the due date.

Ask the AI Business Tutor

• I run a [type of business] registered in [state]. My main sales are [describe products or services and where customers are located], and my main purchases are [describe]. Help me decide the place of supply for each sale type, whether it should carry CGST plus SGST or IGST, and which of my purchases might fall under reverse charge. List the questions I should confirm with my CA.