Understanding the Structure of GST in India
The Goods and Services Tax, introduced with effect from 1 July 2017 pursuant to the Constitution (One Hundred and First Amendment) Act 2016, replaced a fragmented system of central and state indirect taxes with a unified, destination-based consumption tax. The architecture of GST in India is dual: transactions wholly within a state attract Central Goods and Services Tax (CGST) levied under the Central Goods and Services Tax Act 2017 and State Goods and Services Tax (SGST) levied under the respective state's SGST Act, in equal measure. Transactions that cross state lines, or imports, attract Integrated Goods and Services Tax (IGST) levied under the Integrated Goods and Services Tax Act 2017, which is collected by the Central Government and apportioned to the consuming state.
For a small or medium business, the practical implication of this dual structure is that every outward supply invoice must correctly identify whether the transaction is intra-state or inter-state, because this determines whether CGST and SGST are collected or IGST is collected. An error in this classification is a compliance failure that can attract penalty under section 122 of the CGST Act 2017 and creates mismatch in the recipient's input tax credit ledger.
GST Rates and the Schedule Structure
Goods and services are taxed at five principal rates: 0%, 5%, 12%, 18%, and 28%. Essential commodities — most food items, healthcare, and education — are either exempt or taxed at 0% or 5%. The 18% rate applies to the majority of services and to most manufactured goods. The 28% rate is reserved for luxury goods and demerit goods such as automobiles above specified engine capacity, tobacco, and aerated drinks. A GST Compensation Cess is levied additionally on certain goods taxed at 28%.
Registration Thresholds and Procedure
Under section 22 of the CGST Act 2017, a supplier of goods is required to register for GST if aggregate annual turnover exceeds twenty lakh rupees — ten lakh rupees for suppliers in special category states. A supplier of services must register if aggregate annual turnover exceeds twenty lakh rupees in most states. However, several categories of persons must register regardless of turnover: persons making inter-state taxable supplies, e-commerce operators and sellers who supply through an e-commerce platform, persons liable to pay tax under reverse charge, and input service distributors.
Registration is obtained through the GST Common Portal. The application requires the PAN of the business, proof of constitution, proof of the principal place of business, bank account details, and photographs and identity and address proofs of the authorised signatory. Upon successful verification, a 15-digit GST Identification Number (GSTIN) is allotted, with the first two digits representing the state code.
The Composition Scheme
Section 10 of the CGST Act 2017 provides the Composition Scheme, which permits eligible registered persons to pay GST at a flat rate on turnover in lieu of the regular GST mechanism. The scheme is available to suppliers of goods and restaurants with aggregate turnover not exceeding one crore fifty lakh rupees in the preceding financial year. The tax rates under the Composition Scheme are 1% for manufacturers and traders (0.5% CGST + 0.5% SGST) and 5% for restaurant services.
The significant constraint of the Composition Scheme is that composition dealers cannot issue tax invoices, cannot collect GST from customers, cannot take input tax credit on their inward supplies, and cannot make inter-state outward supplies. For an SME that sells predominantly to consumers (B2C) and does not need to pass on input tax credit to its customers, the Composition Scheme substantially reduces the compliance burden — only one quarterly return needs to be filed, as opposed to the monthly GSTR-1 and GSTR-3B under the regular scheme.
When the Composition Scheme Is Not Suitable
The Composition Scheme becomes unsuitable when the business primarily sells to other GST-registered businesses (B2B), because those customers need a tax invoice to claim input tax credit. A B2B customer who purchases from a composition dealer cannot claim ITC on the purchase — which effectively makes the composition dealer less competitive than a regular-scheme supplier on equivalent pricing.
Return Filing: The Monthly Compliance Cycle
Under the regular scheme, a registered person files two primary returns per month: GSTR-1, which reports outward supplies made during the month, and GSTR-3B, which is a summary return reporting net tax liability after adjusting available input tax credit and remitting the balance tax due. GSTR-1 is due by the 11th of the following month for taxpayers with turnover above five crore rupees. GSTR-3B is due by the 20th of the following month for taxpayers with turnover above five crore rupees.
The GSTN auto-populates GSTR-2B, which is a static monthly statement of the input tax credit available to the recipient based on the outward supply returns filed by its suppliers. A critical compliance obligation for every registered business is to reconcile the ITC shown in GSTR-2B with the ITC claimed in GSTR-3B. A claim for ITC that is not supported by a corresponding entry in GSTR-2B is a red flag for the GST department and may trigger a scrutiny notice or audit.
Section 16: Conditions for Input Tax Credit Eligibility
Section 16 of the CGST Act 2017 sets out four cumulative conditions for a registered person to claim input tax credit on an inward supply. First, the registered person must be in possession of a tax invoice or debit note issued by the supplier. Second, the registered person must have received the goods or services. Third, the tax charged in the invoice must have actually been paid to the government by the supplier — this is the condition that links the recipient's ITC eligibility to the supplier's compliance, reflected in GSTR-2B. Fourth, the registered person must have filed its own return under section 39.
An additional condition under the proviso to section 16(2) requires that the recipient must pay the supplier for the supply — including the GST component — within 180 days of the date of invoice. If payment is not made within 180 days, the ITC claimed must be reversed, along with interest at eighteen percent per annum from the date of original availment.
Section 17(5): Blocked Credits
Section 17(5) lists categories of inward supplies on which input tax credit is expressly blocked, regardless of whether all conditions in section 16 are satisfied. The principal blocked credit categories are: motor vehicles and other conveyances (with exceptions for vehicles used for transportation of goods, passenger transport, or driver training), food and beverages, outdoor catering, beauty treatment, health services and cosmetic surgery, membership of a club or health and fitness centre, travel benefits extended to employees, works contract services for immovable property (except for plant and machinery), goods or services for personal consumption, and goods lost, stolen, destroyed, written off, or given as gifts or free samples.
GST Audit, Show Cause Notices, and the Appeal Hierarchy
Every registered person whose aggregate turnover in a financial year exceeds two crore rupees is required under section 35(5) of the CGST Act to have their accounts audited by a chartered accountant or cost accountant and submit an audited annual return in Form GSTR-9C. The annual return in Form GSTR-9 must be filed by all regular taxpayers regardless of turnover. The due date for both GSTR-9 and GSTR-9C is 31 December of the year following the relevant financial year.
Responding to Show Cause Notices
A show cause notice under section 73 or section 74 of the CGST Act is the formal initiation of demand proceedings. Section 73 applies in cases of non-fraud — where tax has not been paid, has been short-paid, has been erroneously refunded, or where ITC has been wrongly availed or utilised without any fraudulent intent. Section 74 applies to cases involving fraud, wilful misstatement, or suppression of facts. The distinction matters significantly because section 74 attracts a penalty equal to one hundred percent of the tax short-paid, whereas section 73 attracts a penalty of ten percent of tax or ten thousand rupees, whichever is higher.
The Appeal Hierarchy
An order passed by the adjudicating authority under section 73 or 74 may be appealed to the First Appellate Authority under section 107 within three months of the date of the order. The appeal must be accompanied by payment of the undisputed portion of the demand and ten percent of the disputed tax as pre-deposit. An order of the First Appellate Authority may be appealed to the GST Appellate Tribunal under section 112, with a pre-deposit of twenty percent of the remaining disputed tax. Further appeal lies to the High Court on questions of law under section 117, and to the Supreme Court thereafter. A taxpayer may also seek an Advance Ruling from the Authority for Advance Rulings (AAR) under section 97 to obtain binding clarity on the tax treatment of a proposed or existing transaction.
GST Compliance Checklist for SMEs
- Verify the correct GST rate applicable to each good and service supplied and review periodically for rate changes notified by the GST Council
- Issue GST-compliant tax invoices for all taxable supplies — including the GSTIN, invoice number in sequential series, HSN/SAC code, rate, and place of supply
- File GSTR-1 by the 11th of each month and GSTR-3B by the 20th — late filing attracts late fees and interest at 18% per annum on the outstanding tax
- Reconcile GSTR-2B with the purchase register and books of account every month before claiming ITC in GSTR-3B
- Do not claim ITC on supplies blocked under section 17(5) — maintain a clear policy on which business expenses qualify for ITC
- Ensure all suppliers from whom ITC is claimed are GST-registered and have filed their own GSTR-1 — ITC is only available if it appears in GSTR-2B
- Pay all invoices on which ITC is claimed within 180 days to avoid reversal with interest
- If turnover exceeds two crore rupees, arrange for a GST audit and file GSTR-9C by 31 December
- Respond to show cause notices promptly and within the time specified — a failure to respond results in an ex parte order
- Before seeking an advance ruling or filing an appeal, assess whether voluntary payment with reduced penalty under section 73 is more cost-effective than contesting the demand