India’s value-added tax (VAT) system was replaced by a unified goods and services tax (GST) in 2017. GST applies to almost every good and service sold in India and splits into different components depending on the location of supply. The tax also comes with registration rules that can surprise foreign businesses, especially those that sell digital services and have no local presence.

Below, we’ll explore how GST works in India, what the various rate tiers mean, and when a foreign business that sells into India might need to register.

Key takeaways

• GST largely replaced India’s fragmented tax system with a single destination-based tax that’s split across multiple components

• Foreign businesses that sell digital services to Indian customers might be required to register for GST with a single sale, regardless of turnover

• Businesses above a set turnover threshold in Indian rupees (INR) must generate invoices through the Indian government’s e-invoicing portal or risk issuing invoices that don’t qualify for input tax credit

What is the India VAT tax?

India uses GST, a destination-based tax, which means businesses must collect money where goods or services are consumed rather than where they’re produced, then remit it to the state. Instead of a company paying tax to the state it ships from and again to the state it ships to, it pays only once. GST covers nearly all goods and services with a short exemption list that includes alcohol for human consumption and certain petroleum products, both of which are still taxed under the older excise and VAT rules.

What are India’s GST rates and how are products and services classified?

Indian GST uses a multitier rate structure that ranges from 0%–40% (with full exemptions for certain items, such as unprocessed food items and healthcare). These are the main rates and the categories they cover:

• 0%: Exports or special economic zone supplies

• 5%: Many household necessities such as basic food items, agricultural products, and some transportation services

• 18%: The default rate for most goods and services, including electronics, software, hospitality, and many professional services

• 40%: Luxury items and what the GST Council classifies as “sin goods”, such as tobacco and sugary beverages

How does India’s GST work across CGST, SGST, IGST, and UTGST?

In India, GST is split into various components depending on where a transaction occurs. This determines who gets paid and how credits move. Each component follows its own rules for collection and settlement:

• Central GST (CGST): This is collected by the central government on transactions that happen within a single state. If a business in Pune sells to a customer in Pune, CGST typically covers half the total GST rate.

• State GST (SGST): The state government collects this tax on intrastate sales. SGST matches CGST, covering the other half of the rate. For example, a sale might be taxed at a rate of 18%, which is often composed of 9% CGST and 9% SGST.

• Integrated GST (IGST): This applies to interstate transactions, including imports. It’s collected by the central government, then apportioned to the destination state. If that Pune business sells to a customer in Bangalore instead, it charges IGST on the sale price, not a combination of CGST and SGST.

• Union Territory GST (UTGST): UTGST functions like SGST for India’s union territories that are special federal administrative regions without their own legislatures, such as Chandigarh and the Andaman and Nicobar Islands. It pairs with CGST in these locations the same way SGST does in the rest of the country.

Who needs to register for GST in India?

Generally, domestic businesses register for Indian GST once their aggregate turnovers exceed a certain threshold: 4 million INR (40 lakhs for short) for those that sell services or 2 million INR (20 lakhs) for those that sell goods.

Different standards apply to foreign businesses:

• Online Information Database Access and Retrieval (OIDAR) services: Non-resident suppliers that provide what India classifies as OIDAR services – services typically delivered through the internet with minimal human mediation and consumed electronically – to Indian customers who aren’t themselves registered for GST have no turnover threshold. Even a single sale can require registration. OIDAR services can include software-as-a-service (SaaS) and digital media.

• Simplified registration: Non-resident OIDAR suppliers register through a simplified GST registration scheme rather than the standard process

• Goods and Services Tax Identification Number (GSTIN): Once registered, the business gets a GSTIN, a 15-digit code that encodes the state and taxpayer’s Permanent Account Number (PAN). Verifying GSTINs helps ensure that invoices are legitimate.

• Reverse charge: If the buyer is a GST-registered business, the transaction shifts to this mechanism instead. The Indian business self-assesses and pays the GST directly.

What compliance obligations follow GST registration?

Registration starts a recurring filing cycle. Non-resident OIDAR suppliers file a monthly return called GSTR-5A that’s due by the twentieth of the following month. They report total taxable supplies and the GST payable on them. Domestic taxpayers generally file a different set of returns depending on their registration type – typically GSTR-1 for outward supplies and GSTR-3B as a monthly summary return.

Here's what to keep in mind:

• E-invoicing threshold: Businesses above the annual turnover threshold, currently 50 million INR (5 crores for short), have to generate invoices through the government’s Invoice Registration Portal (IRP)

• IRP validation: The portal validates the invoice, assigns it a unique Invoice Reference Number, and generates a quick-response (QR) code that has to appear on the final invoice sent to the buyer

• Invalid invoices: If a business above the threshold issues an invoice outside this process, that tax invoice isn’t considered. That affects the buyer’s ability to claim input tax credit on that purchase.

• Falling threshold: The e-invoicing threshold has dropped several times since the system launched in 2020. It began at 5 billion INR (500 crores) and decreased in stages as the government expanded the requirement to include smaller taxpayers. That trend is worth tracking if your turnover is anywhere near the current line, since the next reduction could create an e-invoicing requirement with little notice.

What are common mistakes businesses make when it comes to GST?

Many GST problems trace back to a few recurring missteps. Watch for these common mistakes:

• Misclassifying the transaction type: Charging CGST and SGST on an interstate sale, or IGST on an intrastate sale, is a common error. Since the money goes to the wrong government, it can be complicated to correct the mistake after the fact.

• Assuming a turnover threshold applies to digital services: Foreign businesses might assume the domestic thresholds give them room before they have to register without realising that OIDAR rules remove that threshold for sales to Indian customers

• Treating Harmonized System of Nomenclature (HSN) or Service Accounting Code (SAC) classifications as fixed: Because the GST Council frequently recommends revised rates and reclassifies specific goods, a code that was accurate at registration can quickly become outdated. Companies that don’t check periodically can end up charging the wrong rate without knowing it.

• Missing the e-invoicing threshold change: Since the threshold has repeatedly lowered, businesses that check their obligations once and don’t check again might issue invoices outside the IRP after they’ve already exceeded the threshold

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT and GST on both physical and digital goods and services – in all US states and in more than 100 countries.

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Stripe Tax can help you:

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