GST Basics for Beginners: CGST, SGST, IGST, Invoices and Returns Explained

GST appears on almost every bill you see in India, and it is the first topic an accounts assistant, billing executive or Tally operator is asked about in an interview. The good news is that the core idea fits on one page: tax is collected at every stage of a sale, and each business gets credit for the tax it already paid. This guide explains that idea with worked examples you can check with a calculator — CGST, SGST and IGST, input tax credit, what a tax invoice must show, the composition scheme, and the two returns every beginner hears about, GSTR-1 and GSTR-3B.

What GST is and why it replaced older taxes

Goods and Services Tax (GST) is an indirect tax on the supply of goods and services. It came into force across India on 1 July 2017 and replaced many separate taxes such as central excise, service tax and state VAT. "Indirect" means the business collects it from the customer and pays it to the government; the final consumer bears the cost.

Three ideas make GST work:

• Destination-based. The tax goes to the state where the goods or services are consumed, not where they are made.
• Value-added. Each business in the chain pays tax only on the value it adds, because it gets credit for tax paid on its purchases.
• One registration number. Each registered business gets a 15-character GSTIN for each state it operates in.

Reading a GSTIN

A GSTIN such as 27ABCDE1234F1Z5 (a made-up example) breaks down like this:

The first two digits tell you immediately whether a customer is in your state or another state — which decides the type of GST, as the next section shows.

CGST + SGST vs IGST

GST has different parts depending on where the sale happens:

Worked example 1: sale within the state

Shree Office Supplies in Pune (Maharashtra) sells a printer for ₹10,000 to a customer in Nashik (also Maharashtra). Assume an illustrative GST rate of 18%.

Worked example 2: sale to another state

The same shop sells the same printer to a customer in Bengaluru (Karnataka). The goods move to another state, so IGST applies.

The customer pays the same total either way. What changes is which government receives the tax and how the seller reports it. Charging CGST + SGST on an inter-state sale (or IGST on a local one) is a real error that has to be corrected — it is not just a formatting issue.

Tax-inclusive prices

Shops often quote a price that already includes GST. To find the taxable value, divide by (1 + rate). For an inclusive price of ₹1,180 at an illustrative 18%: 1,180 ÷ 1.18 = ₹1,000 taxable value, and ₹180 GST. A common mistake is to take 18% of ₹1,180 (₹212.40), which is wrong.

Input tax credit (ITC) with a worked example

Input tax credit means a registered business can reduce the GST it owes on sales by the GST it has already paid on business purchases. This is what stops "tax on tax".

Worked example 3: tax through a supply chain

Illustrative rate 18% at every stage. All parties are registered.

Check: 5,400 + 3,600 + 3,600 = 12,600, which is exactly 18% of the final price of ₹70,000. Each business paid tax only on its own value addition (for the trader, 18% of ₹20,000 = ₹3,600). The final customer, who cannot claim credit, bears the whole ₹12,600.

Worked example 4: one month's net tax for a trader

A trader's figures for one month (illustrative):

Check: 8,000 − 5,500 = 2,500. The law sets an order for using credit between heads: IGST credit is used first, CGST credit cannot pay SGST, and SGST credit cannot pay CGST. In this example each head's credit is simply used against the same head. Our TallyPrime GST practice guide shows a case where credit has to be used across heads.

Basic conditions for claiming ITC

• You hold a valid tax invoice (or debit note) from a registered supplier.
• You have actually received the goods or services.
• The supplier has reported the invoice in their return, so it appears in your auto-generated statement on the GST portal (GSTR-2B).
• The supplier has paid the tax to the government, and you have filed your own return.
• The purchase is for business use and is not in the list of "blocked" credits (certain items such as goods for personal use are not eligible — check the current list).

What a tax invoice must contain

A registered business charging GST must issue a tax invoice with prescribed details. The main fields are:

Larger businesses above a turnover limit must also generate e-invoices through the government's invoice registration system, and goods moved above a value limit usually need an e-way bill. The limits have changed over time, so check the current figures on the official portal.

Who must register for GST

Registration is compulsory once a business's aggregate turnover in a financial year crosses the threshold limit. Broadly, the limits have been higher for businesses supplying only goods than for service providers, and lower for some special category states. Check gst.gov.in for the current limits that apply to your state and type of business.

Some businesses must register regardless of turnover. Common examples include:

• Businesses making inter-state taxable supplies of goods (with limited exceptions).
• Sellers supplying through e-commerce platforms, and the e-commerce operators themselves.
• Persons required to pay tax under reverse charge.
• Casual taxable persons, such as someone selling at a temporary exhibition in another state.

Registration is free and is done online on the GST portal using PAN, Aadhaar authentication, address proof of the business and bank details. Anyone charging a "registration fee" is charging for their own service, not a government fee.

The composition scheme in brief

The composition scheme is an option for small businesses that want simpler compliance. Instead of normal GST, they pay tax at a low fixed percentage of turnover.

Composition suits small shops selling mostly to final consumers. It is usually a poor choice for a business selling to other registered businesses, because those buyers cannot claim credit and may prefer a regular supplier.

GSTR-1 and GSTR-3B: an overview

A regular taxpayer files two main returns on the GST portal:

Due dates are set by law and notifications and can be extended, so check the return calendar on the GST portal each month. Late filing attracts late fees and interest on unpaid tax.

A simple monthly routine

1. Close the month's billing: every sale invoice entered with correct GSTIN and place of supply.
2. File GSTR-1 with all sales.
3. Download GSTR-2B and match it with your purchase register. Follow up with suppliers whose invoices are missing.
4. Calculate output tax minus eligible ITC, head by head.
5. Pay any balance through the portal and file GSTR-3B.
6. Save filed return copies and payment challans in a dated folder.

Common beginner mistakes

Practice questions with answers

1. A Chennai (Tamil Nadu) seller bills a Coimbatore (Tamil Nadu) buyer ₹25,000 at an illustrative 5%. Which taxes and how much? Answer: CGST 2.5% = ₹625 and SGST 2.5% = ₹625; total ₹26,250.
2. The same seller bills a Hyderabad (Telangana) buyer ₹25,000 at 5%. Answer: IGST ₹1,250; total ₹26,250.
3. An inclusive price is ₹2,360 at an illustrative 18%. Find taxable value and GST. Answer: 2,360 ÷ 1.18 = ₹2,000; GST ₹360.
4. Output tax ₹14,000; eligible ITC ₹9,500. Cash payable? Answer: ₹4,500 (assuming credit is available in the right heads).
5. A composition dealer wants to show GST separately on a bill. Allowed? Answer: No. A composition taxpayer issues a bill of supply and cannot collect GST from customers.

Once these basics are clear, the next step is recording them in accounting software. Practical GST billing and returns are a core part of Tally With GST training — you can see course details on our courses page — and our accounting basics guide covers the journal entries behind every GST invoice.

Frequently asked questions