Complete Guide On GST For FY 2026-27
The Complete GST Guide Every Indian Business Owner Needs Right Now
Whether you run a small shop in Bhubaneswar, a consulting firm in Mumbai, or an export business in Surat — this guide explains every GST rule, return, and calculator in plain language. No jargon. No confusion. Just clear answers.
📌 What's Inside — Jump to Any Section
The April Morning That Changed Everything for Indian Business
It's the last day of March 2026. Ranjit, who runs a mid-sized textile trading business in Surat, is having his usual evening tea. His accountant calls him in a mild panic — "Ranjit bhai, tomorrow everything changes. New invoice numbering. LUT must be filed. E-invoicing is now mandatory for us. And the GST rates? Some of our items have moved!"
Ranjit is not alone. Across India, lakhs of businesses — from a homemade pickle seller in Chennai to a software company in Hyderabad — are staring at the same reality: April 1, 2026 is not just a new financial year. It's the beginning of GST 2.0 — the most significant overhaul of India's Goods and Services Tax system since its launch in 2017.
This guide is written for Ranjit. And for you. Whether you're a business owner, a student of taxation, a chartered accountant's client who wants to understand what your CA is actually doing, or someone who just received a GST notice and has no idea what it means — we've written every single section in plain, human English. With real examples. And calculators you can use right now.
- GST 2.0 Rates: India now has 4 GST slabs — 0%, 5%, 18%, and 40%. The old 12% and 28% slabs are being phased out.
- E-invoicing expanded: If your business earned more than ₹5 crore (AATO) in FY 2025-26, you must generate e-invoices from April 2026.
- Export services relief: Indian companies providing services to foreign clients (like IT support, back-office work, consulting) no longer pay GST on those services.
- IMS is now strict: The Invoice Management System (IMS) now has hard blocks — your GSTR-3B may be rejected if your claimed ITC doesn't match your GSTR-2B.
- Fresh invoice series: Every business must start a new invoice numbering from April 1, 2026. Your October 2025 invoice INV-500 cannot become INV-501 in April 2026.
- LUT renewed: If you're an exporter, your LUT from last year expired on March 31. File a fresh one immediately.
What is GST? Explained Like You're Hearing it for the First Time
Before we dive into rules and calculators, let's get one thing perfectly clear: what is GST, really?
Think of GST as a tax on the value you add at each stage of a product's journey from raw material to the consumer. Imagine a chain: a cotton farmer sells raw cotton → a mill turns it into cloth → a garment factory turns cloth into a shirt → a shop sells the shirt to you. GST is collected at each step, but each business in the chain pays tax only on the value they added, not on the full price. This is the genius of the system, and it's called the Input Tax Credit (ITC) mechanism.
- Mill sells cloth to garment factory for ₹100 + ₹18 GST = ₹118. Mill deposits ₹18 to govt.
- Garment factory adds value, sells shirt to shop for ₹200 + ₹36 GST = ₹236. But factory claims the ₹18 it already paid as ITC. So it only deposits ₹36 − ₹18 = ₹18 to govt.
- Shop sells shirt to you for ₹300 + ₹54 GST = ₹354. Shop claims ₹36 ITC. Deposits ₹54 − ₹36 = ₹18 to govt.
- You (the consumer) bear the full ₹54 tax. No one is taxed twice. That's the elegance of GST.
The Three Types of GST — And Why They Matter
CGST — Central GST
Goes to the Central Government. Charged on sales within the same state. If you sell in Maharashtra to a buyer also in Maharashtra, you pay CGST + SGST.
SGST / UTGST
Goes to the State Government. Also charged on within-state sales. CGST and SGST are always equal halves of the GST rate. E.g., 18% = 9% CGST + 9% SGST.
IGST — Integrated GST
Charged on inter-state sales (one state to another) and imports. Goes to the Centre, which then shares it with states. Exports are zero-rated — no IGST collected.
The Correct GST Rate Structure — Effective 22 September 2025
India's GST rate structure was overhauled by the 56th GST Council Meeting chaired by Finance Minister Nirmala Sitharaman on 3 September 2025. The new rates took effect via CBIC notifications from 22 September 2025. The headline change: the 12% and 28% slabs are eliminated. India now has two primary workhorse slabs — 5% and 18% — plus a 40% rate for demerit goods, special rates for precious metals, and a 0% category for essentials.
| Old Slab (pre-Sep 2025) | Status in GST 2.0 | Where Did Items Go? |
|---|---|---|
| 0% / Exempt / Nil | ✓ Retained & Expanded | More items added — expanded exemption list (plain breads, more health items) |
| 5% | ✓ Retained & Expanded | Many items from the old 12% slab moved here. Now covers more essentials. |
| 12% | ✗ ABOLISHED | Items split: some moved down to 5% (essentials), others moved up to 18% |
| 18% | ✓ Retained & Expanded | Now the standard rate for most goods & services. Many 12% and some 28% items added. |
| 28% + Compensation Cess | ✗ Largely ABOLISHED | Most items → 18%. Luxury/sin goods → new 40% slab (cess merged in) |
| 40% | ✓ NEW SLAB INTRODUCED | Replaces 28% + cess for luxury & demerit goods. One clean rate instead of tax + cess complexity. |
The Six Rates That Now Exist Under GST — Complete Picture
Essential food (unprocessed/unbranded): Fresh fruits, vegetables, cereals, rice, wheat, maize, pulses (unpackaged) · Fresh milk, curd, lassi, buttermilk, fresh eggs · Fresh meat, fresh fish, fresh poultry (unprocessed) · Unbranded atta, maida, besan, suji · Salt, jaggery (gur)
New additions from Sep 2025: Plain roti, chapati, paratha, parotta (previously attracted GST) · Health insurance premiums for senior citizens · More lifesaving medicines and vaccines
Services exempt from GST: Healthcare (clinical establishment — OPD, surgery, hospital rooms below ₹5,000/day) · Education (school/college tuition fees, recognised institutions) · Public transport (metro, suburban rail, buses) · Government/postal services · Agricultural extension services · RBI services
Exports: Zero-rated supplies — no GST collected but ITC is fully refundable. Different from exempt — exporters benefit from ITC.
Applies only to: Rough diamonds, rough precious stones, semi-precious stones in uncut/unpolished form. This rate has been retained from the original GST structure and is unchanged under GST 2.0.
Applies to: Gold (all forms — bars, coins, ornaments) · Silver · Platinum · Other precious metals including alloys. Note: Making charges on gold jewellery attract 5% GST separately. This rate is unchanged and continues under GST 2.0.
Foods & Daily Necessities: Packaged food items · Edible oils (all types) · Sugar, tea, coffee (except instant) · Spices · Branded cereals/pulses · Branded rice/wheat flour · Fish products (processed) · Honey
Moved from 12% to 5% (new): Toothpaste, soap, hair oil (earlier 12% — now 5%) · Pressure cookers, sewing machines, small washing machines · Umbrellas · Bicycles · Ayurvedic/Unani/Siddha medicines · Footwear up to ₹2,500/pair · Ready-made garments up to ₹2,500/piece (earlier limit was ₹1,000) · Man-made fibres (MMF), man-made yarn · Leather goods — chamois leather, composition leather · Handicrafts — idols (wood/stone/metal), paintings, stone artware, candles · Packaging — corrugated paper boxes, paper pulp trays · Agricultural equipment · Electric Vehicles (EVs) continue at 5% · Life and health insurance premiums (most categories now reduced)
Transport: GTA (Goods Transport Agency) services · Rail transport of goods · Air travel (economy class)
Restaurants: 5% (no ITC) for standalone restaurants · Composition scheme restaurants
Services (most professional services): IT and software services · Telecom services · Banking and financial services (except exempt) · Professional services (CA, legal — above threshold) · Consulting · Advertising · Security services · Manpower supply · Logistics and warehousing · Hotel accommodation above ₹7,500/night
Electronics & Appliances (moved from 28%): TVs (LCD/LED) · Air conditioners · Refrigerators · Washing machines (large) · Dishwashers · Mobile phones and accessories
Automobiles (moved from 28% + cess): Small cars and motorcycles up to 350cc · Commercial vehicles (trucks, delivery vans — earlier 28%) · Cement (moved from 28%)
Construction materials: Steel, iron · Tiles · Paints · Plywood · Construction services
Apparel: Ready-made garments above ₹2,500/piece · Synthetic textiles
Packaged food: Branded snacks, instant noodles, packaged juices, ice cream · Branded packaged water above 20L
Online services: Streaming (OTT platforms) · Online gaming (non-demerit categories)
This is a clean, single rate replacing the confusing old structure of 28% GST + 15–22% Compensation Cess that companies had to compute separately. Now it's one number: 40%.
Tobacco & Related Products: Cigarettes · Cigars · Chewing tobacco · Pan masala · Gutka · Khaini · Zarda (Note: Full transition to 40% pending full settlement of GST compensation loans to states — currently some still at 28% + cess transitionally)
Beverages: Aerated water and drinks (cola, soda) · Caffeinated beverages · Energy drinks
Luxury Vehicles: Large & luxury cars (above 350cc, above 4 metres) · SUVs · Yachts · Private aircraft · Helicopters (private)
Online gaming (demerit): Online gaming platforms classified as demerit goods by the GST Council now attract 40% on the full face value of bets/deposits.
Other luxury items: High-end watches · Luxury cosmetics (select categories)
Rate Changes — Specific Commodities: Old vs New at a Glance
| Item / Category | Old Rate (Before Sep 2025) | New Rate (GST 2.0) | Direction |
|---|---|---|---|
| Toothpaste, soap, hair oil | 12% | 5% | ⬇️ Cheaper for consumers |
| Pressure cookers, sewing machines | 12% | 5% | ⬇️ Cheaper |
| Footwear up to ₹2,500/pair | 12% | 5% | ⬇️ Cheaper |
| Man-made fibres & yarns (textiles) | 12–18% | 5% | ⬇️ Big relief for textile industry |
| Leather goods (chamois, processed) | 12% | 5% | ⬇️ Cheaper |
| Handicrafts — wooden/stone idols, artware | 12% | 5% | ⬇️ Cheaper for artisans |
| Ready-made garments ≤₹2,500/piece | 5% (limit was ₹1,000) | 5% (limit raised to ₹2,500) | ⬇️ More affordable apparel covered |
| Bicycles | 12% | 5% | ⬇️ Cheaper |
| Agricultural equipment | 12–18% | 5% | ⬇️ Farmer relief |
| Job work on hides, leather (MSME) | 12% | 5% | ⬇️ MSME relief |
| Corrugated paper boxes, packaging | 12–18% | 5% | ⬇️ Logistics cost reduction |
| Small cars & motorcycles (≤350cc, <4m) | 28% + cess | 18% | ⬇️ Significant relief on entry-level vehicles |
| Commercial trucks, delivery vans | 28% | 18% | ⬇️ Freight cost impact |
| Cement | 28% | 18% | ⬇️ Construction cost reduction |
| TVs, ACs, refrigerators, washing machines | 28% | 18% | ⬇️ Consumer durables cheaper |
| Dishwashers | 28% | 18% | ⬇️ Cheaper |
| Plain roti, chapati, paratha, parotta | 5% (branded) / dispute | 0% | ⬇️ Exempt now |
| Health insurance (senior citizens) | 18% | 0% (Exempt) | ⬇️ Full exemption |
| Online gaming (demerit) | 28% on face value | 40% | ⬆️ Higher for demerit |
| Large/luxury cars, SUVs | 28% + cess (≈43–50% effective) | 40% | — Simplified (effective rate may vary) |
| Aerated drinks, cola beverages | 28% + 12% cess = 40% effective | 40% | — Same effective rate, cleaner structure |
| Pan masala, tobacco, gutka | 28% + 60–290% cess | Transitioning → 40% (pending cess loan settlement) | — Phased transition |
| Gold, silver, platinum | 3% | 3% (unchanged) | — No change |
| Rough/uncut precious stones | 0.25% | 0.25% (unchanged) | — No change |
| Electric Vehicles (EVs) | 5% | 5% (unchanged) | — Continued incentive |
Things NOT Under GST at All — Four Categories You Must Know
These are not just "exempt from GST" — they are outside the scope of GST entirely. No GST is charged, no ITC is available on inputs, and vendors in these areas do not need GST registration (unless they have other taxable activities). There are four legally distinct categories:
Non-Taxable Supplies — Section 9(2) CGST Act
These items are within the scope of GST as a law but the GST rate has deliberately not been notified yet by the Government. They remain under legacy VAT/excise until a future date when the GST Council brings them in.
- Petroleum crude
- Petrol (Motor Spirit / MS)
- High-speed diesel (HSD)
- Aviation Turbine Fuel (ATF)
- Natural gas
- Alcoholic liquor for human consumption — Section 2(78) specifically excludes this. Taxed by states under their Excise Acts and VAT/CST.
Why not included? These are revenue-critical for states — petrol and diesel alone generate ₹5+ lakh crore annually for states. Bringing them under GST would require revenue-sharing consensus.
Electricity — Exempt under GST
Transmission and distribution of electricity by utilities is absolutely exempt from GST. No GST is charged on your electricity bill. Covered under the Electricity Act, 2003 and taxed via state electricity duty.
Note: Equipment used in power generation (transformers, cables, etc.) does attract GST. Only the electricity supply itself is exempt. This creates an inverted duty structure for power companies that the government periodically addresses.
Negative List — Schedule III Activities
These are neither goods nor services under GST — they are simply outside the law's definition of "supply". No GST at any rate:
- Salary / employment — services by employee to employer
- Sale of land — subject to stamp duty, not GST
- Sale of completed buildings (those with Completion Certificate) — stamp duty only
- Funeral, burial, crematorium services
- Services by courts and tribunals
- Actionable claims (except lottery, betting, gambling)
- Duties by MPs / MLAs / Panchayat members in official capacity
Agriculture & Unprocessed Natural Produce
Agriculturists selling their own produce are exempt from GST registration entirely (regardless of turnover). The produce itself is 0% or outside GST:
- Fresh fruits and vegetables (uncut, unprocessed)
- Grains in natural form (paddy, wheat, corn, millets)
- Raw milk (not packed/branded)
- Raw cotton, raw jute, raw silk (cocoons)
- Firewood, wood charcoal (agricultural)
- Fresh flowers, fresh plants
- Animal husbandry & fisheries (produce, not processed)
| Term | GST Rate | ITC on Inputs | Bill of Supply or Tax Invoice? | Example |
|---|---|---|---|---|
| Nil-Rated | 0% (GST applies but rate is 0) | ✗ Not Available | Bill of Supply (no GST shown) | Fresh vegetables, eggs |
| Exempt | Specifically notified as exempt | ✗ Not Available | Bill of Supply | Healthcare, electricity transmission |
| Zero-Rated | 0% on output | ✓ Fully Claimable & Refundable | Tax Invoice (for exports) | Exports, SEZ supplies |
| Non-GST Supply | Outside GST entirely | ✗ Not Available | No GST document required | Petrol, alcohol, salary |
Key takeaway: Exporters are the biggest beneficiaries — they pay 0% GST but can claim full ITC on their inputs and get refund. Nil-rated and exempt suppliers get no such benefit. This distinction matters enormously for industries that sell both domestic (exempt) and export (zero-rated) products.
With the 12% slab eliminated, every business that previously had 12% products must verify the new classification. Some moved to 5%, others to 18%. Getting this wrong means either over-charging customers (consumer complaint + anti-profiteering notice) or under-charging and bearing the shortfall yourself (demand + interest). Check your HSN codes at cbic-gst.gov.in → HSN Rate Finder or the official CBIC Notification No. 05/2025-CT(Rate) and subsequent amending notifications effective 22 September 2025.
GST Registration — Who Must, Who Can, and How to Do It
GST registration gives you a unique 15-digit number called GSTIN. Think of it as your business's identity card in the GST system. Without it, you cannot legally charge GST on your sales, and your buyers cannot claim ITC on what they buy from you.
Mandatory Registration — Register Immediately, No Threshold Applies
- Inter-state sellers of goods: You sell goods from Odisha to a buyer in West Bengal? Register immediately, even if your annual sales are ₹2 lakh.
- E-commerce sellers: You sell on Amazon, Flipkart, Meesho, or any online platform? Mandatory registration.
- Reverse Charge payers: You regularly buy from unregistered persons for specific services (lawyer fees, GTA transport, etc.)? Register to comply with RCM rules.
- Input Service Distributors (ISD): Companies with multiple branches distributing ITC across units.
- TDS deductors (Section 51): Government departments, PSUs, local bodies that deduct tax at source.
- Non-resident suppliers: Foreign companies supplying to Indian customers.
- OIDAR service providers (OIDAR): Foreign firms providing digital services (Netflix, Spotify, etc.) to Indian consumers.
Threshold-Based Registration — When Crossing These, You Must Register
| Business Type | Normal States | Special Category States* |
|---|---|---|
| Goods suppliers | ₹40 lakh/year | ₹20 lakh/year |
| Service providers | ₹20 lakh/year | ₹10 lakh/year |
| Both goods + services | ₹20 lakh/year | ₹10 lakh/year |
*Special Category States include: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Assam and all North-East states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura), and Puducherry & Telangana for the ₹20L goods limit.
The threshold is based on your Aggregate Annual Turnover (AATO). This includes: taxable sales + exempt sales + export sales + inter-state sales. But it excludes GST paid (you count the base price, not the GST amount you collected), and it counts all businesses under a single PAN across India — not just one state.
Voluntary Registration — Why You Might Want it Even Below the Limit
Say Priya runs a graphic design studio earning ₹12 lakh/year — below the ₹20 lakh threshold. She doesn't have to register. But her clients are all GST-registered companies who want to claim ITC on her invoices. Without a GSTIN, she becomes uncompetitive — her clients may prefer a registered designer because they can claim back the 18% GST on design fees. Voluntary registration might make business sense for Priya.
How to Register — Step by Step
Visit gst.gov.in → Services → Registration → New Registration
Enter your PAN (mandatory — GST is linked to PAN), mobile number, and email address. You'll receive OTPs on both for verification. This creates a temporary reference number (TRN) valid for 15 days.
Fill Form REG-01 — Your Business Details
Business name, constitution (proprietorship, partnership, Pvt Ltd, etc.), principal place of business, HSN codes of goods/services, bank account details (cheque copy or bank statement).
Upload Documents
PAN card, Aadhaar card of promoters, business address proof (electricity bill, rent agreement), photograph, and constitution document (partnership deed, COI for companies, etc.).
Aadhaar Authentication (Mandatory from 2024)
Complete Aadhaar OTP verification for all promoters. Without this, your application goes into physical verification — adding up to 30 days. With Aadhaar auth, most clean applications get GSTIN within 3 working days.
Receive Your GSTIN
A 15-digit GSTIN is issued via email/SMS. Structure: First 2 digits = State code, Next 10 = PAN, 13th = entity number, 14th = Z (default), 15th = check digit. For example, Odisha businesses start with 21XXXXX.
Enable MFA — Mandatory from April 2026
Multi-Factor Authentication (MFA) is now mandatory for all GST portal logins. Set up your authenticator app or SMS-based second factor before your first April 2026 login. The portal will prompt you — but better to do it proactively.
Input Tax Credit (ITC) — The Most Important Concept in GST
If you understand only one thing about GST, make it this: Input Tax Credit. It's the mechanism that prevents the same product from being taxed multiple times as it travels through the supply chain. And getting it right — or getting it wrong — can make or break your business's cash flow.
Think of ITC like a loyalty points system: every time you buy goods or services for your business and pay GST on them, those GST payments become "points" (credit) that you can use to offset the GST you owe when you sell. You don't lose that money — you get it back against your output tax liability.
The Four Conditions to Claim ITC — Section 16(2) of CGST Act
You can't just claim ITC on every purchase. You must satisfy ALL four conditions:
Condition 1: You have a valid tax document
A proper tax invoice (or debit note, or self-invoice for RCM purchases) showing the GSTIN of the supplier, the tax amount, HSN code, and your GSTIN as the recipient. Incomplete invoices = no ITC.
Condition 2: Goods or services are actually received
You've physically received the goods, or the service has been rendered. For goods delivered in installments, ITC is available only after the last installment is received.
Condition 3: Tax has been paid by your supplier
From April 2026, GSTN's IMS hard validates this via GSTR-2B. If your supplier hasn't filed and paid tax, the invoice won't appear in your GSTR-2B, and you cannot claim ITC on it.
Condition 4: You have filed your own GST return
You must have filed your GST returns to be eligible for ITC. Non-filers lose ITC rights for those periods.
ITC on any invoice must be claimed by the earlier of: (a) 30 November of the year following the supply year, OR (b) the date of filing the annual return (GSTR-9). So for FY 2025-26 purchases, the last chance to claim missed ITC is 30 November 2026. After that, the credit is lost forever — you cannot even go to court to recover it.
What ITC is NOT Available On — Section 17(5) Blocked Credits
Section 17(5) is the "blocked credits" list. These are items where you've paid GST on purchase, but you are NOT allowed to claim it as ITC. These are hard-coded blocks — no exceptions unless specifically stated.
| Blocked Item | No ITC On | Exception (Where ITC IS Available) |
|---|---|---|
| Motor vehicles | Cars, bikes, buses — if used for personal transport | If you're in the business of selling cars, transporting people (taxi), or driving school |
| Food & beverages | Restaurant bills, canteen services, outdoor catering | If you're in the restaurant/catering business yourself |
| Health & beauty | Cosmetic surgery, beauty treatment, health services | If you're a hospital/clinic providing these services |
| Works contract for construction | Civil construction of building, roads for own use | Plant and machinery (not buildings) used in your factory |
| Goods used for personal use | Anything bought for the personal benefit of directors, employees, or owner — not the business | Statutory obligations (like uniforms, safety equipment) |
| Membership fees | Club memberships, gym fees, etc. | None |
| Travel for personal purposes | Holiday travel, personal hotel stays | Business travel is eligible |
ITC Utilisation Order — Which Credit Pays Which Tax
When you have multiple types of ITC (IGST, CGST, SGST), there's a specific order in which you must use them against your output tax dues. You can't mix and match freely.
CGST Credit → First pays CGST dues → Then IGST dues → CANNOT pay SGST
SGST Credit → First pays SGST dues → Then IGST dues → CANNOT pay CGST
💡 Key Rule: CGST and SGST credits are cross-locked — they cannot pay each other's dues.
Rohan's Electronics has:
- IGST Credit available: ₹40,000
- CGST Credit available: ₹15,000
- SGST Credit available: ₹15,000
His output tax dues this month:
- IGST payable: ₹35,000 (inter-state sales)
- CGST payable: ₹8,000 (intra-state sales)
- SGST payable: ₹8,000 (intra-state sales)
How ITC is applied:
- IGST Credit ₹40,000 pays IGST dues ₹35,000 → Surplus IGST ITC: ₹5,000
- Surplus IGST ITC ₹5,000 pays CGST dues → Remaining CGST due: ₹8,000 − ₹5,000 = ₹3,000
- CGST Credit ₹15,000 pays remaining CGST ₹3,000 → Surplus CGST: ₹12,000 (carried forward)
- SGST Credit ₹15,000 pays SGST ₹8,000 → Surplus SGST: ₹7,000 (carried forward)
Net cash payable: ₹0. All dues covered by ITC. Surplus ₹19,000 carries forward.
Rule 42 — When Your Business Earns Both Taxable and Exempt Income
Here's a situation millions of Indian businesses face without realising its GST implication: You run a trading business AND earn interest on your business's FD with the bank. Your FD interest is GST-exempt. Your trading income is taxable. You've used the same office, the same staff, the same electricity to run both activities. How much ITC can you keep?
Rule 42 gives you the answer. It forces you to calculate what portion of your ITC relates to your exempt activities — and reverse (give back) that portion. Think of it as: "If 10% of your income is from exempt supplies, you must reverse 10% of your common input costs' ITC."
Rule 42 — Step-by-Step Calculation
Step 2: T1 = ITC used exclusively for exempt supplies (directly identifiable)
Step 3: T2 = ITC used exclusively for non-business/personal purposes
Step 4: T3 = ITC blocked under Section 17(5) (motor vehicles, food, etc.)
Step 5: Common Credit (C1) = T − T1 − T2 − T3
Step 6: D1 = (Exempt Turnover / Total Turnover) × C1
D1 = ITC to be reversed for exempt supplies (including FD interest, dividends, etc.)
Step 7: D2 = 5% × C1 (for non-business use, if not separately quantified)
Net Eligible ITC = C1 − D1 − D2
This is the ITC you actually get to keep and use against output tax.
Suresh runs a pharmaceutical wholesale business in Bhubaneswar. His numbers for October 2026:
- Total ITC on all purchases: ₹2,00,000
- ITC directly for blocked items (Section 17(5)): ₹15,000 (staff canteen bill)
- ITC exclusively for exempt supplies: ₹5,000 (stationery bought only for loan-giving activity)
- ITC exclusively for non-business use: ₹0
- Taxable turnover (pharma sales): ₹30,00,000
- Exempt turnover (FD interest + loan interest given to relatives): ₹1,50,000
- Total turnover: ₹31,50,000
Calculation:
- C1 = ₹2,00,000 − ₹5,000 − ₹0 − ₹15,000 = ₹1,80,000
- D1 = (₹1,50,000 / ₹31,50,000) × ₹1,80,000 = 4.76% × ₹1,80,000 = ₹8,571
- D2 = 5% × ₹1,80,000 = ₹9,000 (if non-business use not separately tracked)
- Net ITC = ₹1,80,000 − ₹8,571 − ₹9,000 = ₹1,62,429
Suresh must reverse ₹17,571 (₹8,571 + ₹9,000) of ITC even though he thought he had ₹2,00,000 to use. This is declared in GSTR-3B Table 4(B)(2).
- Interest received on FDs, recurring deposits, savings accounts with banks
- Interest received on any loan you've given (even to employees or family)
- Dividend from shares, mutual funds
- Sale of shares / securities / bonds
- GST-exempt sales (like basic food items if you also deal in them)
- Residential rental income from property you own
- Sale of agricultural produce by farmers (exempt)
- Healthcare services (if you also run a clinic)
Rule 43 — ITC on Capital Goods Used for Both Taxable and Exempt Supplies
Capital goods are big-ticket items like machinery, computers, factory equipment, vehicles — things you buy once and use for years in your business. When you buy them, you pay GST. Under Rule 43, if those capital goods are used for both taxable and exempt activities, you must reverse a portion of the ITC — but it's calculated differently from Rule 42 for inputs.
The key difference: Capital goods ITC reversal is calculated on a useful life basis of 5 years (60 months). You spread the ITC over 60 months and reverse only the monthly proportion attributable to exempt use each month.
Life of Capital Good = 60 months (5 years — prescribed)
Monthly ITC to Consider = Tc ÷ 60
Monthly Reversal (Te) = (Exempt Turnover / Total Turnover) × (Tc ÷ 60)
Declare this reversal every month in GSTR-3B Table 4(B)(2)
If capital good is exclusively for taxable → Full ITC immediately
If capital good is exclusively for exempt → NO ITC at all
Ananya runs a printing business in Pune. She buys a high-speed printer for ₹12,00,000 + 18% GST = ₹2,16,000 ITC in April 2026.
The printer is used for: (a) printing commercial brochures (taxable at 18%) and (b) printing educational textbooks (GST exempt).
Her monthly turnover split: Taxable ₹8 lakh, Exempt ₹2 lakh, Total ₹10 lakh (20% exempt)
Rule 43 Calculation:
- Monthly ITC consideration = ₹2,16,000 ÷ 60 = ₹3,600/month
- Monthly reversal = 20% × ₹3,600 = ₹720/month
- Over 60 months, total reversal = ₹720 × 60 = ₹43,200
- Effective ITC kept = ₹2,16,000 − ₹43,200 = ₹1,72,800
Each month, Ananya adds ₹720 to her GSTR-3B as reversal. The ratio changes every month based on that month's turnover mix.
Rule 86B — The "Minimum Cash Payment" Rule Explained
Rule 86B was introduced in January 2021 to prevent certain large businesses from paying all their GST through ITC without any cash outgo. The government wanted to ensure high-value businesses contribute some cash to the treasury.
The Rule in Plain English: If your taxable turnover in a month exceeds ₹50 lakh, you must pay at least 1% of your output tax liability in cash — even if you have more than enough ITC sitting in your credit ledger.
Minimum cash to pay = 1% of Total Output Tax Liability
Remaining 99% can be paid from ITC credit ledger
EXEMPT from Rule 86B if ANY of these apply:
— You've paid >₹1 lakh Income Tax in either of last 2 years
— You've received refund of >₹1 lakh (IGST/ITC) in last 12 months
— You've already paid cash GST of ₹1 lakh+ in the current financial year
— You're a govt entity / public sector undertaking
Big Traders sold ₹80 lakh worth of goods in September 2026. Their total GST liability = ₹14.4 lakh. They have ₹20 lakh in their ITC credit ledger. They want to pay everything from ITC — no cash outgo.
Can they? No. Rule 86B applies (turnover > ₹50L). Minimum cash = 1% × ₹14.4 lakh = ₹14,400 must be paid in cash. They can use ITC for the remaining ₹14,25,600.
Small comfort: ₹14,400 is not a huge burden. The rule prevents extreme ITC misuse without adding significant compliance cost to genuine businesses.
Rule 36(4) — ITC Claim Cannot Exceed GSTR-2B
From October 2020, and now enforced with hard portal blocks from April 2026: your ITC claim in GSTR-3B cannot exceed what appears in your auto-populated GSTR-2B. GSTR-2B is your "ITC eligibility certificate" generated by the system on the 14th of each month, based on your suppliers' GSTR-1 filings.
If your purchase register shows ₹5,00,000 ITC this month but your GSTR-2B shows only ₹4,20,000 (because some suppliers haven't filed their GSTR-1 yet), you can claim only ₹4,20,000 in GSTR-3B. The remaining ₹80,000 must wait until the supplier files and it appears in your next GSTR-2B. The portal may now block filing if you try to claim more than GSTR-2B shows.
Reverse Charge Mechanism (RCM) — When the Buyer Pays the Tax
Normally, when you buy something, the seller charges you GST and pays it to the government. But in certain situations — mostly where the supplier is either unregistered or hard to track — the law says: "The buyer will pay the GST directly to the government." This is the Reverse Charge Mechanism (RCM).
Think of RCM like this: instead of the GST going from you → seller → government, it goes directly from you → government. The seller doesn't charge you GST on the invoice. You calculate it yourself, pay it in cash, and then claim it back as ITC in a subsequent period.
When Does RCM Apply? Two Types
| Section | Trigger | Common Examples | ITC Available? |
|---|---|---|---|
| Section 9(3) CGST Act | Specified services/goods — regardless of supplier's registration status | Legal services from a senior advocate, GTA transport (where applicable), director's remuneration, security services | ✓ Yes — on self-invoice |
| Section 9(4) CGST Act | Purchase from unregistered supplier for specified goods | Buying raw cotton from unregistered farmers (above notified limits), unregistered vendors for certain goods | ✓ Yes — on self-invoice |
| Section 5(3) IGST Act | Import of services from outside India | Paying for cloud software subscription to AWS (USA), design services from a UK agency, consulting from a Singapore firm | ✓ Yes (IGST ITC) |
Full List of RCM Services — Section 9(3) Specified List
| Service | Service Provider | Recipient Who Pays RCM | Rate |
|---|---|---|---|
| Legal services | Individual advocate / law firm | Any business entity | 18% |
| Director's services | Director (non-employee) | The company (recipient) | 18% |
| Security services | Unregistered security agency | Registered business | 18% |
| GTA — Goods Transport | GTA not under FCM | Registered consignor/consignee | 5% or 12% |
| Sponsorship services | Any person | Body corporates and partnerships | 18% |
| Import of services | Foreign service provider | Indian registered recipient | Applicable rate |
| Renting of immovable property to govt entity | Any registered person | Govt/local authority | 18% |
GTA — The Forward Charge Option for FY 2026-27
A Goods Transport Agency (GTA) transports your goods for you. Traditionally, the receiver (you) paid 5% GST under RCM. But since 2022, GTAs can opt to pay GST themselves under Forward Charge — charging 5% or 12% on their invoices directly.
If your GTA chose Forward Charge for FY 2025-26, their choice does NOT automatically continue to FY 2026-27. You must obtain a fresh written declaration from your GTA at the beginning of April 2026 stating their choice for FY 2026-27. Without a valid declaration: the RCM liability falls on you as the receiver — and you'll have to calculate and pay the tax yourself on all transport bills, potentially missing it and incurring interest.
How RCM Works — The Self-Invoice Process
Receive the service (no GST on the service bill)
Your lawyer sends you a bill for ₹50,000 with a note "RCM Applicable." The bill has NO GST charged. You pay only ₹50,000 to the lawyer.
Issue a Self-Invoice on the date of payment
You create an invoice in your own books — from the lawyer's name to yourself. Calculate 18% GST on ₹50,000 = ₹9,000. Mark it as "Reverse Charge: Yes." This self-invoice is your legal document for paying RCM tax.
Pay the ₹9,000 RCM tax in CASH
RCM tax cannot be paid from your ITC credit ledger. You must pay ₹9,000 in cash through the GST portal's electronic cash ledger. This is a strict rule, no exceptions.
Claim ₹9,000 as ITC in the NEXT filing period
Once paid, the ₹9,000 RCM tax becomes available as ITC from the following tax period. So if you paid it in October, you can claim it as ITC in November's GSTR-3B — offsetting your output tax.
In October 2026, Meera's consulting firm pays her lawyer ₹1,00,000 under RCM (18% = ₹18,000 cash tax). She also pays ₹50,000 for cloud software import (18% IGST RCM = ₹9,000). Total RCM cash outgo: ₹27,000.
In November 2026, she claims ₹27,000 as ITC and uses it against her output tax. The ₹27,000 was "locked" for one month but came back. Smart businesses plan for this monthly cash cycle.
Forward Charge Mechanism (FCM) — The Normal, Everyday GST Collection
If RCM is the exception, Forward Charge (FCM) is the rule. Under FCM — which covers 95% of all GST transactions — the supplier charges GST on the invoice, collects it from the buyer, and pays it to the government when filing returns.
How FCM Works — A Step-by-Step Transaction
Supplier makes a sale and creates a tax invoice
Vendor sells office furniture to a company. Furniture costs ₹1,00,000 + 18% GST = ₹18,000. Invoice total: ₹1,18,000. The invoice must show GSTIN, HSN code, GST breakup (CGST ₹9,000 + SGST ₹9,000 for intrastate), and buyer's GSTIN.
Buyer pays ₹1,18,000 to the vendor
The ₹18,000 GST is included in the payment. The buyer gets a valid tax invoice and can claim ₹18,000 as ITC in their next GSTR-3B filing.
Vendor reports sale in GSTR-1
By the 11th of next month (for monthly filers), vendor reports this invoice in GSTR-1. It appears in the buyer's GSTR-2A within days, and in GSTR-2B on the 14th.
Vendor pays ₹18,000 to government via GSTR-3B
By 20th of the month, vendor files GSTR-3B and deposits net tax (output tax minus ITC) to the government. The ₹18,000 collected from the buyer flows to the government.
E-invoicing Under FCM — Mandatory from April 2026 for ₹5 Crore+ Businesses
If your business earned more than ₹5 crore in AATO during FY 2025-26, you must generate e-invoices for every B2B sale from 1 April 2026. E-invoicing doesn't mean you email an invoice — it means you upload invoice details to a government portal called the IRP, which returns an IRN (a unique 64-character number) and a QR code. Your buyer will accept only IRN-stamped invoices for ITC claims.
An invoice without a valid IRN for e-invoice eligible businesses is legally invalid. Your buyer cannot claim ITC on it. The penalty is ₹10,000 per non-compliant invoice. For a business raising 100 invoices a month, that's ₹10 lakh in potential penalties monthly. Check if your billing software supports direct IRP integration.
All GST Returns Explained — From GSTR-1 to GSTR-9C
Think of GST returns as report cards you submit to the government at regular intervals. There are different report cards for different things — one for your sales, one for reconciling your purchases, one for your summary tax payment, and one big annual report. Let's go through each.
Who files: All regular taxpayers
Frequency: Monthly (if turnover >₹5 crore) or Quarterly (QRMP scheme, turnover ≤₹5 crore)
Inside GSTR-1 — What Goes Where
| Table | What to Report Here | Practical Tip |
|---|---|---|
| 4A | B2B taxable sales — invoice by invoice, with buyer's GSTIN | Every inter-business invoice must be here. Your buyer's ITC depends on this. |
| 4B | B2B sales where tax is on RCM (you're supplier, buyer pays tax) | Less common — used for supplies by unregistered aggregators etc. |
| 5 | Large B2C sales — inter-state, single invoice above ₹2.5 lakh IGST | Invoice-wise details required here for large consumer sales. |
| 6A | Exports with IGST paid | Link to Shipping Bill number for refund matching by Customs department. |
| 6B | Exports under LUT (without IGST payment) | Quote your LUT number. This must be a fresh FY 2026-27 LUT from April 1. |
| 7 | B2C small — all remaining consumer sales, state-wise consolidated | No invoice-wise details needed — just state-level totals. |
| 9B | Credit and debit notes issued to registered buyers | Always quote original invoice number. IMS shows this to buyer for acceptance. |
| 11A/11B | Advances received / adjusted | Report advance receipt; then adjust when invoice raised. Prevents double taxation. |
| 12 | HSN-wise summary of outward supplies | 4-digit HSN for AATO below ₹5 crore; 6-digit for above ₹5 crore. Mandatory from 2021. |
GSTR-9 Deep Dive — The Annual Return Explained Simply
Add up all 12 months of GSTR-1 data. Table 4 breaks down your sales by type: taxable (at different rates), zero-rated (exports), nil-rated, and exempt. Table 5 shows the breakup of zero-rated, nil-rated, and non-GST supplies. Any amendments made in April–November (for the previous FY) are also captured here — making this your final, definitive sales record for the year.
Table 6: Total ITC availed during the year — broken down by inputs (goods), input services, and capital goods. Match this with your GSTR-3B totals exactly.
Table 7: ITC reversals — Rule 42, Rule 43, Section 17(5) blocked credits, and other reversals. Every reversal you've done during the year is documented here.
Table 8: Reconciliation between GSTR-2A and ITC claimed in GSTR-3B. Differences here invite departmental queries — differences must be explainable (timing, supplier non-filing, etc.).
The full tax payment summary for the year. Shows how much IGST, CGST, SGST, and cess was paid: (a) through ITC utilisation, and (b) through cash payments. This must match your Electronic Cash Ledger and Electronic Credit Ledger statements from the portal exactly. Any difference = overpayment (seek refund) or underpayment (pay with interest now).
This is the GST equivalent of a "grace period." Any amendments to FY 2025-26 data that you declared in your GSTR-1 or GSTR-3B filings from April to November 2026 go here. Missed an invoice? Wrongly claimed ITC? Over-stated a sale? Tables 10-14 are your final opportunity to correct the record. After December 31, 2026, no corrections are legally possible for FY 2025-26.
Think of GSTR-9C as a bridge between your CA's audit report and your GSTR-9. It compares:
(a) Turnover: Revenue per your P&L account vs. taxable turnover per GST returns. Common differences: advance receipts timing, branch transfers treated differently in books, deductions claimed in GST but not accounted yet in books.
(b) ITC: ITC as per books vs. as per GST returns. Explain why they differ.
(c) Tax paid: Any additional tax payable identified during reconciliation must be paid with interest before filing GSTR-9C.
Invoice Furnishing Facility (IFF) and the QRMP Scheme — Explained Clearly
The Quarterly Return Monthly Payment (QRMP) Scheme was introduced to reduce the compliance burden for small businesses. Instead of filing GSTR-1 every single month (12 times a year), businesses with AATO up to ₹5 crore can file GSTR-1 only 4 times a year (once per quarter). But they still pay tax every month.
The problem? If you file GSTR-1 only quarterly, your B2B buyers — who might file monthly — can't see your invoices in their GSTR-2B for 3 months. That's 3 months of blocked ITC for them. The Invoice Furnishing Facility (IFF) solves this.
How IFF Works — The Three-Month Cycle
Optional: Upload B2B Invoices via IFF
Upload your B2B invoices (up to ₹50 lakh value) by the 13th of Month 1. These appear in your buyer's GSTR-2B for Month 1. Pay tax for Month 1 in challan (cash payment) by the 25th.
Optional: Another IFF Window
Upload remaining B2B invoices by the 13th of Month 2. Same ₹50 lakh cap applies per month (not cumulative). Pay Month 2 tax in challan by the 25th.
Full GSTR-1 Due — Mandatory
File the complete quarterly GSTR-1 by the 13th of the month after quarter end. Invoices uploaded via IFF in Months 1 & 2 auto-populate here. No separate IFF window in Month 3.
- IFF is optional — but practically essential if your buyers are monthly GSTR-3B filers who need ITC each month
- Only B2B invoices and credit/debit notes can be uploaded via IFF. B2C supplies wait for the quarterly GSTR-1.
- The ₹50 lakh limit is per IFF period (per month), not per quarter. Large quarterly invoices may need to be split or reported in the quarterly GSTR-1.
- E-invoices for QRMP taxpayers (above ₹5 crore AATO) auto-populate into IFF from April 2026 — a relief from manual upload.
QRMP Tax Payment Options — Fixed Sum or Self-Assessment?
| Payment Method | How You Calculate | Due Date | Best For |
|---|---|---|---|
| Fixed Sum Method (Challan PMT-06) | Pay 35% of the net cash tax paid in the last quarter (or 100% of tax if last quarter was a monthly return quarter). No calculation needed each month. | 25th of each of the first 2 months of quarter | Businesses with stable, predictable monthly sales. Saves time — just pay 35%. |
| Self-Assessment Method | Calculate actual tax liability for the month from your ledgers. Output tax minus ITC = pay this in cash. More work but more accurate. | 25th of each of the first 2 months of quarter | Businesses with highly variable turnover where 35% fixed would over/under-pay significantly. |
Composite Scheme vs Regular Scheme — Which One is Right for Your Business?
The Composition Scheme is GST's gift to small businesses who don't want to deal with complex return filing. Instead of charging GST at standard rates, calculating ITC, and filing monthly returns, composition dealers pay a small flat percentage on their total turnover and file returns just once or twice a year.
But this simplicity comes with serious restrictions. Let's compare both options honestly.
| Feature / Parameter | 🏪 Composition Scheme | 📊 Regular GST Scheme |
|---|---|---|
| Who can opt? | AATO up to ₹1.5 crore (goods), ₹50 lakh (services) | Anyone — no upper limit |
| Tax rate on turnover | 1% (traders/manufacturers), 5% (restaurants), 6% (services) | Standard rates: 0% / 5% / 18% / 40% |
| What is taxed? | Your total turnover (simple!) | Value added at each step (output − ITC) |
| ITC on purchases | ✗ Not Available | ✓ Available |
| Your buyer gets ITC? | ✗ No — you issue Bill of Supply, not tax invoice | ✓ Yes — you issue proper tax invoice |
| Inter-state sales | ✗ Not Allowed | ✓ Allowed |
| E-commerce platform sales | ✗ Not Allowed | ✓ Allowed |
| Returns to file | CMP-08 (quarterly) + GSTR-4 (annual once) | GSTR-1 + GSTR-3B (monthly or quarterly via QRMP) |
| RCM liability | Still applies — must pay RCM in cash | Applies — pay and claim ITC |
| Reverse charge on purchases from unregistered | Applicable — and NO ITC benefit | Applicable but ITC available |
| Penalty for wrong composition claim | Tax + 100% penalty if ineligible person opted composition | |
| Annual compliance cost | Low — minimal accounting needed | Moderate to High |
Choose Composition If...
- You're a local retailer selling to end consumers (grocery store, local restaurant, clothing shop)
- All your sales are within one state — no interstate movement
- Your buyers are mostly individuals, not businesses (so they don't need ITC from you)
- Your input costs are low relative to turnover (so missing ITC isn't painful)
- You want minimal paperwork and a simple tax life
- Your major customers are GST-registered businesses who demand ITC — they'll prefer a regular scheme supplier
- You sell across states (inter-state) or through e-commerce platforms (Amazon, Flipkart)
- You have significant input costs — factories, warehouses, heavy inputs — where ITC savings are substantial
- You want to export goods or services — composition dealers cannot export
- You're close to the threshold and likely to cross it — switching mid-year is painful
Sunita runs a pharmacy in Cuttack with ₹80 lakh annual sales. Most customers are individual patients (B2C). She buys medicines from distributors who are registered. Her ITC from purchases is about ₹6 lakh/year.
Under Composition (1% of turnover): Tax = ₹80,000/year. No ITC. Simple filing. Only CMP-08 quarterly.
Under Regular: Output tax ≈ ₹5,00,000 (many medicines are at 5% or 12%) minus ITC ₹6,00,000 = Net payable ₹0, with ₹1,00,000 ITC credit carried forward. Monthly filings required.
Decision: Regular scheme saves Sunita ₹80,000 in tax outgo AND builds ITC credit. Despite the compliance work, regular scheme wins here. If her ITC were only ₹40,000, composition at ₹80,000 tax might still lose — she should calculate carefully each year.
GST Audit Compliance — The Records That Protect Your Business
A GST audit notice can land on any registered business. When it does, the question the officer asks isn't just "did you pay the right tax?" — it's "can you prove it?" Unlike income tax where officers often carry the burden of proof, in GST, you must prove your ITC claims and tax computations.
Here's the good news: maintaining the right records isn't complicated if you build the habit now. Let's go through exactly what you need to keep, for how long, and why.
Mandatory Records — Section 35 & Rules 56–58
| Record Type | What Must Be in It | How Long to Keep |
|---|---|---|
| Sales Register / Outward Supply Register | Every invoice you issued — date, buyer's GSTIN, invoice number, value, tax charged, HSN code. E-invoices must include IRN and QR code copy. | 72 months (6 years) from the due date of the annual return for that year |
| Purchase Register / Inward Supply Register | All purchases — supplier GSTIN, invoice number, date, value, tax paid, ITC claimed. Cross-referenced with GSTR-2B. | 72 months |
| Stock / Inventory Register | Opening stock, receipts, issues/sales, closing stock — item by item. Used to verify ITC isn't claimed on goods diverted for personal use. | 72 months |
| ITC Register | ITC availed per invoice, Rule 42/43 reversals, GSTR-2B matching status, pending ITC register. | 72 months |
| GST Payment Records | Challans (PMT-06), GSTR-3B filings, Electronic Cash Ledger downloads, RCM self-invoices with payment proof. | 72 months |
| E-Invoice Archive | Signed JSON, IRN, QR code — for every e-invoice generated. | 72 months — the IRP portal only stores IRN for 24 hours; YOU must store the full data. |
| Export Documents | Shipping bills, bill of lading, LUT, e-BRC (proof of export proceeds received in foreign currency). | 72 months |
| Bank Statements | For IGST/RCM payment verification, refund receipts, export foreign currency receipt. | 72 months |
| GSTR-2B Monthly Downloads | Save the PDF/JSON of every month's GSTR-2B — it can change if GSTN makes corrections. | 72 months |
The Five Biggest Audit Risks in FY 2026-27
ITC Claimed Without Matching GSTR-2B
With hard validations from April 2026, this is now a filing block — but if it slipped through in earlier periods, auditors will find it. Match your purchase register against GSTR-2B every single month. Maintain a "pending ITC" register for invoices that appear in books but not GSTR-2B yet.
Rule 42 Reversal Not Done for Exempt Income (FD Interest, etc.)
As discussed — if you earn FD interest, dividend, or any exempt income and haven't reversed ITC proportionately, you have an underpaid tax liability. Auditors specifically check exempt turnover vs. ITC reversal in your GSTR-3B.
E-Invoice Compliance Gaps
All B2B invoices from April 2026 (for ₹5 crore+ businesses) need valid IRNs. Auditors can now verify this electronically. Invoices without IRN = invalid documents for your buyers' ITC. Expect scrutiny notices for any period where IRNs are missing.
GSTR-1 vs GSTR-3B Mismatch
Your GSTR-1 reported ₹50 lakh sales. Your GSTR-3B shows only ₹45 lakh taxable value. The difference must be explainable (credit notes, nil-rated supplies, etc.). Unexplained gaps trigger demand notices for under-declared tax.
HSN Code Errors Post Rate Rationalisation
With GST 2.0 moving some products from 12% to 18%, businesses that haven't updated their HSN-rate mapping are charging wrong rates. Charging lower rate than applicable = demand for the shortfall + 18% interest + possible penalty.
- Download GSTR-2B on the 15th → reconcile with purchase register → identify mismatched invoices → follow up with suppliers
- Before filing GSTR-3B → calculate Rule 42 reversal if you have exempt income that month
- After filing → download your filed GSTR-3B and store it with the period's records
- For exporters → verify LUT is current, shipping bills are linked in GSTR-1, and e-BRC is filed for realised exports
Live GST Calculators — Use Them for Your Own Situation
Below are six calculators covering the most common GST computations. Each has a description, fields you fill in, and instant results. All amounts are in Indian Rupees (₹). Click the tab for the calculator you need.
GST Tax Calculators — FY 2026-27
Select the calculator below. Fill values and click Calculate for instant results.
Under the Forward Charge Mechanism (FCM), you as the seller charge GST on your invoice and deposit it to the government. This calculator computes the GST on your sale and the total invoice value.
Calculate your net GST payable after using available ITC (ITC). Enter your output tax liability and ITC available in each category. The calculator applies the mandatory set-off order.
Rule 42 applies when your business earns both taxable GST income AND exempt income (like FD interest, dividends, residential rent). You must reverse the portion of ITC that relates to your exempt activities.
Rule 43 applies when you buy capital goods (machinery, equipment, computers) and use them for both taxable AND exempt supplies. ITC reversal is calculated over a 60-month useful life — spread monthly.
Rule 86B requires that if your taxable turnover in a month exceeds ₹50 lakh, at least 1% of your total output GST liability must be paid in cash — not from ITC ledger. This calculator checks if Rule 86B applies and calculates the minimum cash payment.
Calculate GST you must pay under the Reverse Charge Mechanism (RCM). Under RCM, you (the buyer) pay the GST directly — the supplier doesn't charge it. Enter each type of RCM purchase and get the total tax payable in cash.
Key GST Compliance Dates — FY 2026-27
Missing a GST deadline costs money. Late filing attracts ₹50/day penalty (₹25 CGST + ₹25 SGST) for most returns, and late payment attracts 18% annual interest on the unpaid amount. Mark these dates in your calendar now.
| Return / Action | Who Files | Due Date | Penalty for Late Filing |
|---|---|---|---|
| LUT Filing (RFD-11) | All exporters (goods or services without IGST) | Before raising first export invoice of FY 2026-27 — file by 1 April 2026 | Cannot export without IGST payment until LUT is filed |
| GSTR-1 (Monthly) | Turnover > ₹5 crore | 11th of following month | ₹50/day (₹25+₹25) — max ₹10,000 per return |
| GSTR-1 (Quarterly) | QRMP taxpayers | 13th of month following quarter end | ₹50/day — max ₹10,000 |
| IFF (Invoice Furnishing Facility) | QRMP taxpayers (optional) | 13th of Month 1 and Month 2 of quarter | No direct penalty — but buyers lose ITC for that month |
| GSTR-3B (Monthly) | All monthly filers | 20th of following month | ₹50/day + 18% interest on unpaid tax amount |
| GSTR-3B (QRMP) | QRMP taxpayers — final quarter return | 22nd (Category 1 states) or 24th (Category 2 states) of month after quarter | ₹50/day + interest |
| QRMP Monthly Challan (PMT-06) | QRMP taxpayers — Month 1 and 2 of quarter | 25th of Month 1 and Month 2 | 18% interest on unpaid tax |
| GSTR-7 (TDS Return) | TDS deductors (govt, PSU, local bodies) | 10th of following month | ₹50/day + interest + possible 100% penalty for non-deduction |
| GSTR-9 (Annual Return) | Regular taxpayers with AATO > ₹2 crore | 31 December 2026 (for FY 2025-26) | ₹200/day (₹100 CGST + ₹100 SGST) |
| GSTR-9C (Reconciliation) | AATO > ₹5 crore | 31 December 2026 (same as GSTR-9) | Same as GSTR-9 penalty — they're filed together |
| CMP-08 (Composition quarterly tax) | Composition scheme dealers | 18th of month following each quarter | ₹50/day |
| GSTR-4 (Composition annual) | Composition scheme dealers | 30 April (for previous FY) | ₹50/day up to ₹2,000 max |
GSTN now blocks filing of any return that is more than 3 years past its due date. So if you haven't filed GSTR-3B for March 2023 (due April 20, 2023), the portal will not allow you to file it after April 20, 2026. This means lost ITC, possible best judgment assessments, and permanent compliance gaps. If you have pending returns, file them NOW before this deadline permanently closes your options.
Year Start — Multiple Actions Required Simultaneously
File fresh LUT (if exporter). Start new invoice numbering series. E-invoicing goes live for ₹5 crore+ businesses. GST 2.0 rates take effect. IMS hard validations begin. MFA mandatory for all portal users.
GSTR-1 for March 2026
Last chance to declare March 2026 sales. Include any amendments to February 2026 invoices. Ensure all e-invoices have valid IRNs.
IFF for QRMP — April (Month 1 of Apr–Jun Quarter)
Optional B2B invoice upload for QRMP taxpayers. Upload to ensure your buyers get ITC in April itself.
GSTR-3B for March 2026
Pay net tax for March 2026. Rule 42 reversals for March must be included. Last chance to claim ITC for invoices in GSTR-2B for March period.
GSTR-9 and GSTR-9C for FY 2025-26
Annual return and reconciliation statement. Also the last date to claim ITC for FY 2025-26 purchases (Section 16(4) deadline). Prepare well in advance — GSTR-9 needs 12 months of data reconciled.
Eight More GST Concepts Every Business Owner Must Understand
The sections so far covered registration, rates, ITC, returns, and calculators. But GST has several other pillars that directly affect your tax liability — especially if you deal in goods movement, advances, exports, or e-commerce. Here they are, explained simply.
1. Place of Supply — The Rule That Decides IGST vs CGST+SGST
This is one of the most misunderstood rules in GST. The Place of Supply (POS) determines which type of GST you charge — IGST (if inter-state) or CGST+SGST (if intra-state). Getting this wrong means paying the wrong tax type, which cannot be cross-credited. You'll owe one state and have excess in another — a very messy problem to fix.
Supplier State ≠ Recipient State? → Inter-state → Charge IGST
Supply to SEZ or outside India? → Treated as Inter-state → IGST (or Zero-rated)
| Type of Supply | Place of Supply Rule (IGST Act) | Common Confusion |
|---|---|---|
| Goods with movement | Where the goods are when movement terminates (destination state) | Odisha seller ships to Mumbai buyer → POS = Maharashtra → IGST applies |
| Goods without movement (installed) | Where installation happens | Machinery installed in Gujarat by Delhi company → POS = Gujarat |
| Services — recipient is registered | Location of the registered recipient | Mumbai CA advises Odisha company → POS = Odisha (IGST) |
| Services — recipient is unregistered | Location of the service provider | Delhi hotel stay by individual → POS = Delhi (CGST+SGST) |
| Restaurant / dining | Where the restaurant is located | Always the state where you eat |
| Transport of goods | Where goods are handed over to transporter | Goods given to courier in Chennai → POS = Tamil Nadu |
| Online/digital services (OIDAR) | Location of the recipient | Indian buyer pays Netflix (USA) → POS = India |
If you charge CGST+SGST on what should be IGST: the wrong state gets the tax, the right state gets nothing, and your buyer cannot set off CGST/SGST against IGST dues they may have. You must refund the wrong tax, pay the correct tax, and pay 18% interest on the delay. Always verify POS before issuing any invoice.
2. Time of Supply — When Does Your GST Liability Actually Begin?
You pay GST when you file GSTR-3B — but when does the liability begin? The Time of Supply (TOS) rules under Sections 12 and 13 of the CGST Act answer this. TOS matters for calculating interest if you pay late and for determining which month's return to include a transaction in.
| Type | Time of Supply | Practical Meaning |
|---|---|---|
| Goods (under FCM) | Earlier of: Date of invoice OR Last date invoice should have been issued | If you deliver goods on 28 Oct but raise invoice on 5 Nov — TOS is 28 Oct (you had 30 days to issue invoice after delivery, which expires Nov 27) |
| Services (under FCM) | Earlier of: Date of invoice OR Date of receipt of payment — whichever is earlier, but if invoice is within 30 days of service, invoice date | If you complete a consulting project on Oct 15 and raise invoice on Oct 20 — TOS is Oct 20 |
| Advances received | Date of receipt of advance — regardless of when service is provided | Client pays ₹2 lakh advance in October. GST on ₹2 lakh is due in October itself, not when you deliver in December |
| Reverse Charge (RCM) | Earlier of: Date of payment by recipient OR Date of self-invoice (31 days after supplier's invoice if neither above triggers first) | You pay your advocate on 15 Nov — RCM liability arises 15 Nov, declare in Nov's GSTR-3B |
| Continuous supply (utilities, rent) | Date of issue of invoice OR date of payment, whichever is earlier; if neither, date of completion of each period | Quarterly software subscription: TOS = invoice date each quarter |
This surprises many service providers. If a client pays you ₹5,00,000 advance in October for a project you'll complete in January, you must pay GST on ₹5,00,000 in October itself. The GST goes in GSTR-3B for October. When you finally raise the full invoice in January, you adjust the advance (show it in GSTR-1 Table 11B) and only charge GST on the remaining balance. Ignoring this leads to interest at 18% p.a. from October.
3. Value of Supply — What Exactly Gets Taxed?
GST is computed on the Value of Supply (Section 15, CGST Act). In most cases, this is simply the price you charge. But the law has inclusions and exclusions that can catch you off guard.
| What's INCLUDED in Value (Taxable) | What's EXCLUDED from Value (Not Taxed) |
|---|---|
| Any amount charged for freight/packing/loading if separately shown on invoice | GST itself (you don't pay GST on GST) |
| Subsidies received from any person other than the government | Government subsidies linked to price (these reduce taxable value) |
| Taxes, duties, cesses — other than GST (like customs duty, stamp duty) | Pre-supply discounts shown on the face of the invoice |
| Interest, late fees, penalty charged for delayed payment by your buyer | Post-supply discounts — now allowed even without pre-agreement under Section 15(3)(b) as amended April 2026 |
| Incidental expenses billed to buyer (commission, packing, insurance) | Pure reimbursements (actual third-party costs paid on behalf of customer, with evidence) |
Your manpower agency bills you ₹1,00,000 for staff salaries. On top of that, they paid ₹12,000 as EPF (Employees' Provident Fund) contribution and ₹6,500 as ESI (Employees' State Insurance) on behalf of the employees.
Question: Is GST on ₹1,00,000 (just wages) or ₹1,18,500 (wages + EPF + ESI)?
Answer: Multiple GST AAR rulings and the GST Council's clarification hold that GST is on the entire contract value including EPF and ESI, unless the agency provides actual third-party payment proof AND the amounts are genuinely reimbursed at cost. In most manpower contracts, EPF/ESI is bundled — so it's taxable at 18% on the full amount including statutory contributions.
4. E-Way Bill — The GST Passport for Goods Movement
Before any goods worth more than ₹50,000 travel from one place to another (inter-state or intra-state — though states may have different thresholds), you need an E-Way Bill. Think of it as a digital transit permit for goods. It links the movement of physical goods with the tax invoice already filed or to be filed.
| Parameter | Rule |
|---|---|
| Who generates it? | Supplier, recipient, or transporter — whoever initiates movement. For inter-state, supplier usually generates before handing to transporter. |
| Threshold value | ₹50,000 (goods value before GST). State-specific intra-state thresholds may be higher (e.g., some states ₹1 lakh). |
| Validity period | 100 km = 1 day. Beyond that, 1 additional day per 200 km. For ODC (Over-Dimensional Cargo) — 1 day per 20 km. |
| What it contains | Invoice number, supplier/recipient GSTIN, value, HSN code, vehicle number, transporter ID. |
| Consequence of no E-Way Bill | Goods can be seized and detained. Penalty = Tax payable on goods OR ₹10,000 — whichever is higher. Goods released only after penalty payment. |
| Exempt movements | Empty cargo vehicles, exempt goods (fresh vegetables, milk, etc.), movement within notified areas, distance less than state threshold. |
5. GST Refunds — When the Government Owes You Money
You can claim a refund of GST paid when: (a) you exported goods/services and paid IGST — you get that IGST back; (b) your exports were under LUT and you have ITC accumulated — claim ITC refund; (c) you're in an inverted duty structure (tax on inputs is higher than tax on output); or (d) you paid excess tax by mistake.
Export Refund (IGST Paid)
File RFD-01. GSTN auto-processes refunds by matching Shipping Bill data from Customs with your GSTR-1 Table 6A. From April 2026: the ₹1,000 minimum refund threshold removed — even ₹1 refund is now claimable. Refund is usually within 7 working days if documents match.
Inverted Duty Structure Refund
When you buy inputs at 18% GST but sell your output at 5%, your ITC permanently accumulates (you can never use it). File RFD-01 for this "inverted duty structure" refund. From April 2026: provisional refund extended to 90% of claimed amount — much faster cash flow relief.
Excess Cash Balance Refund
Over-deposited in Electronic Cash Ledger (like paying ₹50,000 when only ₹30,000 was due)? Apply for refund via RFD-01. Processed within 60 days. Interest at 6% p.a. if delayed beyond 60 days.
ITC Refund for LUT Exports
If you export under LUT (no IGST paid) but have accumulated ITC on your inputs, you can claim refund. Formula: Refund = (Export Turnover / Total Turnover) × Net ITC. Declare exports in GSTR-1 Table 6B and file RFD-01.
6. GST Demands — Section 73 vs Section 74
If the government believes you haven't paid enough GST, they issue a demand notice. There are two types — one for honest mistakes, one for fraud. The difference matters enormously.
| Section | When It Applies | Time Limit to Issue Notice | Penalty |
|---|---|---|---|
| Section 73 — Non-Fraud | Honest mistake, oversight, misinterpretation — no intent to evade tax | 3 years from the due date of annual return for that year | If you pay before notice: Nil penalty. If you pay after notice but before order: 10% of tax. If order is passed: 10% of tax or ₹10,000 — whichever is higher. |
| Section 74 — Fraud/Wilful Misstatement | Deliberate tax evasion, fake invoices, suppression of sales, false ITC claims | 5 years from the due date of annual return | 100% of tax evaded — always. No reduction even if you pay voluntarily after notice. Plus prosecution possible under Section 132. |
If you receive a demand order and disagree with it, the new Section 101A interim appellate mechanism (effective April 1, 2026) provides a faster first-level appeal route before the formal GST Appellate Authority. This is meant to reduce pendency at higher tribunals. Use your CA to file an appeal within 3 months of the order date — the appeal suspends recovery during pendency (subject to conditions).
7. Job Work — Sending Goods for Processing Without Paying GST
Job work (Section 143, CGST Act) is a very business-friendly provision. It allows you to send your goods (inputs, semi-finished, or capital goods) to another person (the job worker) for processing, testing, repair, or any other treatment — without paying GST on that movement, provided the goods return or are directly supplied from job worker's premises within specified time limits.
- No GST on sending goods to job worker. Use a delivery challan (not a tax invoice) for the movement.
- Inputs must return within 1 year. Capital goods must return within 3 years.
- If goods don't return in time → deemed supply as of the date of original sending. GST + interest applies retrospectively.
- Job worker's services are taxable — they charge GST on their labour/processing fee (18% for most manufacturing services).
- You can supply finished goods directly from the job worker's premises — you don't need to bring them back first.
- Principal can claim ITC on job worker's invoice (their processing fee). Movement of goods itself has no GST but needs E-Way Bill if value >₹50,000.
8. Credit Notes and Debit Notes — Correcting Invoices After the Fact
Mistakes happen. Goods get returned. Prices get renegotiated. A Credit Note reduces your original supply (you charged too much, goods returned, or post-supply discount). A Debit Note increases it (you undercharged, additional charges apply).
| Document | When to Issue | Effect | GST Return Impact | Deadline |
|---|---|---|---|---|
| Credit Note | Sales return, overcharge correction, post-sale discount, quality rejection | Reduces your output tax liability. Buyer must reverse their ITC (via IMS acceptance). | Report in GSTR-1 Table 9B. Reduces your GSTR-3B Table 3.1(a) liability. | Earlier of: 30 Nov following FY, or filing of annual return |
| Debit Note | Undercharge correction, additional charges, price escalation | Increases your output tax liability. Buyer gets additional ITC. | Report in GSTR-1 Table 9B. Increases GSTR-3B output tax. | No time limit — can be issued any time |
From April 2026, credit notes you issue appear in your buyer's IMS (Invoice Management System). If the buyer rejects your credit note in IMS, it does NOT reduce your output tax in GSTR-3B automatically. There will be a mismatch. Always coordinate with your buyer before issuing credit notes on large transactions — ensure they've accepted it in IMS before finalising your GSTR-3B.
Tally Prime GST Journal Entries — Scenario-by-Scenario with Reconciliation Notes
Tally Prime handles most GST entries automatically when vouchers are created correctly with the right GST ledgers and tax classifications. But knowing the underlying journal entry helps you verify Tally's work, correct errors, and reconcile your books with the GST portal's records. All entries below use standard Tally Prime ledger naming conventions.
- Create separate ledgers: Output IGST, Output CGST, Output SGST (under Duties & Taxes → GST → Output)
- Create: Input IGST, Input CGST, Input SGST (under Duties & Taxes → GST → Input)
- Create: RCM Payable - CGST, RCM Payable - SGST, RCM Payable - IGST (under Current Liabilities)
- Create: Electronic Cash Ledger (under Current Assets — represents GST portal cash balance)
- Enable GST in company features (F11) → set GSTIN, state, composition status
- All sales invoices: use Sales Voucher (F8). All purchases: Purchase Voucher (F9). RCM: Journal Voucher (F7).
Entry 1 — Intrastate Purchase (Both Buyer and Seller in Same State)
| Ledger Account | Dr/Cr | Amount (₹) | Explanation |
|---|---|---|---|
| Purchase Account (or Stock-in-Trade) | Dr | 1,00,000 | Cost of goods — goes to P&L |
| Input CGST A/c | Dr | 9,000 | 50% of 18% GST = CGST credit earned |
| Input SGST A/c | Dr | 9,000 | 50% of 18% GST = SGST credit earned |
| Supplier (Creditor) A/c | Cr | 1,18,000 | Total payable to vendor |
Reconciliation note: Input CGST and Input SGST balances must match what appears in GSTR-2B → Tally's ITC report. Run Gateway of Tally → Display More Reports → GST → GSTR-2 → ITC Available and verify against portal GSTR-2B PDF.
Entry 2 — Interstate Purchase (Buyer and Seller in Different States)
| Ledger Account | Dr/Cr | Amount (₹) | Explanation |
|---|---|---|---|
| Purchase Account | Dr | 2,00,000 | Base cost |
| Input IGST A/c | Dr | 36,000 | Full 18% as IGST — interstate purchase |
| Supplier A/c | Cr | 2,36,000 | Total payable |
Reconciliation note: IGST ITC can be used to pay IGST, CGST, or SGST output dues. Tally automatically applies the set-off order when you generate the GSTR-3B report.
Entry 3 — Intrastate Sale (Both in Same State)
| Ledger Account | Dr/Cr | Amount (₹) | Explanation |
|---|---|---|---|
| Customer (Debtor) A/c | Dr | 1,77,000 | Total receivable from buyer |
| Sales Account | Cr | 1,50,000 | Revenue (base price only) |
| Output CGST A/c | Cr | 13,500 | GST liability — must be remitted to govt |
| Output SGST A/c | Cr | 13,500 | GST liability — must be remitted to govt |
Reconciliation note: Output CGST + Output SGST balances in Tally must match GSTR-1 filed outward supply data. Run GSTR-1 report in Tally → compare total tax with portal GSTR-1 summary.
Entry 4 — RCM on Legal Services from Advocate (Intrastate)
Step A — Record the service expense (at time of booking):
| Ledger | Dr/Cr | Amount (₹) |
|---|---|---|
| Legal & Professional Charges A/c | Dr | 50,000 |
| Advocate (Creditor) A/c | Cr | 50,000 |
Step B — Record RCM liability (create self-invoice on payment date):
| Ledger | Dr/Cr | Amount (₹) | Note |
|---|---|---|---|
| RCM CGST Expense A/c (or Legal Charges A/c) | Dr | 4,500 | 18% × ₹50,000 ÷ 2 |
| RCM SGST Expense A/c (or Legal Charges A/c) | Dr | 4,500 | 18% × ₹50,000 ÷ 2 |
| RCM Payable - CGST A/c | Cr | 4,500 | Liability to pay GST to govt |
| RCM Payable - SGST A/c | Cr | 4,500 | Liability to pay GST to govt |
Step C — Pay RCM tax in cash to government via GST portal:
| Ledger | Dr/Cr | Amount (₹) |
|---|---|---|
| RCM Payable - CGST A/c | Dr | 4,500 |
| RCM Payable - SGST A/c | Dr | 4,500 |
| Electronic Cash Ledger A/c (Bank) | Cr | 9,000 |
Step D — Claim ITC in NEXT month's GSTR-3B:
| Ledger | Dr/Cr | Amount (₹) |
|---|---|---|
| Input CGST A/c | Dr | 4,500 |
| Input SGST A/c | Dr | 4,500 |
| RCM CGST Expense A/c | Cr | 4,500 |
| RCM SGST Expense A/c | Cr | 4,500 |
Reconciliation note: GSTR-3B Table 3.1(d) = total RCM liability. GSTR-3B Table 4(A)(3) = ITC from RCM claimed next month. These must tie to your Tally RCM payable ledger movements.
Entry 5 — Security Services RCM (Unregistered Agency — Proprietorship)
| Ledger | Dr/Cr | Amount (₹) | When |
|---|---|---|---|
| Security Charges A/c | Dr | 1,00,000 | Month of service |
| Security Agency A/c (Creditor) | Cr | 1,00,000 | |
| RCM CGST A/c (Expense) | Dr | 9,000 | Self-invoice date |
| RCM SGST A/c (Expense) | Dr | 9,000 | Self-invoice date |
| RCM Payable - CGST | Cr | 9,000 | |
| RCM Payable - SGST | Cr | 9,000 | |
| RCM Payable - CGST | Dr | 9,000 | Cash payment to govt |
| RCM Payable - SGST | Dr | 9,000 | Cash payment to govt |
| Electronic Cash Ledger | Cr | 18,000 | |
| Input CGST A/c | Dr | 9,000 | NEXT MONTH — ITC claim |
| Input SGST A/c | Dr | 9,000 | NEXT MONTH — ITC claim |
| RCM CGST A/c (Expense) | Cr | 9,000 | |
| RCM SGST A/c (Expense) | Cr | 9,000 |
Important: ITC on security services IS eligible under GST (not blocked by Section 17(5) — security for business premises is a legitimate business expense). However, if the PSU uses security for employee residential quarters, that portion's ITC may be contested.
Entry 6 — Rule 42 ITC Reversal (FD Interest Example)
| Ledger | Dr/Cr | Amount (₹) | Note |
|---|---|---|---|
| ITC Reversal Expense A/c (indirect expense) | Dr | 17,571 | This becomes a P&L expense — you lose this ITC permanently |
| Input CGST A/c | Cr | 8,786 | 50% of ₹17,571 — reversed from credit ledger |
| Input SGST A/c | Cr | 8,785 | Balance 50% — reversed from credit ledger |
Reconciliation note: This reversal must appear in GSTR-3B Table 4(B)(2) "Other reversals." Your Tally ITC reversal entry must match the amount entered in GSTR-3B exactly. Generate Tally → GST Reports → GSTR-3B and check Table 4(B)(2) vs what you manually entered in portal.
Entry 7 — GST Payment to Government (ITC Set-Off + Cash Payment)
| Ledger | Dr/Cr | Amount (₹) | What This Represents |
|---|---|---|---|
| Output IGST A/c | Dr | 26,000 | Clearing output IGST liability |
| Output CGST A/c | Dr | 12,000 | Clearing output CGST liability |
| Output SGST A/c | Dr | 12,000 | Clearing output SGST liability |
| Input IGST A/c | Cr | 20,000 | IGST ITC used — pays IGST first, then surplus to CGST |
| Input CGST A/c | Cr | 5,000 | CGST ITC used against CGST dues |
| Input SGST A/c | Cr | 5,000 | SGST ITC used against SGST dues |
| Electronic Cash Ledger A/c | Cr | 20,000 | Cash paid to portal — IGST ₹1,000 + CGST ₹7,000 + SGST ₹12,000 (balance) |
Reconciliation note: After filing GSTR-3B, download your Electronic Cash Ledger and Electronic Credit Ledger statements from the portal. These must match your Tally ledgers exactly. Any difference = error in either Tally entry or portal filing — investigate immediately.
Entry 8 — Export Sale Under LUT (Zero-Rated, No GST)
| Ledger | Dr/Cr | Amount (₹) | Note |
|---|---|---|---|
| Foreign Debtor A/c (USD receivable) | Dr | 10,00,000 | At applicable exchange rate on invoice date |
| Export Sales A/c | Cr | 10,00,000 | Revenue — zero-rated, no GST line item |
When payment is received:
| Ledger | Dr/Cr | Amount (₹) |
|---|---|---|
| Bank A/c (EEFC or INR account) | Dr | 10,02,000 (if rate favourable) |
| Foreign Debtor A/c | Cr | 10,00,000 |
| Forex Gain A/c | Cr | 2,000 |
Reconciliation note: File the e-BRC (Electronic Bank Realization Certificate) in the GST portal after receiving payment to close the export loop. Link GSTR-1 Table 6B entries (LUT exports) with the e-BRC for completeness. Tally: Mark voucher as "Export" with LUT number in narration.
Entry 9 — Credit Note Issued (Sales Return / Price Correction)
| Ledger | Dr/Cr | Amount (₹) |
|---|---|---|
| Sales Return A/c (or Sales A/c) | Dr | 30,000 |
| Output CGST A/c | Dr | 2,700 |
| Output SGST A/c | Dr | 2,700 |
| Customer A/c (Debtor) | Cr | 35,400 |
Reconciliation note: Credit note reduces your output tax in GSTR-1 Table 9B. Your customer's ITC reduces accordingly after they accept it in IMS. Tally: Use Credit Note voucher (Ctrl+F8), link to original invoice number, buyer must see it in their GSTR-2B and accept via IMS.
Entry 10 — TDS Deduction by PSU/Government Client (Section 51)
| Ledger | Dr/Cr | Amount (₹) | Note |
|---|---|---|---|
| Govt Client A/c (Debtor) | Dr | 3,54,000 | Full invoice amount |
| Service Sales A/c | Cr | 3,00,000 | Revenue |
| Output CGST A/c | Cr | 27,000 | GST charged |
| Output SGST A/c | Cr | 27,000 | GST charged |
| Bank A/c | Dr | 3,48,000 | Actual cash received |
| GST TDS Receivable A/c | Dr | 6,000 | TDS deducted — appears in your GSTR-2A as credit |
| Govt Client A/c | Cr | 3,54,000 | Receipt against full invoice |
Reconciliation note: The ₹6,000 TDS will appear in your GSTR-2A (Section 7 — TDS credits). Offset it against your GSTR-3B output tax. In Tally: Create "GST TDS Receivable" ledger under Current Assets. Verify the government body has filed their GSTR-7 by the 10th — only then will your TDS credit appear on the portal.
GST Clauses Every Organisation Must Include in Manpower Service Agreements
Every year, companies and PSUs across India face GST notices and demands — not because of their own mistakes, but because their manpower vendors didn't comply with GST rules. A security agency didn't file GSTR-1. A transport contractor charged wrong GST rate. A data entry outsourcing firm stopped filing returns mid-contract.
The result? The organisation loses crores of ITC, pays 18% interest, and faces departmental audits for their vendor's sins. The right agreement, written correctly, protects you. Here's a complete GST clause checklist for agreements involving manpower agencies supplying data entry operators, watchmen, security guards, drivers, and similar personnel.
Step 1 — Determine RCM or FCM Before Signing
The single most important determination before any manpower agreement is: Is the agency a body corporate or not? This single fact changes who pays the GST entirely.
Under Notification 13/2017-CT(R) as amended, security services (including supply of security personnel) provided by any person OTHER than a body corporate to a registered person attract Reverse Charge Mechanism (RCM). This means:
- Agency is Proprietorship / Partnership / HUF / LLP → RCM applies → YOU (the recipient) pay 18% GST in cash. Agency issues invoice without GST.
- Agency is Private Limited / Public Limited / OPC (body corporate) → Forward Charge → Agency charges 18% GST on invoice and deposits it. You pay the agency's invoice amount including GST and claim ITC.
Manpower supply services (supply of labour for data entry, clerical work, driving, cleaning, etc.) under SAC 9985 do NOT fall under Notification 13/2017. These are always under Forward Charge — the agency charges GST regardless of their constitution. Your agreement must specify the SAC code to avoid confusion at audit time.
| Service Type | SAC Code | GST Rate | RCM Applicable? | Who Pays? |
|---|---|---|---|---|
| Security guards, watchmen | 998522 | 18% | Yes — if agency is NOT body corporate | Recipient (if RCM); Agency (if body corporate) |
| Data entry operators, clerks (manpower supply) | 998513 | 18% | No — always FCM | Agency charges and pays GST |
| Drivers (manpower supply — not GTA) | 998513 | 18% | No — always FCM | Agency charges and pays GST |
| Housekeeping, cleaning staff | 998532 | 18% | No — always FCM | Agency charges and pays GST |
| Peon, office boy, helper | 998513 | 18% | No — always FCM | Agency charges and pays GST |
| Works contract (skill + material) | 995411+ | 18% | Specific provisions | Varies — check nature of contract |
The 15 Mandatory GST Clauses in Every Manpower Agreement
What to write: "The Service Provider represents and warrants that it holds a valid GST Registration Number [GSTIN: _________] under the Central Goods and Services Tax Act, 2017 and shall maintain such registration throughout the term of this Agreement. The Service Provider shall immediately notify the Client in writing within 7 days of any suspension, cancellation, surrender, or modification of its GST registration."
Why it matters: If the agency's GSTIN is cancelled and you've been claiming ITC on their invoices, all that ITC becomes ineligible from the date of cancellation. GSTN now cross-checks this automatically. Verify the GSTIN at gst.gov.in → Search Taxpayer before every quarterly payment.
Penalty without this clause: ITC reversal + 18% interest from the date of ITC claim if agency registration was cancelled.
What to write: "The Service Provider discloses that it is a [Proprietorship / Partnership Firm / Limited Liability Partnership / Private Limited Company / Public Limited Company] as evidenced by [Certificate of Incorporation / Partnership Deed / Registration Certificate] annexed hereto. The Service Provider shall provide immediate notice of any change in its legal constitution. In the event the Service Provider's constitution changes such that the applicability of Reverse Charge Mechanism under Notification No. 13/2017-CT(R) is affected, the invoicing arrangements under this Agreement shall be modified accordingly within 30 days."
Why it matters: For security services, whether you pay RCM or the agency pays GST under FCM depends entirely on whether the agency is a body corporate. If a partnership firm converts to Pvt Ltd mid-contract, the entire tax treatment flips. Without this clause, you may continue paying RCM when FCM has become applicable — and your self-invoices become wrong documents.
What to write: "The parties acknowledge and agree that the consideration for services under this Agreement, for the purpose of computation of Goods and Services Tax, shall include all components of the invoice value — including but not limited to wages, Employees' Provident Fund (EPF) contributions, Employees' State Insurance (ESI) contributions, bonus, gratuity loading, and any other statutory or contractual payments made by the Service Provider on behalf of deployed personnel, in accordance with applicable GST Authority for Advance Rulings and CBIC clarifications. The GST rate of 18% applies on the total contract value."
Why it matters: Many agencies show EPF/ESI separately and argue it's a "pure reimbursement" (not taxable). GST Officers and AARs have consistently held that unless you can prove actual third-party payment with original receipts AND the arrangement is a pure reimbursement (not part of the service fee), GST applies on the full amount. Audit notices on this point are very common in PSU contracts. Fix the basis in the agreement itself.
What to write: "The Service Provider shall ensure that all tax invoices raised under this Agreement are duly reported in GSTR-1 (or IFF under QRMP scheme) by the 11th of the month following the supply (or within the applicable due date). The Client's ITC eligibility is directly contingent upon such timely filing. In the event the Service Provider fails to file GSTR-1 within the due date and the Client's ITC is denied, reversed, or becomes subject to interest under Rule 36(4) due to such failure, the Service Provider shall indemnify the Client for the full amount of ITC denied and interest thereon within 30 days of a written demand by the Client."
Why it matters: This is the single most litigation-prone issue in service agreements. From April 2026, GSTR-3B will block ITC not reflected in GSTR-2B. If your vendor doesn't file, you don't get the credit. Without this clause, you have no contractual remedy. With this clause, you can legally recover the ITC loss and 18% interest from the agency.
What to write: "All invoices raised by the Service Provider under this Agreement shall be in the format prescribed under Rule 46 of the CGST Rules, 2017, and shall mandatorily contain: (a) Service Provider's GSTIN; (b) Client's GSTIN; (c) Place of Supply with state code; (d) applicable SAC code [998522 for security / 998513 for manpower]; (e) GST amount broken down as CGST and SGST or IGST; (f) Invoice Reference Number (IRN) and QR code where the Service Provider's Aggregate Annual Turnover exceeds ₹5 crore (Five Crore Rupees). Invoices not conforming to this format will not be accepted and payment shall be withheld pending re-issuance of a compliant invoice."
Why it matters: An invoice without your GSTIN means you cannot claim ITC. An invoice without the correct SAC code creates classification disputes at audit. An invoice from a ₹5 crore+ agency without IRN is legally invalid. Payment withholding is your most effective enforcement tool — use it explicitly in the contract.
What to write: "In the event that the Client is required to reverse Input Tax Credit availed on invoices issued by the Service Provider, or is denied ITC by reason of: (a) non-filing or delayed filing of GSTR-1 by the Service Provider; (b) mismatch between invoices issued and amounts declared by Service Provider in GSTR-1; (c) cancellation of Service Provider's GST registration; (d) any GST demand, penalty or interest arising from the Service Provider's non-compliance with any provision of the CGST Act, 2017 or rules made thereunder — then the Service Provider shall fully indemnify and hold harmless the Client for the ITC amount reversed or denied, together with interest at 18% per annum, and any penalty imposed on the Client solely due to the Service Provider's default, within 45 days of written demand."
Why it matters: This clause creates a contractual right to recover your losses. Without it, you'll have to file a civil suit under general contract law — a long process. With this clause, the agency has a contractually defined obligation, including timeline. Many organisations have recovered lakhs using this clause in arbitration.
What to write: "The rate of GST applicable to services under this Agreement as of the date hereof is 18% (Eighteen Percent). In the event of any change in the applicable rate of GST by any statutory amendment, GST Council notification, or government order, the consideration payable under this Agreement shall be adjusted to reflect the revised GST rate from the effective date of such change, without the need for a formal amendment to this Agreement. Both parties agree that such rate changes shall be passed through transparently — the Client shall not absorb any GST rate increase, and the Service Provider shall promptly pass on any GST rate reduction."
Why it matters: GST 2.0 changed rates for several services. If your 3-year manpower contract was signed assuming 12% GST and the rate moved to 18%, who bears the additional 6%? Without this clause, it becomes a dispute. The clause ensures the economic burden is clear and legally enforceable.
What to write: "The Client being a [Government Department / Local Authority / Public Sector Undertaking / Authority established under statute], is required to deduct Tax at Source (GST-TDS) at the rate of 2% (Two Percent) on the taxable value of services under this Agreement where the contract value for a single contract or cumulative supplies in a financial year exceeds ₹2,50,000 (Rupees Two Lakh Fifty Thousand), in accordance with Section 51 of the CGST Act, 2017 read with Rule 66 of CGST Rules, 2017. The Client shall: (a) deduct GST-TDS at source and issue TDS certificate in Form GSTR-7A; (b) deposit the TDS amount with the Government by the 10th of the following month; (c) file GSTR-7 by the 10th of the following month. The Service Provider acknowledges that such TDS deduction reduces the net payment receivable and constitutes a tax credit available to the Service Provider in their Electronic Cash Ledger on the GST portal."
Why it matters: PSUs that fail to deduct GST-TDS face: demand for the undeducted amount + 100% penalty + 18% interest. The agency, not knowing TDS applies, may dispute the deduction. This clause pre-empts all disputes and ensures both sides understand the legal obligation.
What to write: "The Client reserves the right to withhold payment of any invoice, or the relevant GST component thereof, if on the due date of payment: (a) the corresponding invoice has not appeared in the Client's GSTR-2B for the relevant period; (b) the Service Provider's GSTR-1 return for the relevant period is overdue or unfiled; (c) the Service Provider's GSTIN is found to be suspended or cancelled upon verification at gst.gov.in. Such withholding shall not constitute a breach of this Agreement. Upon the Service Provider rectifying the default and the invoice appearing in the Client's GSTR-2B, the withheld payment shall be released within 10 working days."
Why it matters: This is your strongest enforcement tool. Money talks. If an agency knows you'll withhold their payment until you see the invoice in GSTR-2B, they'll file on time every month. Courts have upheld contractual payment withholding linked to GST compliance as a legitimate commercial arrangement.
What to write: "The Client shall have the right to audit and inspect, either directly or through an authorised representative, the Service Provider's GST-related records, including GSTR-1 filings, GSTR-3B filings, Electronic Cash Ledger statements, Electronic Credit Ledger statements, and tax invoices relating to supplies made under this Agreement, upon giving 7 days' written notice. The Service Provider shall preserve all GST-related records for a period of not less than 72 (Seventy-Two) months from the due date of the annual return for the relevant financial year, in accordance with Section 35 of the CGST Act, 2017."
Why it matters: If you face a GST audit regarding the manpower contract, you need to verify that the agency's filed data matches your records. Without this clause, they can refuse access. The 72-month retention mirrors the GST law requirement — your contract must mandate the same period.
What to write: "Where the supply of services under this Agreement is subject to Reverse Charge Mechanism under Notification No. 13/2017-CT(R) (as amended), the Client shall: (a) issue a Self-Invoice in accordance with Rule 47A of CGST Rules within 30 days of the date of invoice received from the Service Provider or the date of payment, whichever is earlier; (b) pay the applicable GST on reverse charge basis in cash through the Electronic Cash Ledger of the Client on the GST portal; (c) declare such inward supplies attracting reverse charge in Table 3.1(d) of GSTR-3B for the relevant tax period; (d) claim ITC on the self-invoiced amount only in the tax period immediately following the period in which RCM tax is paid. The Service Provider shall NOT charge GST on its invoice for RCM-applicable services and shall clearly indicate 'Reverse Charge Applicable' on each invoice."
Why it matters: Missing a self-invoice = RCM tax not recorded = demand + penalty. Claiming RCM ITC in the same month as payment (instead of next month) = wrong ITC = reversal + interest. This clause clarifies the exact procedure for both parties, preventing expensive compliance mistakes.
What to write: "The Service Provider shall, by November 30 each year, provide the Client with a reconciliation statement confirming: (a) total supplies made to the Client during the preceding financial year; (b) GST charged on such supplies; (c) GST declared in GSTR-1 for each month/quarter; (d) GST paid in GSTR-3B; and (e) any discrepancies between invoices issued and amounts declared in GST returns. This reconciliation shall be used by the Client for preparation of its annual GSTR-9 return and GSTR-9C reconciliation statement. The Service Provider shall cooperate fully in resolving any reconciliation differences within 30 days of identification."
Why it matters: Your GSTR-9C requires reconciling GSTR-9 data with audited financials. If the agency's declared figures don't match your records, GSTR-9C differences arise — which invite GST officer queries. Having the agency contractually commit to providing reconciliation data annually makes your year-end compliance much smoother.
What to write: "The Service Provider shall not subcontract any part of the services under this Agreement without prior written consent of the Client. Where sub-contracting is permitted, the Service Provider shall: (a) ensure that all sub-contractors are GST-registered; (b) obtain valid tax invoices from sub-contractors with correct GSTIN, SAC code, and GST amounts; (c) ensure sub-contractors file their GST returns timely; and (d) ensure that the supply chain remains GST-compliant at all levels. The Service Provider shall not benefit from any arrangement involving unregistered sub-contractors where GST leakage may occur, and shall indemnify the Client against any GST liability arising from sub-contractor non-compliance."
Why it matters: A common GST fraud scheme involves a large registered agency sub-contracting to small unregistered firms — collecting GST from you but not depositing it in full. The agency claims ITC from sub-contractors who don't actually file — creating fake ITC chains that GST officers trace back to the principal recipient (you). This clause creates liability accountability throughout the supply chain.
What to write: "The Service Provider confirms that any reduction in the rate of GST applicable to services under this Agreement, or any additional ITC benefit made available to the Service Provider pursuant to any amendment to the CGST Act or Rules, shall be passed on to the Client by way of a corresponding reduction in the service charges or other arrangement as mutually agreed, in compliance with Section 171 of the CGST Act, 2017 (Anti-Profiteering provisions). The Service Provider shall not retain any GST rate reduction benefit without passing it to the Client."
Why it matters: Section 171 makes it illegal to retain GST rate reduction benefits without passing them to customers. Complaints to the National Anti-Profiteering Authority can result in penalties on the agency AND embarrassment to the organisation that kept paying old inflated rates. This clause creates a contractual mechanism ahead of statutory enforcement.
What to write: "Any dispute arising specifically in relation to the GST treatment, GST rate applicability, RCM determination, ITC eligibility, or any other GST-related matter under this Agreement shall first be attempted to be resolved by reference to the relevant provisions of the CGST Act, 2017, IGST Act, 2017, applicable CBIC notifications, circulars, and GST Council clarifications. The parties agree to seek an Advance Ruling from the GST Authority for Advance Rulings (AAR) jointly or individually for any genuine classification dispute, and shall abide by such ruling for the term of this Agreement. General disputes under this Agreement shall be resolved by [arbitration / competent court — as applicable]."
Why it matters: GST disputes are technical and fact-specific. Courts are not always the right forum — AARs exist precisely for this. A clause pointing to AARs for GST classification questions, before litigation begins, saves both parties enormous time and cost. Many manpower contract disputes (RCM vs FCM, EPF/ESI taxability) have clear AAR precedents — use them.
Pre-Signing GST Verification Checklist — 10 Things to Check Before You Sign
| # | Check This | How to Verify | Risk if Missed |
|---|---|---|---|
| 1 | Agency's GSTIN is active and valid | gst.gov.in → Search Taxpayer → enter GSTIN | ITC denied if GSTIN invalid |
| 2 | Constitution of agency (body corporate vs others) | Check MCA portal / Certificate of Incorporation / GSTIN registration details | Wrong RCM/FCM treatment = demand + penalty |
| 3 | Agency's GSTR-1 filing history (last 12 months) | gst.gov.in → Search Taxpayer → Return Filing Status | Past non-filer = likely future non-filer = ITC risk |
| 4 | Correct SAC code confirmed in agreement and invoice format | cbic-gst.gov.in → SAC finder tool | Classification dispute, wrong rate charged |
| 5 | RCM or FCM clearly determined and stated in agreement | Notification 13/2017-CT(R) (for security); SAC 9985 list for manpower | Both parties paying or neither paying GST |
| 6 | E-invoice requirement checked (if agency AATO >₹5 crore) | Ask for previous year's GSTR-9 or ITR to assess AATO | Invalid invoices, ITC denied to you |
| 7 | GST on EPF/ESI agreed and documented | Get agency's AAR ruling or written CA opinion | Demand for GST on EPF/ESI reimbursements |
| 8 | TDS applicability under Section 51 (for PSUs) | Check your organisation's legal status — PSU/govt body triggers Section 51 | 100% penalty for non-deduction + interest |
| 9 | LUT status of agency (if they export any services) | Not usually relevant for manpower — but check if agency has mixed activities | Cross-contamination of GSTIN records |
| 10 | Agreement period and GST return period alignment | Ensure payment cycles align with GSTR-2B generation (14th of month) | ITC timing gaps cause monthly cash flow issues |
- Re-verify agency GSTIN status (not cancelled or suspended)
- Obtain updated constitution document (partnership firms can convert to company)
- Verify agency's AATO for e-invoice threshold applicability
- Confirm fresh GTA declaration if drivers are supplied under GTA arrangement
- Review GST rate changes from the new financial year — update contract value if rates changed
- Cross-verify GSTR-9 of agency (once available) against your purchase records for the year
- Issue fresh indemnity undertaking request from agency if annual reconciliation shows differences
- Mistake 1 — Treating all security agencies as FCM: A proprietorship security firm is RCM. Many PSU finance teams, unfamiliar with Notification 13/2017, just pay the agency's invoice with GST and claim ITC — which is wrong. The self-invoice obligation was on the PSU, not the agency. Result: demand for the GST the PSU should have paid as RCM, plus 100% penalty under Section 74 (wilful misstatement by omission).
- Mistake 2 — Not claiming ITC reversal when manpower is used for exempt activities: If your PSU has exempt activities (hospital wing, canteen for employees, residential quarters), the security and manpower ITC attributable to those wings must be reversed under Rule 42. Missing this for years = huge demand at audit.
- Mistake 3 — Paying agency bills without GSTR-2B match verification: Finance teams approve payment as soon as invoice is received. But if the agency hasn't filed GSTR-1, ITC won't appear in GSTR-2B, and claiming it in GSTR-3B will be blocked or denied. Implement a mandatory GSTR-2B verification step before every vendor payment approval.
GSTIN — Decoding Every Digit of Your 15-Character Tax Identity
Your GSTIN is not a random string. Every single character carries specific legal information — the state where you're registered, your PAN, what type of entity you are, and how many GST registrations you hold in that state. Knowing how to read a GSTIN can save you from accepting wrong invoices, identifying fraudulent vendors, and understanding your counterparty's legal constitution before signing a contract.
The 15-Digit GSTIN Structure — Character by Character
Example: 21AABCP1234A1Z8 — An Odisha-registered entity, entity type P (Individual/Proprietor), first registration in state.
Breaking Down Each Component
Digits 1–2 — State Code
The first two digits identify the state of registration. If a business has GST registrations in multiple states, each state gets a separate GSTIN with a different state code prefix — all sharing the same PAN digits in positions 3–12.
| Code | State / UT | Code | State / UT | Code | State / UT |
|---|---|---|---|---|---|
| 01 | Jammu & Kashmir | 14 | Manipur | 27 | Maharashtra |
| 02 | Himachal Pradesh | 15 | Mizoram | 28 | Andhra Pradesh (pre-bifurcation) |
| 03 | Punjab | 16 | Tripura | 29 | Karnataka |
| 04 | Chandigarh (UT) | 17 | Meghalaya | 30 | Goa |
| 05 | Uttarakhand | 18 | Assam | 31 | Lakshadweep |
| 06 | Haryana | 19 | West Bengal | 32 | Kerala |
| 07 | Delhi | 20 | Jharkhand | 33 | Tamil Nadu |
| 08 | Rajasthan | 21 | Odisha | 34 | Puducherry (UT) |
| 09 | Uttar Pradesh | 22 | Chhattisgarh | 35 | Andaman & Nicobar (UT) |
| 10 | Bihar | 23 | Madhya Pradesh | 36 | Telangana |
| 11 | Sikkim | 24 | Gujarat | 37 | Andhra Pradesh (new) |
| 12 | Arunachal Pradesh | 25 | Daman & Diu (merged into 26) | 96 | Other Territory / Foreign |
| 13 | Nagaland | 26 | Dadra & Nagar Haveli and D&D | 97 | Other Country (import services) |
Digits 3–12 — The 10-Digit PAN
These ten characters are the entity's PAN number, embedded verbatim. This is why GST registration requires a PAN — it's the backbone of the GSTIN. The PAN structure itself encodes critical information:
Digit 4: Second letter — alphabetic
Digit 5: Third letter — alphabetic
Digit 6 (4th of PAN): ENTITY TYPE INDICATOR — the most important character
Digit 7 (5th of PAN): First letter of surname (for individuals) or first letter of entity name
Digits 8–11 (6th–9th of PAN): Unique sequential number (0000–9999)
Digit 12 (10th of PAN): Alphabetic check character (computed by Income Tax Department)
Digit 6 (4th Character of PAN) — The Entity Type Code
This single character is your window into the legal constitution of any GST-registered entity. It directly affects RCM applicability, TDS obligations, and ITC eligibility.
| 4th PAN Char (Digit 6 of GSTIN) | Entity Type | GST Constitution Description | RCM Impact |
|---|---|---|---|
| P | Person / Individual Including Sole Proprietors |
Individual human beings. Sole proprietors use owner's PAN — so sole proprietor GSTIN shows 'P', same as a salaried individual. Cannot tell apart by GSTIN alone. | If security/manpower provider and not a body corporate → RCM applies on recipient |
| C | Company | Private Limited, Public Limited, OPC (One Person Company), Section 8 Company. Incorporated under Companies Act. | Body corporate → FCM applies (agency charges GST on invoice) |
| H | Hindu Undivided Family (HUF) | Family business managed by Karta (head of family). Common in trading, agriculture, real estate. | Not a body corporate → RCM may apply for security/manpower |
| F | Firm / Partnership / LLP | Partnership firms, LLPs. Very common for professionals (CA firms, law firms, doctor partnerships). | Not body corporate → RCM applies for security/manpower if unregistered or below threshold |
| A | Association of Persons (AOP) | Groups formed for a common purpose — clubs, societies, certain cooperative bodies. | Not body corporate → check RCM applicability |
| T | Trust | Charitable trusts, religious trusts, private trusts. Includes hospitals and educational bodies registered as trust. | Not body corporate → RCM applicability to be checked |
| B | Body of Individuals (BOI) | Similar to AOP but constituted differently. Less common in business context. | Not body corporate |
| L | Local Authority | Municipal corporations, panchayats, port trusts, development authorities. Subject to TDS deduction obligations under Section 51. | TDS deductor obligations apply; body corporate status depends on specific entity |
| J | Artificial Juridical Person | Entities not covered elsewhere — universities, statutory corporations with special legal status. | Check specific legal constitution |
| G | Government | Central government, state governments, government departments with PAN. These GSTINs typically have no tax payable — they register to facilitate ITC flow for suppliers. | Mandatory TDS deductor under Section 51; all purchases attract 2% GST TDS |
Digit 13 — Entity Count (Multiple Registrations in Same State)
A single PAN can have multiple GST registrations in the same state — for example, a company with two separate business verticals operating in Maharashtra might get two GSTINs for Maharashtra. Digit 13 tracks this count:
- 1 — First (and usually only) GST registration for that PAN in that state. This is the most common value you'll see.
- 2, 3… up to 9 — Second, third… additional registrations for the same PAN in the same state (separate business verticals).
- A, B, C… up to Z — Continues when registrations exceed 9 (rare but possible for large conglomerates with many verticals).
- What it tells you: If digit 13 is '2' or higher, the entity has multiple business units in that state. Check whether you're dealing with the correct vertical — invoices from one vertical's GSTIN cannot be used to claim ITC for a different vertical unless they have an ISD registration.
Digit 14 — Always 'Z'
Currently reserved and always set to 'Z'. The GST law kept this position for future use — if GST ever needs to track additional attributes beyond what the current 15-digit format captures. For now, any GSTIN with a character other than 'Z' in position 14 is invalid.
Digit 15 — Check Digit (Alphanumeric)
Computed using a Luhn Mod-36 algorithm applied to the first 14 characters. This is a mathematical checksum — if anyone tampers with even one character of a GSTIN, the check digit will fail. GST portal validation uses this to instantly flag fake or mistyped GSTINs without making a database lookup.
How to Identify Entity Type in Practice — And Why It Matters
Both a salaried individual and a sole proprietor get a 'P' type PAN and therefore a 'P' in position 6 of their GSTIN. A freelance graphic designer with GSTIN 33AAXPP1234A1Z5 and a sole proprietor running a security agency with GSTIN 33AAXPP5678B1Z3 both show 'P'. To confirm whether it is a sole proprietorship (and not a registered company), you must go to: gst.gov.in → Search Taxpayer → enter GSTIN → check "Constitution of Business" field. This field will show: Proprietorship, Partnership, Company, etc. This is critical before signing manpower contracts (determines RCM vs FCM).
- 21 → Odisha (state code 21)
- AAFCS2345B → PAN = AAFCS2345B
- → 4th character of PAN = C → Entity type: Company (Private or Public Limited)
- → 5th character of PAN = S → Company name starts with 'S'
- 1 → First GST registration for this PAN in Odisha
- Z → Always Z (reserved)
- 6 → Check digit (validates authenticity)
- Conclusion: This is a company registered in Odisha. Since it's a body corporate (C-type PAN), if you hire them for security services, FCM applies — they charge you GST on invoice. No RCM obligation for you.
Verifying a GSTIN — Step by Step on the GST Portal
Go to gst.gov.in → Services → Search Taxpayer → Search by GSTIN/UIN
No login required. Enter the 15-digit GSTIN of your vendor, customer, or counterparty.
Check Registration Status — Must Show "Active"
"Active" means the GSTIN is valid and the entity can charge GST and issue valid tax invoices. "Cancelled," "Suspended," or "Inactive" means any invoice from this date onwards is invalid for ITC claim.
Verify: Legal Name, Trade Name, Constitution of Business, Principal Place of Business
Ensure the legal name matches your contract and invoice. Mismatched name = potential ITC dispute. Constitution of Business tells you Proprietorship / Partnership / Private Ltd / Public Ltd etc. — use this, not just the PAN character.
Check Return Filing Status
Click "View" next to "Last Filed Returns." If the vendor hasn't filed GSTR-1 for the past 2–3 months, be cautious — their current invoices may not appear in your GSTR-2B, blocking your ITC until they file.
GST TDS — How It Works, How to Accept It, and How Not to Lose It
TDS under GST is completely different from TDS under Income Tax. In income tax, TDS reduces your tax liability. In GST, TDS under Section 51 of the CGST Act is deducted by the buyer (usually a government entity or PSU) from your payment and deposited directly to the government on your behalf. It then appears as a credit in your Electronic Cash Ledger — which you can use to pay your GST dues.
Think of it this way: you raise a ₹10 lakh invoice to a government department. Instead of paying you ₹10 lakh + ₹1.8 lakh GST = ₹11.8 lakh, they pay you ₹11.6 lakh and deduct ₹20,000 (2% TDS on ₹10 lakh) — depositing it directly to the GST government treasury. That ₹20,000 belongs to you — it's not lost. It sits in your Electronic Cash Ledger on the GST portal waiting for you to use it.
Who Must Deduct GST TDS — Section 51 Deductors
Central and State Government Departments
Any government department making a payment for taxable supplies — Public Works Department, Forest Department, Health Department, Education Dept, etc. Includes autonomous bodies set up by the government.
Public Sector Undertakings (PSUs)
Companies where government holds more than 51% — SAIL, ONGC, NALCO, BPCL, state electricity boards, state water boards, and all notified PSUs. Check each organisation's notification status at cbic.gov.in.
Local Authorities
Municipal corporations, panchayati raj institutions, port trusts, cantonment boards, and development authorities (housing boards, industrial development corporations).
Persons and Entities Notified by Government
The GST Council and CBIC can notify additional entities as TDS deductors. Check Notification 50/2018-CT and subsequent amendments for the current list.
GST TDS Rate and Threshold — What Triggers Deduction
→ 1% CGST + 1% SGST for intrastate supplies
→ 2% IGST for interstate supplies
Threshold: TDS is deducted only when the value of individual contract exceeds ₹2.5 lakh
(Contracts below ₹2.5 lakh — no TDS deduction obligation, even for government bodies)
Exemptions — No TDS when:
— Supplier is unregistered (they can't claim TDS credit without GSTIN)
— Supply is exempt from GST (zero rate, nil rate, exempted supplies)
— Payment is for purchase of goods covered under the composition scheme
— Both supplier and deductor are in SEZ
From FY 2026-27, deductors must report TDS invoice by invoice in GSTR-7 — not as lump sum. This means each payment against each invoice is tracked separately. As a supplier, you can now cross-verify: "Did the government department deduct TDS on invoice INV-2026-105 dated 15 April 2026 for ₹5 lakh?" You can match it to the exact transaction. This also means wrong GSTIN errors are now caught invoice-by-invoice — making it both easier to claim and easier to detect errors early.
The Full GST TDS Flow — From Deduction to Your Pocket
Issue Tax Invoice with GSTIN, SAC/HSN, GST amount
Example: Invoice for ₹10,00,000 + 18% GST = ₹11,80,000. Your GSTIN and the government entity's GSTIN (yes, they must also be GST-registered as TDS deductors) are both on the invoice.
They deduct 2% TDS on ₹10,00,000 = ₹20,000
They pay you ₹11,60,000 (₹11,80,000 minus ₹20,000 TDS). The ₹20,000 is held back — not paid to you. They deposit it to government.
Your TDS credit is formally reported
The government entity/PSU files GSTR-7 mentioning: your GSTIN, invoice details, amount, TDS deducted (₹20,000), deposited to government. From April 2026, this is invoice-wise.
You can see ₹20,000 waiting in the portal
Log in to gst.gov.in → Returns → TDS and TCS Credit Received. The ₹20,000 appears here. Status: "Unaccepted." It sits here until you take action.
₹20,000 moves to your Electronic Cash Ledger
After you accept, the ₹20,000 instantly appears in your Electronic Cash Ledger — available to pay your GST dues in your next GSTR-3B. Net effect: you've effectively received the full ₹20,000 government deducted.
Step-by-Step: How to Accept or Reject TDS Credits on the GST Portal
Login → gst.gov.in → Your GSTIN → Services → Returns → TDS and TCS Credit Received
This dedicated section shows all TDS entries credited by government deductors against your GSTIN. You'll see entries month-wise, with deductor's GSTIN, invoice details, amount, and TDS deducted.
Select the Return Period (Month/Year) → Click "Prepare Online"
TDS credits are period-specific. If a government department filed their GSTR-7 for April 2026 (deducting TDS on your April invoice), you'll see it under the April 2026 period.
Review Each Entry — Cross-Check Against Your Records
For each TDS entry, verify: (a) Deductor's GSTIN is correct, (b) Invoice number matches your books, (c) Taxable value matches your invoice, (d) TDS amount = 2% of taxable value, (e) Tax type is correct (CGST+SGST for intrastate, IGST for interstate). See detailed checklist below.
Accept — If All Details Are Correct
Click "Accept." The TDS amount flows immediately into your Electronic Cash Ledger — it's now your money on the portal, usable for paying CGST, SGST, or IGST in your next GSTR-3B. You can also claim refund of excess TDS if you have no GST dues.
Reject — If There is an Error
Click "Reject" and the entry goes back to the deductor's account. The deductor must then file an amendment in their next GSTR-7 with the correct details. The corrected entry will reappear in your TDS credit section after they file. Do not accept wrong entries — accepted TDS credits cannot be reversed easily.
What to Check Before Accepting TDS Credit — 10-Point Verification
| # | What to Verify | How to Check | Risk if Wrong |
|---|---|---|---|
| 1 | Your own GSTIN is correct in the TDS entry | Match against your registration certificate — all 15 characters | If wrong GSTIN → credit goes to someone else → your accounts show unrecovered TDS → reconciliation nightmare |
| 2 | Deductor's GSTIN is valid and matches the government entity you supplied to | Note deductor GSTIN → verify at gst.gov.in → Search Taxpayer | Fraud or error — wrong entity filed TDS. Don't accept credits from unknown GSTINs. |
| 3 | Invoice number matches your records exactly | Cross-reference with your sales register / invoice book | If invoice number wrong → GSTR-9 reconciliation mismatch; may indicate the deductor confused two suppliers |
| 4 | Taxable value matches the payment you received | Match with your accounts receivable ledger for that bill | Over-deduction means you received less cash than entitled — must get corrected before acceptance |
| 5 | TDS = exactly 2% of taxable value | Compute manually: TDS ÷ Taxable Value × 100 = should be exactly 2.00% | Over-deduction (3% or more) = deductor error → reject and ask for correction |
| 6 | Tax type correct: CGST+SGST vs IGST | Was it intrastate supply (same state)? → CGST+SGST. Interstate? → IGST | Wrong tax type = cash ledger credit in wrong head → cannot offset against correct output tax liability without extra steps |
| 7 | Month/Period is correct | TDS should correspond to the month when payment was made, not when you raised the invoice | Wrong period → may affect which GSTR-3B you can use this credit in |
| 8 | Contract value exceeds ₹2.5 lakh threshold | Check your work order / purchase order — if contract is below ₹2.5L, no TDS should have been deducted | TDS on contracts below ₹2.5L is an excess deduction — you're entitled to full amount; reject and claim from deductor |
| 9 | Supply was taxable (not exempt) | Verify your invoice has taxable GST — if supply was exempt, no TDS should have been deducted | TDS on exempt supplies = wrong deduction; reject |
| 10 | Not already accepted in a previous period | Check your Electronic Cash Ledger history — ensure you haven't already received this TDS credit | Duplicate acceptance would give you double credit, which is fraud; GSTN may auto-flag this |
Time Limit to Accept GST TDS Credits — The Deadlines You Must Not Miss
- No explicit monthly deadline: Unlike income tax TDS, GST law does not require you to accept TDS credit in the same month it appears. You can accept it in a subsequent period.
- Practical deadline — Before GSTR-9 filing (31 December): All TDS credits for FY 2025-26 should ideally be accepted before you file your GSTR-9 (due 31 December 2026). Unaccepted TDS credits as on the GSTR-9 filing date create reconciliation differences between your books (showing TDS as receivable) and GST returns (not showing it as received).
- Section 16(4) connection: The broader deadline of 30 November of the following year applies as a safe outer boundary. Beyond this, any unaccepted TDS credit will create permanent reconciliation issues in your GSTR-9 and audit records.
- Monthly best practice: Check and accept TDS credits every month — ideally before filing GSTR-3B. This way your Electronic Cash Ledger reflects all available funds when computing your net cash payable for the month.
- FY 2026-27 TDS credits: Must be accepted by 30 November 2027 (outer limit, aligned with Section 16(4)) or earlier when filing GSTR-9 for FY 2026-27 (expected 31 December 2027).
A transport contractor (M/s Speedways Logistics, GSTIN: 21AABCS1234A1Z5) raises invoice for ₹8,00,000 + 18% GST = ₹9,44,000 to OSWC for cargo transport services in October 2026.
OSWC's action (as deductor): Pays ₹9,24,000 (₹9,44,000 − ₹20,000 TDS at 2% of ₹10L base). But wait — contract value ₹8L, not ₹10L. TDS = 2% × ₹8,00,000 = ₹16,000. So OSWC pays ₹9,28,000 and deposits ₹16,000 as TDS. Files GSTR-7 by 10 November 2026.
Speedways' verification checklist:
- Log in → TDS and TCS Credit Received → October 2026 period
- See: Deductor GSTIN 21AAGOW1234A1Z5 (OSWC), Invoice: INV-2026-088, Taxable Value: ₹8,00,000, TDS: ₹16,000 — matches their records ✓
- Tax type: CGST ₹8,000 + SGST ₹8,000 (intrastate, both Odisha) ✓
- Click Accept → ₹16,000 credited to Electronic Cash Ledger
- In November GSTR-3B: Output tax = ₹1,44,000 (18% on Oct sales) minus ITC ₹1,20,000 = ₹24,000 net payable. Uses ₹16,000 from TDS credit. Cash to pay: only ₹8,000.
GST TDS vs Income Tax TDS — Key Differences
| Aspect | GST TDS (Section 51 CGST Act) | Income Tax TDS (Section 194C/194J etc.) |
|---|---|---|
| Applicable tax | GST (Goods and Services Tax) | Income Tax |
| Rate | 2% of taxable value of supply | 1%–10% depending on nature of payment |
| Threshold | Contract value > ₹2.5 lakh | Payment-type specific (₹30,000 to ₹1L+) |
| Who deducts | Only specified government entities, PSUs, local bodies | Any specified person making above-threshold payments |
| Deducted on | Taxable value (base price before GST) | Gross payment amount |
| Where it goes | Supplier's Electronic Cash Ledger on GST portal | Supplier's Form 26AS on Income Tax portal |
| How to claim | Accept in TDS/TCS Credit section → offset against GSTR-3B liability | Claim in income tax return as advance tax paid |
| Both apply simultaneously? | Yes — same payment can attract both GST TDS (2%) AND income tax TDS (1–2%). Both are deducted by the paying government entity. | |
New Financial Year — Direct Tax Code and Its Effect on GST
The new Income Tax Act, 2025 (replacing the Income Tax Act, 1961) was introduced in Parliament with an effective date of 1 April 2026. One major structural change discussed was whether to shift India's financial year to a calendar year (January–December), as recommended by various committees. However, as of the enacted version effective from 1 April 2026:
- GST financial year remains April 1 to March 31 — defined in Section 2(21) of the CGST Act, 2017 as "financial year means the year commencing on the 1st day of April." This has not been amended along with the new income tax code.
- What changed under new direct tax code: The new Income Tax Act uses the term "tax year" instead of "previous year" / "assessment year" — simplifying income tax terminology. The tax year runs April 1 to March 31 — same as before. No change to the April–March cycle for income tax either.
- Implication: All GST deadlines (GSTR-9 by 31 December, Section 16(4) by 30 November, GSTR-3B by 20th of month) remain unchanged. The financial year for GST compliance continues as 1 April 2026 to 31 March 2027 for FY 2026-27.
- However — watch for CBIC notifications: If Parliament later amends Section 2(21) of CGST Act to align with any future calendar-year shift in direct taxes, all GST deadlines would shift accordingly. Subscribe to CBIC notifications at cbic.gov.in for real-time updates.
| Old IT Term | New IT Term (from 1 April 2026) | GST Equivalent |
|---|---|---|
| Previous Year | Tax Year (April–March) | Financial Year (April–March) |
| Assessment Year | Assessment Year (one year after tax year) | No equivalent — GST is self-assessed |
| Assessing Officer | Tax Authority | Proper Officer (GST) |
| Demand under Section 156 | Demand Notice | DRC-07 (GST demand) |
| Penalty under Section 271 | Penalty Provisions | Sections 122–138 CGST Act |
Powered by AI · April 2026 Provisions
Comments
Post a Comment