GST for startups

GST is a single indirect tax that replaced many older taxes in 2017. A business adds it to the price it charges a customer, collects it and passes it to the government. Because the business is only a collector, GST is not a cost for a registered firm unless it cannot claim credit on its own purchases.

There are three parts. CGST goes to the central government and SGST to the state when a sale is within one state. IGST is a single tax charged on sales between states and on imports. The part the government gets is the same either way.

The standard limit for registration is yearly turnover above ₹40 lakh for a business that only sells goods, and ₹20 lakh for a business that sells services or a mix. For special category states, mostly in the north-east and hill regions, the limits are lower. These limits have been in place since 2019, and as of October 2026 the GST Council has not announced a change that I could confirm. Check the GST portal or a professional for the current numbers in your state.

Several cases need registration whatever your turnover. Selling goods across state lines generally needs it. So does selling goods or services through an e-commerce operator, with some exceptions. Many startups register early anyway, since large customers want GST invoices and a registered firm can claim credit.

Following reforms announced in September 2025, most goods and services now fall into two main rates, 5% and 18%, with a high 40% rate for a short list of sin and luxury goods. Most software and IT services, digital services, consulting and many business services are taxed at 18%. Some items, such as essential foods and health items, are at zero or 5%, and some services are exempt.

Rates move through Council decisions, so always check the rate for your product's category before you price it. Wrong rates lead to unpaid tax, interest and penalties.

Input tax credit (ITC) lets you subtract the GST you paid on business purchases from the GST you collected on sales. If you charged customers ₹10 lakh in GST and paid ₹6 lakh on your cloud, ads, rent and equipment, you pay the government only ₹4 lakh.

Credit has conditions: you hold a valid tax invoice, the supplier has filed its return and paid the tax, and the purchase is for business. Some items, such as certain personal-use goods, are blocked. A startup that sells exempt services cannot claim credit on the related purchases. Early-stage companies often have large expenses and small sales, so they may accumulate credit that they cannot use quickly.

Exports of goods and services are zero-rated. That means no GST on the sale, and you can still claim credit on your purchases. A software startup that sells to overseas clients and gets paid in foreign currency can export under a Letter of Undertaking (LUT), a yearly filing that lets it export without paying IGST first, and then claim refunds of any unused credit.

The conditions are strict. The customer must be outside India, the service must be delivered to a person outside India, and the payment must normally come in convertible foreign exchange. Services to a customer's Indian office may not count as exports, so check the facts of each contract.

E-commerce platforms collect tax at source (TCS) on sales made through them and report each seller's turnover. Sellers who supply goods through such platforms generally need to register and cannot use the composition scheme. Marketplace startups themselves charge GST on their commission or fees, and in some cases must pay GST on a seller's service, for example for ride-hailing or food delivery, under rules the Council has set.

A startup that imports digital services or pays an overseas vendor may have to pay GST on a reverse-charge basis, which means the buyer pays the tax instead of the seller. Examples are foreign software, advertising and consulting bills. This is easy to miss and a common cause of notices.

A registered business files monthly or quarterly returns: GSTR-1 for outward sales and GSTR-3B for a summary and payment. Larger firms file an annual return and, above a turnover limit, a reconciliation statement. Late filing brings fees and interest, and wrong credit claims bring penalties. Every state in which you have a place of business needs its own registration.

Many startups use accounting software linked to the GST portal, and a chartered accountant for filings. The composition scheme, a simpler regime with a flat low tax rate and no credit, rarely suits a startup because it does not allow inter-state sales or most online selling. This guide is general information as of October 2026, not tax advice, so check with a qualified professional.