Goods and Services Tax (GST) is the tax you charge customers on most sales and pay the government, minus the GST you already paid on your own purchases. That "minus" is the whole game. Understand it well and GST is a clean pass-through that barely touches your economics. Misunderstand it and you will overprice, overpay, or quietly bleed margin. This lesson shows you how the mechanics translate into real numbers on your P&L.
What GST actually is for your startup
When you sell, you collect GST on top of your price. That money is never yours: it is a liability you hold on the government's behalf until you remit it. When you buy inputs (software, hosting, professional fees, raw materials), you pay GST to your suppliers. As a registered business you can offset the GST you collected against the GST you paid, and send only the difference to the government. Since 22 September 2025, the main rate slabs are 5%, 18%, and 40% (plus 0% for exempt items), after the 12% and 28% slabs were removed. Most services and standard goods sit at 18%.
Registration thresholds: when you must sign up
You must register for GST once your aggregate turnover in a financial year crosses:
- Goods: ₹40 lakh (₹20 lakh in special category states).
- Services: ₹20 lakh (₹10 lakh in special category states).
Some situations force registration from the very first rupee, regardless of turnover: making inter-state taxable supplies of goods, and selling goods through an e-commerce operator. Many founders also register voluntarily so they can claim input credit and so that business customers will buy from them.
Input tax credit and your real margin
Input Tax Credit (ITC) is what lets GST leave your margin untouched. Suppose you provide a service and invoice a client ₹1,00,000 plus 18% GST, so you collect ₹18,000. To deliver it you spent ₹20,000 on software and tools, on which you paid ₹3,600 GST. Your net GST payable is ₹18,000 minus the ₹3,600 credit, which is ₹14,400 to the government. The ₹3,600 credit means your software really cost you ₹20,000, not ₹23,600.
Two lessons follow. First, compute margins on your ex-GST numbers (₹1,00,000 of revenue against ₹20,000 of cost), never on the GST-inclusive totals. Second, ITC only helps when your customer is also GST-registered and can reclaim what you charge. For business (B2B) buyers, GST is invisible to their cost. For retail (B2C) or unregistered customers, GST raises the price they actually feel, so factor that into how price-sensitive segments respond.
To legally claim ITC under Section 16, four things must all be true: you hold a valid tax invoice, you have received the goods or services, the invoice appears in your auto-drafted GSTR-2B (meaning the supplier filed and paid), and you have filed your GSTR-3B. You must also pay the supplier within 180 days, or the credit reverses with interest until you do.
Common errors that cost founders money
- Treating collected GST as revenue. It is a liability, not income. Founders who spend it face a cash crunch at filing time.
- Claiming credit that is not in GSTR-2B. If your supplier has not filed, you cannot claim, no matter what your invoice says. Vet vendor compliance before you buy.
- Claiming blocked credits. Under Section 17(5), items such as personal expenses, most motor vehicles, and food and beverages (for example, client entertainment) are ineligible. Claiming them invites reversal and penalties.
- Missing the claim deadline. ITC for a financial year must be claimed by 30 November of the following year (or the date you file the annual return, whichever is earlier). After that, the credit is lost.
- Choosing the composition scheme carelessly. It offers low flat rates for turnover up to ₹1.5 crore (goods) or ₹50 lakh (services), but you cannot claim ITC, cannot charge GST to customers, and cannot make inter-state supplies. Great for small B2C sellers, usually wrong for B2B startups.
The habit to build: track GST separately from revenue, reconcile your purchases against GSTR-2B every month, and always reason about pricing and margins on ex-GST figures.