Indirect Taxation in India: A UK Business Guide to GST, Types and Compliance

If your UK business is planning to trade with India, set up a subsidiary, or work with Indian suppliers, understanding indirect taxation in India is one of the first things to get right — and it's something the team at VenturEasy helps businesses navigate every day. India's tax system can look unfamiliar at first, but the basics are more straightforward than they appear, and several changes in the past year have made things simpler still.

This guide explains what indirect tax means in India, the main types you'll come across, how GST works, and what compliance actually involves for a business like yours.

What Is Indirect Taxation in India?

Indirect taxation is tax collected on transactions rather than on income. A business charges the tax to its customer as part of the price, then pays it on to the government. It's a similar principle to VAT in the UK, though the mechanics differ in several important ways.

Where UK VAT has one standard rate plus a reduced and zero rate, India's Goods and Services Tax works through several linked components and a small set of rate bands, which we'll cover below.

Direct Tax vs Indirect Tax: The Key Difference

For a UK business, this distinction matters in practice: your Indian income tax obligations on profits run entirely separately from your GST obligations on transactions, and both need their own compliance calendar.

Types of Indirect Tax in India

India's indirect tax system rests on three main pillars:

• Goods and Services Tax (GST) – the primary tax on the sale of goods and services, and the one most UK businesses will deal with directly

• Customs duty – charged on goods imported into or exported from India

• Central excise duty – still applied to a small number of specific goods (mainly petroleum and tobacco products) that sit outside GST

For most UK companies trading with or operating in India, GST types in India and customs duty are the two areas that matter most day to day.

GST Explained: CGST, SGST, IGST and UTGST

GST is not a single flat charge. It splits into four components depending on where a transaction takes place:

• CGST (Central GST) – the central government's share on sales within a state

• SGST (State GST) – the matching state government share on the same sale

• IGST (Integrated GST) – applied instead of CGST/SGST when goods or services move between states

• UTGST (Union Territory GST) – the equivalent of SGST for India's union territories

In practice, a sale within one Indian state is charged CGST plus SGST, while a sale between two states is charged IGST instead. This is roughly comparable to how VAT works across EU member states, though India applies the split within a single country rather than across borders.

GST 2.0: The 2026 Rate Reform

This is the part most guides on this topic still haven't caught up with. In September 2025, the GST Council simplified India's rate structure through a reform now known as GST 2.0. The old four-tier system (5%, 12%, 18% and 28%) was cut down to three main slabs:

• 5% – everyday essentials and household goods

• 18% – the default rate covering most goods and services, including electronics, cars under certain engine sizes, and construction materials

• 40% – luxury and "sin" goods, such as premium vehicles, tobacco and gambling services

A handful of items remain at 0% or a small number of special low rates. According to the Central Board of Indirect Taxes and Customs (CBIC), which administers GST at the national level, the reform was designed specifically to reduce classification disputes and simplify compliance for businesses. For a UK business pricing goods for the Indian market or budgeting for imports, this makes GST considerably easier to plan around than it was even a year ago.

GST Registration for Businesses

GST registration becomes compulsory once a business crosses a set turnover threshold, which varies by activity and state:

• ₹40 lakh (roughly £38,000) for suppliers of goods, in most states

• ₹20 lakh (roughly £19,000) for suppliers of services

• ₹10 lakh (roughly £9,500) in certain special category states

A UK company setting up an Indian subsidiary, or trading directly with Indian customers above these thresholds, will generally need to register and file returns, regardless of where the parent company is based.

Not sure whether your business crosses the threshold, or which state rules apply to you? VenturEasy's GST team can review your specific situation and handle the registration end-to-end.

Input Tax Credit: How It Works

GST is charged multiple times on a product as it passes through the various phases of production and distribution. Input tax credit (ITC) balances this multiple taxation.

Let’s say a manufacturer purchases raw materials, for which the manufacturer is charged GST at the rate of 18%. When the manufacturer sells the finished product to a retailer, the manufacturer is also charged  GST of 18%. The manufacturer, however, does not pay GST at the rate of 18% on the finished product. Instead, the manufacturer pays GST at the rate of 18% only on the value that was added by the manufacturer. The manufacturer determines the value that was added by subtracting the GST paid on the raw material. The principle behind this provision is to ensure that the tax charged is in proportion to the value added at each step of production and distribution.

GST Compliance Requirements

After registration, various GST compliance duties arise, including the following:

•  Issue tax invoices for all taxable supplies.

•  File returns on a monthly, quarterly, or annual basis based on the turnover.

•  Reconcile purchase documents to support Input Tax Credit claims.

• Make timely payment of GST.

• Keep e-way bills for transit of goods where the value of the goods exceeds the threshold.

Breach of any of these conditions may lead to imposition of penalties. For this reason, many businesses with GST registration have incorporated the duties in their regular finance processes. These processes are repealed once a business stops its operations. Some businesses with GST registration have not done away with the processes, and a significant number of such businesses are small businesses. Compliance processes for small businesses are very onerous. We can advise you on your compliance obligations.

Customs Duty for UK Exporters and Importers

Importing into or exporting from India means you must account for customs duties in addition to GST.

When goods enter India, the Central Government charges customs duty based on the goods' HS code. Additionally, IGST is charged on customs duty. GST is applied on the total value of the goods and customs duty. Therefore, to determine the total amount you must pay to clear customs in India, you need to understand the HS code applicable to your goods.

See if your goods’ classification enables you to take advantage of any preferential trade agreements or lower the customs duty charged to your goods. The same goods can attract different customs duty based on the preferred trade agreement.

You must factor customs duty and GST into the sale price of your goods to account for indirect taxes. Doing this gives you a better idea of the total cost of the goods to the end customer.

Why This Matters If You're Expanding from the UK

For UK-based founders or finance teams assessing the Indian market, understanding indirect taxes is critical. Indirect taxes impact product pricing, the structure of agreements with Indian partners, and the management of cash flow with regard to the timing of the import of goods and the ITC.

At the same time, the manner in which a business prices its products across borders impacts the profits that are repatriated, and thus, international taxation. Accordingly, while assessing the impact of GST, the Indian external tax regime also merits consideration.

It is better to build the complete structure of the business prior to the start of commercial operations, as it is more difficult to amend the structure at a later stage.

Getting Your India Tax Setup Right

While GST has eased the process of indirect taxation in India, getting other related aspects of taxation right continues to be a challenge for the taxpayer, particularly for the taxpayer who is based outside of India and wishes to do business in India. This is especially true for getting registration, issuance of tax invoices, and compliance. Frequently, the GST Council revises the rates and exemption thresholds. Hence, it becomes important for the taxpayer to check the current rate and exemption threshold for the goods and services that they intend to supply before finalizing the prices or entering into contracts.

Thinking about expanding your business into India? Speak to VenturEasy's tax and compliance specialists for a free consultation on GST registration and setup.