The Goods and Services Tax (GST) is a transformative tax reform that has reshaped the Indian economy. Introduced on 1 July 2017, GST subsumed numerous indirect taxes, creating a unified tax structure across the country. For MSMEs, understanding the levy and collection of GST is crucial, as it directly impacts business operations, tax compliance, Input Tax Credit (ITC), and financial health. This guide explains the essentials of GST levy and collection, including the types of GST levies, the provisions under Section 9 of the CGST Act, GST 2.0 reforms, and their implications for MSMEs in India.

Understanding GST tax levy

The levy of GST refers to the imposition of tax on the supply of goods and services in India. This taxation mechanism is a key aspect of the Goods and Services Tax (GST) system, governed by the Central Goods and Services Tax (CGST) Act, State Goods and Services Tax (SGST) Act, and Integrated Goods and Services Tax (IGST) Act.

Under GST, tax generally applies to taxable supplies of goods or services, whether within the same state or across state borders. Intra-State supplies generally attract CGST and SGST (or UTGST, where applicable), while inter-State supplies generally attract IGST. The applicable GST rate depends on the classification of the goods or services and the relevant government notification.

Following the GST 2.0 reforms, the main rate structure includes 5% and 18% rates, alongside a 40% special rate for specified goods and services. Certain supplies are exempt or attract other specified rates. A cess may also apply to specified goods and services, subject to the applicable legal provisions and notifications.

Understanding these rates is essential, especially for MSMEs, as they directly affect pricing strategies, market competitiveness, Input Tax Credit (ITC), and overall profit margins. Awareness and proper application of GST rates can make a significant difference in the financial health of MSMEs.

Types of GST levies

GST is divided into four distinct levies, each applicable under specific circumstances:

Central GST (CGST): Imposed by the Central Government on taxable intra-State supplies of goods and services, alongside SGST or UTGST, as applicable.

State GST (SGST): Charged by the respective State Government on taxable intra-State supplies, working alongside CGST.

Integrated GST (IGST): Applied to inter-State supplies and imports, subject to the applicable provisions. IGST is levied and collected by the Central Government, with revenue apportioned between the Centre and States in accordance with the law.

Union Territory GST (UTGST): Functions similarly to SGST but applies to taxable intra-State supplies in Union Territories without a legislature, alongside CGST.

For instance, if a Micro, Small, and Medium Enterprise in Maharashtra supplies goods to a customer in Maharashtra, both CGST and SGST will generally apply, provided the supply is taxable and the place of supply is in Maharashtra. Conversely, if the goods are supplied to a customer in another state and the transaction qualifies as an inter-State supply, IGST will generally be charged. Understanding these types of GST levies is crucial for MSMEs to ensure compliance with tax regulations and avoid potential penalties.

Collection of GST

The collection of Goods and Services Tax (GST) in India involves a systematic process that ensures the efficient transfer of tax from consumers to the government. Below is an overview of how GST is collected:

1. Point of sale collection

GST is generally collected on taxable supplies of goods or services. When a registered business makes a taxable supply, it charges the applicable GST to the customer, subject to the relevant provisions. The GST rate depends on the specific type of goods or services, as determined by the government.

2. Types of GST

Different types of GST are collected based on the nature of the transaction, including:

• CGST (Central GST)
• SGST (State GST)
• IGST (Integrated GST)
• UTGST (Union Territory GST)

3. Invoice generation

For taxable supplies, registered businesses must issue a GST invoice in accordance with the applicable provisions. Businesses covered by e-invoicing requirements must also comply with the applicable Invoice Registration Portal (IRP) requirements. A tax invoice is an important document for both the seller and buyer, supporting GST compliance and the claiming of Input Tax Credit (ITC), subject to eligibility conditions.

4. Filing of GST returns

Businesses are required to file GST returns at the applicable frequency through the GST portal. Regular taxpayers generally file Form GSTR-1 to report outward supplies and Form GSTR-3B to declare tax liabilities and discharge eligible tax dues. Eligible taxpayers with an aggregate annual turnover of up to ₹5 crore can opt for the Quarterly Return with Monthly Payment (QRMP) Scheme, subject to the prescribed conditions. Under this scheme, GSTR-1 and GSTR-3B are filed quarterly, while tax payments are made monthly. Returns must accurately report the relevant transactions and tax liabilities.

5. Remittance to government

Businesses must pay their GST liabilities within the applicable due dates through the GST portal. Tax payments are generally made electronically using the electronic cash ledger and, where permitted, the electronic credit ledger. Businesses must reconcile their tax liabilities, eligible ITC, and payments to ensure accurate reporting and avoid interest or penalties for non-compliance.

6. Input Tax Credit (ITC)

Businesses can claim Input Tax Credit on eligible GST paid on purchases used in the course or furtherance of business, subject to the conditions and restrictions under the CGST Act. This allows eligible businesses to offset credit against their output tax liability, reducing the net GST payable. The ITC mechanism helps prevent cascading taxation, ensuring that eligible credit is available across the supply chain.

7. Compliance and audits

To ensure adherence to GST laws, businesses must maintain accurate accounts, invoices, and transaction records, file returns on time, and pay their tax liabilities within the prescribed deadlines. Tax authorities may scrutinise returns or conduct audits under the CGST Act. Businesses should therefore maintain supporting documents and respond to notices or audit queries within the applicable timelines.

This structured approach to GST collection helps facilitate tax compliance across the supply chain. Understanding this process is crucial for businesses, particularly MSMEs, as it affects cash flow, working capital, and compliance responsibilities. The GST Network (GSTN) plays a pivotal role in facilitating this process by providing the digital infrastructure for taxpayers to file returns, make payments, and manage GST compliance effectively.

Understanding Section 9 of the CGST Act

Section 9 of the Central Goods and Services Tax (CGST) Act, 2017, plays a pivotal role in defining how GST is levied and collected on intra-State supplies of goods and services in India. It also covers reverse charge provisions and tax liability in specified cases. Below is a simplified explanation:

Levy of GST (sub-section 1)

Section 9(1) specifies that CGST is levied on intra-State supplies of goods and services, except the supply of alcoholic liquor for human consumption. The tax is calculated on the value determined under Section 15 of the CGST Act and charged at rates notified by the government on the recommendations of the GST Council.

• Intra-State supply: CGST generally applies to taxable supplies within the same state, alongside SGST, or UTGST in applicable Union Territories.
• Exclusion: Alcoholic liquor for human consumption is excluded from GST and is subject to applicable state taxes and regulations.
• Taxable value: GST is calculated on the value determined under Section 15 of the CGST Act, which generally includes the transaction value and specified additional amounts, subject to the applicable conditions.

Reverse Charge Mechanism (sub-section 3)

Section 9(3) introduces the Reverse Charge Mechanism, where the responsibility to pay GST shifts from the supplier to the recipient of goods or services. This mechanism applies to specified categories of goods or services notified by the government on the recommendations of the GST Council.

Applicability: RCM applies to notified categories of goods and services, which may include specified legal services, goods transport agency services, and other notified supplies, subject to the applicable conditions.

Recipient’s Role: Under RCM, the recipient is responsible for paying the applicable GST and meeting the relevant compliance requirements.

GST on unregistered suppliers (sub-section 4)

Section 9(4) provides for reverse charge on specified categories of goods or services received from unregistered suppliers by specified classes of registered persons, as notified by the government on the recommendations of the GST Council. It does not apply automatically to every purchase from an unregistered supplier.

Unregistered suppliers: Registered businesses may need to pay GST under RCM when purchasing specified goods or services from unregistered suppliers, provided the recipient and transaction fall within the applicable notification.

Current status: The provision has been narrowed through amendments and applies to specified cases notified by the government. MSMEs should check the relevant notifications to determine whether a particular purchase attracts RCM.

GST on e-commerce operators (sub-section 5)

Section 9(5) allows the government to notify specific categories of services for which GST on intra-State supplies must be paid by the Electronic Commerce Operator (ECO) through which the services are supplied, rather than by the individual service provider. This provision applies to specified services, subject to the relevant notifications.

E-commerce operators: Platforms such as Uber and OYO may be responsible for paying GST on specified services supplied through their platforms, depending on the applicable notifications and the nature of the service.

Liability: For services notified under Section 9(5), the electronic commerce operator is treated as the supplier liable for paying GST. This differs from Tax Collection at Source (TCS) under Section 52, where the operator collects tax at source on specified supplies.

GST 2.0 reforms (effective from September 22, 2025)

The GST 2.0 reforms, effective from September 22, 2025, have simplified India’s Goods and Services Tax structure, making compliance easier for MSMEs and businesses across sectors. Understanding these updates is crucial for managing tax liabilities and leveraging available benefits. Key changes include:

• New GST slabs: The main GST rate structure now centres on 5% and 18%, with a special rate of 40% for specified luxury and demerit goods. Exemptions and certain other specified rates also apply.
• Reduced rates on essentials: Several everyday products, including soaps, toothpaste, and specified Indian breads, received GST rate reductions or exemptions, depending on their classification and applicable notifications.
• Lower GST on consumer durables: Specified consumer durables, including televisions, air conditioners, and dishwashers, moved from 28% to 18% under the revised rate structure.
• Higher tax on luxury and sin goods: Specified luxury and demerit goods attract the special 40% GST rate. The applicable rate for products such as pan masala, tobacco products, aerated drinks, high-end cars, yachts, and private aircraft depends on their classification and the relevant notifications.
• MSME-focused compliance measures: GST 2.0 included measures to simplify registration, refunds, and compliance. Existing facilities such as the Composition Scheme and the QRMP scheme continue to support eligible small businesses; these schemes were not newly introduced by GST 2.0.

Increased thresholds and support measures for MSMEs

The GST 2.0 reforms introduced measures to simplify compliance and improve the ease of doing business for MSMEs. However, the reforms did not raise the Composition Scheme turnover limit from ₹1.5 crore to ₹2 crore. The general turnover limit remains ₹1.5 crore for eligible businesses in most states, while a lower limit of ₹75 lakh applies in specified states.

The GST registration threshold for suppliers of goods also did not increase from ₹40 lakh to ₹50 lakh under GST 2.0. Eligible suppliers of goods may benefit from a threshold of ₹40 lakh in states that have adopted it, subject to applicable conditions. The general registration threshold for services is ₹20 lakh, with lower thresholds applicable in certain states.

Under the Quarterly Return Monthly Payment (QRMP) scheme, eligible businesses with aggregate annual turnover of up to ₹5 crore can file GSTR-1 and GSTR-3B quarterly instead of monthly. Tax dues must still be paid monthly. This reduces the frequency of return filing and can help small businesses manage cash flow more effectively.

To support businesses dealing with the Inverted Duty Structure (IDS), the GST refund framework allows eligible taxpayers to claim refunds of accumulated input tax credit, subject to the applicable provisions and conditions. CBIC has not issued a verified notification or circular confirming that 90% of Inverted Duty Structure (IDS) refund claims filed on or after 1 October 2025 would be provisionally sanctioned. The 90% provisional refund facility is available only in specific cases, including eligible export-related refunds of unutilised ITC. It does not automatically apply to all refund claims under the inverted duty structure.

Here’s a simple step-by-step guide for MSMEs to opt for the QRMP scheme and apply for refunds under the inverted duty structure:

Registering for the QRMP Scheme

1. Log in to the GST Portal using your GSTIN credentials.
2. Navigate to Services → Returns → Opt-in for QRMP Scheme.
3. Select the relevant financial year and quarter for which the filing frequency is available.
4. Confirm the quarterly filing option for GSTR-1 and GSTR-3B. Your aggregate annual turnover must meet the ₹5 crore eligibility limit, and other scheme conditions must be satisfied.
5. Save and submit your selection. A confirmation message will appear once the filing frequency has been updated.

Eligible taxpayers must also have filed their latest due GSTR-3B return and meet the other conditions prescribed under the QRMP scheme. The option to change filing frequency is available only during the prescribed window.

Applying for provisional refunds under Inverted Duty Structure (IDS)

1. Log in to the GST Portal using your GSTIN credentials.
2. Go to Services → Refunds → Application for Refund and select the relevant refund category.
3. Select the refund on account of an inverted duty structure, where applicable.
4. Enter the required details of eligible input tax credit, relevant outward supplies, and the refund amount.
5. Upload the supporting documents required under the applicable procedure and submit the application. Track the refund status through the GST Portal. The tax authorities will process the claim under the applicable statutory provisions and verification procedures; provisional sanction is subject to the relevant legal provisions and eligibility conditions.

Statistical analysis

Let us look some key statistics which depict the impact of GST levy and collection on MSMEs:

• MSME registration and formalisation: According to the Ministry of MSME’s official dashboard, India recorded approximately 9.85 crore combined Udyam and Udyam Assist Platform registrations as of 13 October 2026. These figures indicate the scale of MSME formalisation, but they should not be interpreted as the number of GST-registered businesses.
• GST compliance: GST compliance involves timely return filing, accurate reporting of taxable supplies, payment of tax liabilities, and claiming eligible Input Tax Credit (ITC). Businesses can use the GST compliance checklist to review their obligations.
• Impact on business operations: GST has established a common indirect tax framework across India and provides a mechanism for eligible businesses to claim ITC. However, filing obligations, tax-payment schedules, and delays in eligible refunds can affect MSME cash flow. The actual impact varies according to the business’s sector, size, transaction profile, and compliance requirements.

These indicators highlight the importance of GST compliance for MSMEs. While the GST levy and collection framework supports tax reporting and input tax credit across the supply chain, managing return filing, tax payments, and working capital remains important for small and medium-sized enterprises.

GST compliance for MSMEs

Ensuring GST compliance goes beyond merely following tax regulations, as it is also vital for maintaining smooth business operations. Here are some practical steps to help MSMEs stay compliant:

• Maintain accurate records: It is essential to keep detailed records of all transactions, including invoices, receipts, purchase records, and GST returns. Accurate record-keeping makes it easier to file returns, reconcile Input Tax Credit (ITC), and respond to queries from tax authorities.
• Utilise GST software: Leveraging technology can simplify the GST compliance process. Various GST software solutions are available that automate tasks such as return filing, e-invoicing, tax calculations, and reconciliation, thereby reducing manual effort and minimising errors.
• Stay updated with legal changes: GST laws, rates, and compliance requirements can change through amendments, notifications, and circulars. MSMEs should regularly check official updates from the CBIC and GST Portal or consult a tax professional to stay informed about changes that affect their business.
• File returns on time: Timely filing of GST returns is critical to avoid late fees, interest, and other consequences of non-compliance. Eligible businesses with aggregate annual turnover of up to ₹5 crore can opt for the Quarterly Return Monthly Payment (QRMP) scheme, which allows quarterly filing of GSTR-1 and GSTR-3B while requiring monthly tax payments. This can reduce the frequency of return filing and ease the compliance burden.

GST compliance challenges for MSMEs 

Challenge	Impact	Solution
Working capital constraints	MSMEs may need to pay GST before collecting payments from customers, putting pressure on cash flow.	Eligible businesses can opt for the QRMP scheme, which allows quarterly return filing with monthly tax payments. Track receivables, plan tax payments, and follow up on overdue invoices.
Access to credit	Incomplete financial records and inconsistent GST return filing can make it harder for MSMEs to demonstrate creditworthiness to lenders.	Maintain accurate GST returns, invoices, bank statements, and financial records to support loan applications and demonstrate business performance.
Compliance complexity	Understanding GST rates, ITC eligibility, reverse charge, and return-filing requirements can be time-consuming.	Use GST-compliant accounting software, reconcile ITC regularly, track filing deadlines, and check official CBIC notifications for changes in GST rules and rates.
Technological hurdles	Some MSMEs struggle with digital return filing, e-invoicing, and reconciling transaction data.	Use the GST Portal’s online facilities, suitable accounting software, and professional tax support where needed. Businesses covered by e-invoicing requirements should follow the applicable Invoice Registration Portal rules.

Conclusion

Understanding the levy and collection of GST is crucial for MSMEs operating within India’s tax framework. By staying informed about GST rate changes, maintaining accurate records, filing returns on time, and using digital tools, MSMEs can manage their tax liabilities and compliance requirements more effectively.

Recent GST reforms aim to simplify the tax structure and improve compliance, although businesses must continue to follow the applicable rules, notifications, and filing deadlines. As India’s GST framework evolves, MSMEs that adopt sound tax practices and plan their cash flow carefully will be better positioned to manage compliance costs and support sustainable business growth.

*This article is for basic information only. For more in-depth knowledge regarding the topic please visit the official GST portal or consult with a GST practitioner, CA or relevant professional for more details on the GST levy and collection process. 

 FAQs

What is the levy and collection of GST?

The levy of GST refers to the tax imposed on taxable supplies of goods and services. Collection involves charging, reporting, and paying the applicable GST to the government.

What are the four types of GST levies in India?

The four types are Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).

What is Section 9 of the CGST Act?

Section 9 of the CGST Act, 2017, covers the levy and collection of CGST on intra-State supplies, including provisions relating to reverse charge and specified e-commerce services.

How is GST collected from businesses?

Registered businesses generally charge GST on taxable supplies, report transactions through applicable GST returns, and pay their tax liabilities within the prescribed deadlines.

What is the Reverse Charge Mechanism (RCM) under GST?

Under RCM, the recipient of specified goods or services is liable to pay GST instead of the supplier, subject to applicable legal provisions and notifications.

What is Input Tax Credit (ITC) under GST?

ITC allows eligible businesses to offset GST paid on qualifying business purchases against their output tax liability, subject to the conditions under GST law.

What are the GST 2.0 reforms in India?

GST 2.0 refers to the rate rationalisation and related reforms effective from 22 September 2025, including revised rates for specified goods and services.

What is the QRMP scheme under GST?

The Quarterly Return Monthly Payment (QRMP) scheme allows eligible taxpayers with aggregate annual turnover of up to ₹5 crore to file GSTR-1 and GSTR-3B quarterly while paying tax monthly.

How does GST affect MSMEs in India?

GST affects MSMEs through tax liabilities, return filing, pricing, ITC claims, and working capital requirements. Accurate records and timely compliance help businesses manage these obligations.

How can MSMEs ensure GST compliance?

MSMEs can maintain accurate invoices and accounts, reconcile ITC, use GST-compliant software, track filing deadlines, and follow official CBIC and GST Portal updates.