GST on Services vs GST on Goods: What Small Businesses Must Know

Under GST, goods and services are taxed differently based on classification, rate, time of supply, and invoicing rules. Understanding this difference is critical for correct compliance — and in 2026, with automated data matching catching classification errors faster than ever, getting it wrong isn’t just inconvenient. It triggers notices.

Most GST notices I see land on small business owners’ desks for one reason: they classified something wrong. Not because they evaded tax. Not because they filed late. They simply couldn’t tell whether what they sell falls under GST on goods or GST on services — and that single confusion cascaded into wrong rates, incorrect HSN or SAC codes, and mismatches in returns.

Here’s what this guide gives you: a clear, practical framework to identify whether your supply attracts GST on services or GST on goods, apply the correct GST treatment, and avoid the classification mistakes that cost small businesses 18–28% in blocked ITC and unexpected penalties.

Quick readiness check: Can you describe what your business sells — product, service, or both — in one sentence? If yes, keep going. If that answer feels fuzzy, this post is exactly where you need to be.

What Is Considered “Goods” Under GST?

 

 

Goods are every kind of movable property, excluding money and securities. That’s the legal definition, stripped down.

In practice, if your business sells physical products — inventory on shelves, manufactured items, raw materials, packaged food, electronics, garments — you’re supplying goods. The key marker: it’s tangible, it moves from seller to buyer, and ownership transfers.

A few examples that trip people up:

• Software sold as a physical product (boxed, on a disc) = goods
• Growing crops, grass, trees attached to land that are agreed to be severed = goods
• Electricity = treated as goods under GST

The classification code for goods uses the Harmonized System of Nomenclature (HSN). Businesses with turnover above ₹5 crore must use 6-digit HSN codes on invoices. Below that threshold, 4-digit codes work — but skipping HSN entirely invites audit flags.

What Is Considered “Services” Under GST?

Services are anything that isn’t goods, money, or securities. If that sounds vague, it is — intentionally so.

The GST framework defines services by exclusion. Consulting, digital marketing, software-as-a-service (SaaS), repairs, transportation, legal advice, accounting, restaurant dining, telecom — all services.

The tricky ones:

• Software delivered electronically (download, cloud access) = service
• Works contracts (construction involving both materials and labour) = treated as service
• Restaurant food = service (not goods, even though you’re eating a physical product)

Services use Services Accounting Codes (SAC) instead of HSN. For example, management consultancy falls under SAC 9983. Getting this code wrong doesn’t just look sloppy — it creates mismatches when your GSTR-1 data gets auto-matched against GSTR-2B.

Key Differences Between GST on Goods and GST on Services

This is where the distinction gets operational. The table below covers what matters for day-to-day compliance:

One number that sticks: 70% of small service providers lose ITC because their input suppliers aren’t registered. For goods traders, the composition scheme offers simplicity — but the moment you make one interstate sale, you’re disqualified.

How GST Rates Differ for Goods and Services

Goods spread across all five GST slabs. Essential items (unbranded food grains, fresh milk) sit at 0%. Common consumer goods (packaged food, garments under ₹1,000) fall at 5%. Electronics, industrial inputs at 18%. Luxury and sin goods (cars, tobacco, aerated drinks) hit 28%, sometimes with additional cess.

Services cluster differently. The bulk — consulting, IT services, financial services, telecom — sit at 18%. Healthcare and educational services are exempt. Restaurant services (non-AC, non-alcohol) are taxed at 5% without ITC. Hotel rooms vary by tariff.

Post-2025 reforms simplified the services slab structure further, pushing most into either 5% (limited/no ITC) or 18% (full ITC).

But here’s what catches small businesses off guard: roughly 30% of B2C service providers land in the 18% slab unexpectedly because they assumed their service category qualified for a lower rate. The fix is boring but effective: look up your exact SAC on the CBIC rate schedule before you issue your first invoice. Don’t rely on what a competitor charges.

Time of Supply — Why It Matters More Than You Think

The time of supply determines when your GST liability crystallizes. Get this wrong, and you’re either paying late (penalties) or paying early (cash flow drain).

For goods: GST becomes payable at the earlier of the invoice date or the date of removal/delivery. If you ship inventory on March 28 but invoice on April 3, your liability triggers in March — not April. That one-week gap can shift your entire GSTR-3B filing period.

For services: GST becomes payable at the earlier of the invoice date or the date you receive payment. If a client pays you an advance on February 15 for work you’ll complete in April, your GST liability is February. Not April.

This timing difference is where cash flow gets messy. Service businesses receiving advances owe GST immediately — before they’ve even started the work. Goods businesses tied to delivery dates need their logistics and invoicing systems synced.

For a detailed breakdown of when and how tax payments under GST work, including advance receipt scenarios, that guide covers the mechanics.

Invoicing Rules for Goods vs Services

 

The invoice is where classification errors become permanent. Once filed, a wrong HSN or SAC code propagates through your GSTR-1, your buyer’s GSTR-2B, and the entire ITC chain.

For goods invoices:

• HSN code is mandatory (4 or 6 digits based on turnover)
• Invoice must be issued at or before delivery
• Quantity, unit, and description of goods are required fields
• E-way bill needed for goods valued over ₹50,000 in transit

For services invoices:

• SAC code is mandatory
• Invoice must be issued within 30 days of service completion (45 days for banking/financial services)
• Description of service rendered replaces quantity/unit fields
• No e-way bill requirement

Common invoicing mistakes I see repeatedly:

1. Using a generic HSN code (like 9988) for a specific service that has its own SAC
2. Issuing a goods invoice for a works contract (which is legally a service)
3. Missing the 30-day invoicing window for services, creating time-of-supply mismatches
4. Not mentioning whether supply is inter-state (IGST) or intra-state (CGST + SGST)

Your GST invoice structure needs to reflect the correct classification from the start. Correcting it later means credit notes, GSTR-1 amendments, and reconciliation headaches.

Reporting in GST Returns: GSTR-1 and GSTR-3B

How you report outward supplies in GSTR-1 depends directly on whether you’re supplying goods or services.

GSTR-1 requires HSN-wise summary for goods and SAC-wise summary for services. B2B supplies need invoice-level detail. B2C supplies above ₹2.5 lakh need invoice-level reporting; below that, state-wise consolidated figures work.

GSTR-3B then picks up the aggregate — your total output tax, your claimed ITC, and the net payable. If your GSTR-1 HSN/SAC data doesn’t reconcile with what your buyers see in GSTR-2B, the system flags it.

In 2026, these mismatches trigger automated scrutiny faster than manual review ever did. One practical tip: file GSTR-1 before your GSTR-3B deadline. This gives you time to catch mismatches. Data shows GSTR-3B errors hit roughly 25% of filings, often because the GSTR-1 data wasn’t reconciled first.

Common GST Mistakes Small Businesses Make

These aren’t theoretical. They’re the patterns behind actual notices:

• Misclassifying services as goods (or vice versa). A web development agency billing “software product” instead of “IT service” — wrong SAC, wrong rate, wrong ITC chain for the buyer.
• Using incorrect or outdated HSN/SAC codes. Codes get updated. What worked in 2023 might map to a different rate today.
• Applying the wrong GST rate. Assuming all services are 18% when your specific category (say, job work on textiles) is actually 5%.
• Ignoring RCM on service imports. If you’re a small business receiving services from an unregistered supplier or importing OIDAR services, reverse charge applies. Skipping it blocks your ITC and creates a liability you didn’t budget for.
• Mixing up aggregate turnover thresholds. Services hit the ₹20 lakh registration trigger in general states (₹10 lakh in special category states). Goods get ₹40 lakh. If you sell both, your combined AT determines registration — and many businesses miscalculate by excluding exempt supplies.
• Delayed ITC reconciliation. Filing without checking GSTR-2B against your purchase ledger. A 90%+ ITC match rate means you’re clean. Under 70% signals supplier data problems that need fixing before you file.

Frequently Asked Questions

How long does GST registration take for a new small business?
Registration through the GST portal typically completes in 3–7 working days if documents are in order. Delays usually come from incomplete applications or Aadhaar authentication failures. Start the GST registration process before you hit the turnover threshold — not after.

What happens if I use the wrong HSN or SAC code on an invoice?
The immediate risk is ITC denial for your buyer, since GSTR-2B matching will flag the mismatch. You’ll need to issue a credit note, correct the invoice, and amend your GSTR-1 before the deadline. Repeated errors attract scrutiny notices.

Can a business sell both goods and services under the same GST registration?
Yes. But you must classify and report each supply separately — goods with HSN codes, services with SAC codes. Your aggregate turnover combines both, which affects threshold calculations and composition scheme eligibility.

Is the composition scheme available for service providers?
Limited. Service providers can opt for composition only if aggregate turnover stays under ₹50 lakh, and the tax rate is 6% (3% CGST + 3% SGST). Goods-focused businesses get the ₹1.5 crore threshold at 1%. Interstate supply disqualifies both.

Why does my ITC keep getting rejected even though I file on time?
The most common cause: your suppliers aren’t filing their GSTR-1, so your purchases don’t appear in GSTR-2B. Roughly 70% of small service providers face this. The only reliable fix is sourcing from GSTIN-verified, regularly filing vendors — and checking GSTR-2B reconciliation before every GSTR-3B submission.

Final Takeaway

The difference between goods and services under GST isn’t academic. It determines your classification code, your tax rate, when your liability triggers, how you invoice, and how you report. Every one of those has a downstream compliance impact.

Most of these mistakes are avoidable. Pull five recent invoices right now. Check the HSN or SAC codes. Verify the rates. Match them against your GSTR-1 data. That ten-minute exercise catches problems that take months to fix after a notice lands.

Systems that auto-classify and keep invoice data aligned with return filings reduce these errors structurally — not just once, but every filing cycle.