Misclassifying goods vs services in GST is one of the most common and costly compliance mistakes — here is a clear, practical guide to getting it right.
GST Definitions: Goods vs Services in the CGST Act
Under the Central Goods and Services Tax (CGST) Act 2017, 'goods' means every kind of movable property other than money and securities, including actionable claims, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. 'Services' means anything other than goods, money, and securities — including activities relating to the use of money or its conversion.
In simpler terms: if you can physically touch it and it moves from seller to buyer, it is likely goods. If the transaction involves doing something, providing access, or creating an experience without transferring physical ownership of a tangible item, it is likely services. Money and securities are specifically excluded from both definitions.
Why the Goods vs Services Classification Matters for GST Rates
GST rates are assigned based on HSN (Harmonised System of Nomenclature) codes for goods and SAC (Services Accounting Codes) for services. The rate for the same economic activity can differ significantly depending on whether it is classified as goods or services.
Example: Software sold on a physical medium (CD/DVD/USB) has been treated as goods at 18% GST. Software accessed online as SaaS is treated as services at 18% GST. In this case, rates happen to align — but for many business categories, classification determines tax rate. Restaurant food prepared and served at the restaurant is a service (GST rate 5%). Packaged food sold over the counter (takeaway in sealed packaging) may be classified as goods depending on the nature of packaging and intent.
Getting the classification wrong means: either paying the wrong GST rate (and facing interest and penalties for underpayment) or overclaiming input tax credit on the wrong basis.
Composite Supplies and Mixed Supplies: The Complicating Factor
Composite Supply
A composite supply involves two or more goods or services that are naturally bundled and supplied in conjunction with each other in the ordinary course of business, where one is the principal supply. Tax treatment: the rate applicable to the principal supply applies to the entire composite supply. Example: courier service that includes packaging materials — the principal supply is the courier service; the packaging is ancillary. GST rate of the service applies to the whole package.
Mixed Supply
A mixed supply is a combination of two or more individual supplies made in conjunction with each other for a single price, where the supplies are not naturally bundled. Tax treatment: taxed at the rate of the supply attracting the highest tax rate. Example: A gift hamper containing food items, electronics, and cosmetics — taxed at the highest rate among the included items.
Identifying whether your supply is composite or mixed is crucial because it determines which tax rate applies to the entire transaction.
Frequently Asked Questions
Are digital products like e-books, online courses, and software subscriptions classified as goods or services under GST?
Digital products in India are classified as 'OIDAR' (Online Information and Database Access or Retrieval) services — they are services, not goods. This applies to: e-books, online courses, software subscriptions (SaaS), digital music downloads, online games, cloud storage, and similar digital supplies. GST rate: 18% SAC 9984 for OIDAR services. The services classification applies regardless of whether the customer receives a file or access to online content. A foreign company supplying OIDAR services to Indian consumers is also required to register for GST in India under the place of supply rules.
How do I determine the correct HSN code for my goods business or SAC code for my services?
For goods: the HSN (Harmonised System of Nomenclature) code is a globally standardised 6-8 digit commodity classification code. Start by searching the GST portal's HSN search tool (gstn.gov.in) using the product description. For most common products, the CBIC's GST tariff schedule is the definitive reference. Businesses with turnover above ₹5 crore must use 6-digit HSN codes; businesses between ₹1.5 crore and ₹5 crore use 4-digit codes; businesses below ₹1.5 crore can use 2-digit codes. For services: SAC codes follow a similar search process at the GST portal. If you cannot determine your HSN/SAC code confidently, a CA or GST practitioner can advise on classification for specific products or services.
What is the GST rate for software services and IT services in India?
Most IT and software services in India are taxed at 18% GST under SAC 9983 (IT and IT-enabled services). Specific sub-categories: customised software development (18%), software testing services (18%), IT consulting and advisory (18%), cloud computing services (18%), data entry and back-office services (18%), and website development (18%). Export of IT services to foreign clients: zero-rated under GST (0% applicable, with refund of input tax credit). This is a significant benefit for Indian IT exporters — the effective GST cost of inputs is recovered through refund, making export IT services tax-neutral.