What is Integrated Goods and Services Tax (IGST) ?

Introduction

Integrated Goods and Services Tax (IGST) is one of the three types of GST applied in India. It is levied on inter-state transactions, i.e., sales between states. IGST ensures that taxes are collected centrally and then shared between the states. The primary aim of IGST is to make cross-border trade smoother and ensure seamless taxation for businesses. In this article, we will explain what IGST is, how it works, its features, rates, and provide a detailed example with calculations to make the concept easy to understand for beginners.

What is IGST?

IGST (Integrated Goods and Services Tax) is a tax applied by the Central Government on inter-state supplies of goods and services. It was introduced to simplify the taxation of goods and services that move across state borders. IGST is a part of the GST system and is levied when:

1. Goods or services are supplied between two states (i.e., Inter-state transactions).
2. Imports and exports also attract IGST because they are treated as inter-state transactions.

IGST ensures that the Central Government collects tax on inter-state transactions, which is then distributed to the appropriate state where the goods or services are consumed. The full tax rate under IGST is the same as the combined rate of CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax).

Open Demat account and Unlock smarter investing today!

For example, if the CGST rate is 9% and the SGST rate is 9%, the IGST rate will be 18%. This is applicable to transactions where goods are shipped across state lines in India.

IGST applies to:

• Goods are supplied from one state to another.
• Imports of goods into India from other countries.
• Exports of goods out of India.

By charging IGST on inter-state transactions, businesses avoid paying multiple taxes on the same transaction and reduce the tax burden. It ensures uniform taxation and promotes a smooth flow of goods and services across India.

Features of IGST

Here are the key features of IGST:

1. Levy on Inter-State Sales:
   IGST is charged on goods or services that are supplied from one state to another.
2. Unified Tax:
   IGST combines CGST and SGST into one unified tax for inter-state transactions.
3. Tax Credit:
   Businesses can set off IGST paid on input goods/services with IGST collected on output sales, just like GST.
4. Revenue Distribution:
   After collection by the Central Government, the IGST revenue is distributed to the state where the goods are consumed, ensuring that the destination state gets its share.
5. Neutral Impact on Exports and Imports:
   IGST applies to both exports and imports, ensuring a uniform tax system across domestic and international trade.
6. Refunds on Exports:
   Exports are zero-rated, meaning no tax is applied, and businesses can claim a refund of the IGST paid on exports.
7. Tax Collection at Source:
   IGST collects tax on the final consumer's behalf while ensuring smooth, consistent transactions.

GST Explained: An Example

Let’s look at an example to understand how IGST works:

Scenario:

• A manufacturer in Mumbai (Maharashtra) sells goods to a wholesaler in Delhi.
• The price of the goods is ₹1,00,000.
• The GST rate is 18%, which is divided as 9% CGST and 9% SGST (since it's an intra-state transaction).
  However, this is an inter-state transaction, so IGST applies instead.

Step 1: Calculate IGST

• IGST Rate = 18% (Combined CGST and SGST).
• IGST Amount = ₹1,00,000 × 18% = ₹18,000.

Step 2: Add IGST to the price

• Total Invoice Price = ₹1,00,000 + ₹18,000 = ₹1,18,000

Step 3: Set off IGST

The wholesaler in Delhi can claim the IGST paid as Input Tax Credit (ITC) when they sell the goods in Delhi, ensuring there is no double taxation.

Thus, the seller in Mumbai charges 18% IGST, and the buyer in Delhi gets a credit for the tax paid.

Which State will Receive the Tax Revenue?

IGST is collected by the Central Government, and then it is distributed to the state where the goods or services are consumed. Here’s how the tax is split:

1. Destination State:
   The state where the goods are consumed or where the services are provided is the recipient state. This state receives the tax revenue.
2. Central Government:
   The Central Government retains the portion of IGST that is not distributed to the states.

For example, if goods are sold from Maharashtra to Delhi, the Central Government collects the IGST and distributes the tax to Delhi, ensuring the destination state gets its rightful share of the tax revenue.

Things to Keep in Mind About IGST

1. Applicable Only for Inter-State Transactions: IGST is only applicable when goods or services are supplied between different states or to/from India.
2. Input Tax Credit: You can claim ITC for IGST paid on inputs, reducing the GST liability on output sales
3. Export Exemption: Exports are zero-rated, meaning no IGST is charged on export goods.
4. Filing Returns: IGST must be reported on GST returns, and businesses must ensure the correct reporting of inter-state transactions.
5. Refund for Exports: Exporters can claim a refund of the IGST paid on export goods, ensuring no tax burden on export transactions.

How are the GST Rates Fixed?

GST rates are determined by the GST Council, which is a body comprising the Central and State Finance Ministers. The council decides the rates based on:

1. Commodity Type:
   Different goods and services are taxed at different rates, such as 5%, 12%, 18%, and 28%.
2. Economic Factors:
   Essential goods (like food) are taxed at lower rates, while luxury items and sin goods (like tobacco) are taxed at higher rates.
3. State and Central Agreement:
   The GST rates for inter-state transactions are agreed upon by both Central and State Governments to ensure smooth revenue sharing.

Refund of IGST

IGST paid on exports is refundable under GST laws. Exporters are allowed to claim a refund of IGST to avoid the tax burden on export goods. The process involves:

1. Filing GST Return:
   The exporter needs to file GST returns indicating the IGST paid on exported goods.
2. Application for Refund:
   After filing, an application for IGST refund can be submitted through the GST portal.
3. Refund Process:
   The GST department processes the refund and credits the refund amount to the taxpayer’s bank account.

Conclusion

IGST plays an important role in the smooth flow of goods and services across India by ensuring that inter-state transactions are taxed correctly. It simplifies tax collection and ensures transparency. By understanding how IGST works, its features, and its application, businesses can ensure compliance with GST laws and claim the correct tax benefits. Knowing about IGST also ensures businesses can avoid double taxation and receive refunds for export transactions.