IGST; Integrated Goods and Services Tax

Introduction

Integrated Goods and Services Tax (IGST) is one of the three key components of the Goods and Services Tax (GST) framework in India. IGST is primarily levied on the inter-state transfer of goods and services, serving as a critical tool to manage taxation across state borders.

Components of GST

1. CGST: It is called as Central Goods and Services Tax. CGST is levied by the Central Government on intra-state supplies.

2. SGST: It is called as State Goods and Services Tax. SGST is levied by the State Government on intra-state supplies.

3. IGST: It is called as Integrated Goods and Services Tax. IGST is levied on inter-state supplies and imports.

What is IGST?

Integrated Goods and Services Tax (IGST) is a part of the Goods and Services Tax (GST) framework in India. The government levies IGST on inter-state transactions, such as the supply of goods or services from one state to another or exports out of the country. IGST distributes tax revenue between the central and state governments, ensuring a seamless tax system nationwide.

It eliminates the cascading effect of taxes, where tax is levied on tax, and ensures that goods and services can move freely across state borders without multiple taxations. IGST is governed by the Integrated Goods and Services Tax Act, 2017.

Features of IGST

1. Applicable on Inter-State Transactions:

IGST is imposed on the supply of goods and services between different states in India. For example, if a business in Maharashtra sells goods to a customer in Karnataka, IGST will be levied on the transaction. It also applies to imports and exports.

2. Mechanism of Input Tax Credit (ITC):

IGST follows the Input Tax Credit mechanism, allowing businesses to claim credit for taxes paid on inputs. For instance, if a business has paid IGST on the purchase of raw materials, it can set off this tax amount against the IGST, CGST, or SGST payable on the final product. This feature helps in avoiding double taxation and reduces the overall tax burden.

3. Centralized Collection and Distribution:

The central government collects IGST and later distributes it between the central and state governments. This ensures the destination state receives its share of revenue by allocating it fairly to the state where consumers use the goods or services.

4. Eliminates the Cascading Effect of Taxes:

IGST helps eliminate the tax-on-tax scenario by integrating multiple taxes into a single system. Earlier, businesses had to pay Central Sales Tax (CST) along with other taxes, leading to a cascading effect. IGST ensures that only one tax is levied, which simplifies tax compliance.

5. Facilitates Seamless Movement of Goods Across States:

Before the implementation of IGST, businesses had to face multiple checkpoints and paperwork for inter-state transport of goods. With IGST, the process has become more streamlined, ensuring that goods can move smoothly across state borders without unnecessary delays.

6. Applies to Imports and Exports:

IGST is not just limited to inter-state transactions within India. It also applies to goods and services imported into India, making them subject to taxation at the point of entry. The government levies IGST on exports but typically sets the rate to zero, allowing exporters to claim refunds for taxes they paid.

7. Uniform Taxation Across the Nation:

One of the primary goals of IGST is to ensure uniformity in tax rates across the country. Unlike the pre-GST era, where different states had varied tax rates, IGST ensures that the same tax rate is applicable throughout India for a particular type of inter-state transaction.

8. Compliance and Documentation:

Businesses engaged in inter-state trade are required to be registered under GST to deal with IGST. This promotes better compliance and helps track transactions, reducing the chances of tax evasion. It also simplifies documentation, as businesses can file returns electronically under the GST portal.

These features make IGST a crucial component of India’s GST framework, facilitating smooth inter-state trade, ensuring tax compliance, and fostering a uniform tax structure across the country.

You may also want to know Value Added Tax (VAT)

IGST Explained: An Example

Consider the example of cashew nuts:

• When traders in Delhi transfer cashew nuts to Agra, they apply a 5% IGST. Traders in Agra pay this tax, and traders in Delhi collect it and then pay it to the Central Government.
• In contrast, for an intra-state transaction, the tax would be divided into CGST (2.5%) and SGST (2.5%), totaling 5%.

Practical Example of IGST Application

Stage 1: Mukesh to Ajay

• Mukesh, based in Ahmedabad, sells goods to Ajay in Mumbai for ₹20 lakh.
• Mukesh charges IGST at 5%, so Ajay pays ₹21 lakh in total (₹1 lakh as IGST).

Stage 2: Ajay to Anita

• Ajay sells these goods to Anita in Lucknow for ₹25 lakh, charging IGST again at 5%.
• Anita pays ₹22,05,000, including ₹1,05,000 as IGST.

Ajay can claim an input tax credit of ₹1 lakh (paid to Mukesh) and needs to pay only ₹5,000 to the government.

Which State Receives the Tax Revenue?

The state where the goods or services are ultimately consumed receives the tax revenue:

• For the transaction between Mukesh and Ajay, Maharashtra (Ajay’s state) will receive the tax.
• For the transaction between Ajay and Anita, Uttar Pradesh (Anita’s state) will receive the tax.

The Central Government initially collects IGST and then distributes the respective shares to the state governments.

Key Points to Remember About IGST

1. The Importing State Receives the Tax Revenue:

The state where the goods are consumed accrues the tax revenue of Goods or Services from IGST.

2. IGST Equals CGST + SGST:

This ensures that the tax rate is consistent, regardless of whether the transaction is intra-state or inter-state.

How Are GST Rates Fixed?

The GST rates are set by the GST Council, which was established alongside the GST regime in 2017. The Council, in consultation with the government and relevant ministries, determines the rates for different goods and services. Periodic meetings are held to review and adjust these rates based on economic needs and industry feedback.

Refund of IGST

IGST refunds are available under certain circumstances, such as for international tourists who are non-residents of India and have made purchases during their stay. These tourists can claim a refund of the IGST paid on goods taken outside India.

Taxpayers can seek a refund if they mistakenly pay IGST instead of SGST or CGST, as long as they redeposit the correct payment under the appropriate tax head.

Conclusion

Integrated Goods and Services Tax (IGST) streamlines inter-state transactions and ensures fair tax distribution between the central and state governments. By simplifying the tax structure and avoiding double taxation, IGST benefits both businesses and consumers, fostering a more transparent and efficient tax system in India.