What is IGST - Full Form, Applicability, Calculation & More

IGST’s full form is Integrated Goods and Services Tax, and it was introduced in 2017. It is a goods and services tax levied and collected when goods or services are supplied from one state to another.

It combines the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST), simplifying the taxation process for interstate transactions.

The formula for IGST is:

IGST = CGST + SGST

IGST’s distribution is different from SGST. The Central GST authority is responsible for the collection of tax revenue under IGST. It is then distributed between the GST authorities of the origin and destination states.

Let us understand the integrated tax meaning better with an IGST example:

A company in Delhi sells furniture worth ₹1 lakh to a customer in Mumbai. If CGST and SGST were applied separately, the company would collect both taxes and deposit them with their respective governments. With IGST, the company adds a single IGST, say, 18%, on the invoice, which is ₹18,000. This IGST incorporates both central and state tax components.

The central government receives half of the IGST rate from the collected amount, while the remaining half goes to the Maharashtra state government.

Prior to 2017, India's tax system was a complex web, with both central and state governments levying various taxes on goods and services. This often led to cascading taxes, where a product was taxed multiple times at different stages.

The Goods and Services Tax (GST) was introduced to streamline this. The three main components of GST are:

• SGST (State Goods and Services Tax): The state government imposes this tax on the supply of goods and services within that state.
• CGST (Central Goods and Services Tax): The central government imposes this tax on the supply of goods and services within a state.
• IGST (Integrated Goods and Services Tax): Introduced specifically for interstate transactions of
  goods and services. IGST acts as a combined levy, incorporating both CGST and SGST.

IGST ensures the central and state governments receive their respective shares of tax revenue from interstate trade, promoting a unified tax system across India.

IGST is levied on all types of interstate transactions, where goods and services move outside a state. These transactions can be classified into 4 categories.

• Interstate supply of goods and services: IGST is applicable when goods or services move between different states. The seller collects the tax revenue from the customer by charging it on the sales invoice, and then transfers it to the Central Government.
• Import and export of goods into and from India: All imports into India and exports from India are charged IGST. Importers and exporters have to pay IGST and customs duties to the Central Government.
• Supply to or by Special Economic Zones (SEZs): IGST is applied to all transactions between SEZs, as they are considered to be outside India’s customs territory.
• Export-oriented units (EOUs) supply: The Foreign Trade Policy recognises EOUs as manufacturing units engaged in exporting their entire production. They, too, attract IGST as SEZs.

The introduction of IGST in India’s tax system brought several advantages for businesses and the economy as a whole.

Let us explore some of its key features:

• Applies to Interstate Transactions: IGST is levied solely on the supply of goods and services between two different states in India. This includes both Business-to-Business (B2B) and Business-to-Consumer (B2C) transactions.
• Uniform Tax Rate: Unlike CGST and SGST, which have separate rates for different states, IGST boasts a single, unified tax rate set by the GST Council. This ensures transparency and predictability for businesses operating across state borders.
• Destination-Based Tax: IGST follows the destination principle. This means the tax collected on an interstate sale goes to the consuming state (destination state), where the goods or services are finally used. This ensures the state where the economic activity ultimately takes place receives its fair share of tax revenue.
• Input Tax Credit (ITC) Mechanism: A crucial feature for businesses, IGST allows for claiming input tax credit (ITC). This means businesses can utilise the IGST paid on purchases to offset their own IGST liability on future sales. This helps reduce the overall tax burden and promotes a smooth flow of credit across the supply chain.
• Reduced Compliance Burden: Prior to IGST, interstate transactions involved complex tax calculations and separate filings for central and state taxes. IGST simplifies this by requiring businesses to file a single return for all interstate supplies. This reduces administrative costs and paperwork for businesses.
• Enhanced Revenue Sharing: With IGST, the central and state governments share the tax revenue collected on interstate trade in a pre-determined manner. This fosters a sense of cooperation and ensures both levels of government benefit from economic activity across the country.

GST rates in India are not fixed permanently and can be revised periodically. The decision-making body for GST rates is the GST Council, a joint forum comprising representatives from the central government and finance ministers from all Indian states and union territories.

There are currently five primary GST slabs - 0%, 5%, 12%, 18%, and 28% - along with a few less-used rates. The GST Council determines the specific rate assigned to a good or service. For example, the GST on health insurance plan premiums is currently 18%.

On 15 August 2025, the Indian Prime Minister, Narendra Modi, announced upcoming alterations to GST, with revised rates effective from Diwali of 2025. These alterations focus on a simplified tax framework, where most goods and services will be taxed at 5% and 18%. The slabs of 12% and 28% will be eliminated. The GST on health insurance plans is likely to be rationalised to a lower rate.

All goods and services under GST are classified using the Harmonised System Nomenclature (HSN) code system for goods or the Services Accounting Code (SAC) system for services. The GST Council links these codes with specific tax slabs.

When a business exports goods out of the state, the IGST paid on those goods can be automatically refunded. The exporter files a shipping bill electronically with customs authorities. This document serves as proof of export.

The exporter ensures they have filed their GST returns (GSTR-1 and GSTR-3B) accurately, reflecting the exported goods and the IGST paid on them. Government systems automatically match the data from the shipping bill with the GST return information.

If there are no discrepancies, the system automatically processes the IGST refund and electronically credits it to the exporter’s bank account linked with customs.

Let’s understand this with the help of an example.

Suppose a textile manufacturer from Gujarat exports goods worth ₹10 lakhs to the USA. The IGST rate applicable is 12%.

The exporter deposits an IGST of ₹ 1.2 lakhs (10,00,000 x 12%) while filing the shipping bill and GSTR-3B with the customs authority. After the customs verifies the export details, it approves the IGST refund claim, and the Gujarat-based exporter receives the IGST amount of ₹ 1.2 lakhs in the bank account linked to their GSTIN.

The introduction of the Integrated Goods and Services Tax (IGST) has significantly transformed India’s tax landscape for interstate transactions. By streamlining the process, promoting transparency, and ensuring a fairer distribution of tax revenue, IGST has paved the way for a more unified market and economic growth.

From simplified tax calculations to reduced compliance burden and efficient credit flow, IGST calculation offers numerous benefits for businesses operating across state borders. As the GST regime continues to evolve, IGST remains a cornerstone in facilitating the seamless movement of goods and services across the nation.

With its well-defined features and functionalities, IGST empowers businesses and contributes to the overall development of the Indian economy.

IGST applies to health insurance plans at 18%. Thus, if you want to save on IGST, consider buying low-premium health insurance.

TATA AIG’s affordable mediclaim policy can fulfil your requirements by providing adequate coverage and necessary add-ons. You can choose and buy health insurance plans from the options of family health insurance plans, individual health insurance plans, or super top-up health insurance plans.

Also Read: Tax Saving on Medical Insurance Bills for Senior Citizens Under 80D