What is Integrated Goods and Services Tax (IGST) ?

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.

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Imagine CGST (Central Goods and Service Tax) and SGST (State Goods and Service Tax) as individual ingredients in a dish. While both are essential for the final product, would it not be easier to have a pre-mixed version for specific situations? That is exactly what IGST (Integrated Goods and Services Tax) is.

IGST is a single tax levied on the movement of goods and services across states in India. It combines the elements of CGST and SGST into one, simplifying the taxation process for interstate transactions.

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.

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.

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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%.

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.

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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.

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.