The full form of IGST stands for Integrated Goods and Services Tax. IGST is one of the key components of the Goods and Services Tax (GST) system. This tax applies when there is a transfer of goods and services between different states.
The three key components of GST are:
- CGST: Central Goods and Services Tax
- SGST: State Goods and Services Tax
- IGST: Integrated Goods and Services Tax
When GST was rolled out by the central government in July 2017, its objective was to consolidate various indirect taxes into a single, streamlined system. The implementation of GST aimed at simplifying the tax system for both the supply and demand sides. Since India is a federal nation, both the central and state governments are authorized to levy and collect taxes.
Given this, it was not feasible to have a single tax structure to cover all needs. Hence, the division into three categories was introduced to address the various levels of taxation and transactions.
What Does IGST Mean?
Here’s a simplified explanation of IGST:
- IGST Definition
Integrated Goods and Services Tax (IGST) can be viewed as the sum of CGST and SGST. For example, the movement of goods from New Delhi to Agra will be subject to IGST.
You might have the following questions:
- What exactly is Integrated Goods and Services Tax?
- Does it mean inter-state transfers are more expensive than intra-state transfers?
- Which state is responsible for paying the tax?
- Which state receives the tax?
- Does the central government have any involvement in this process?
We’ll address these questions in the following sections.
Key Features of IGST
- IGST is the sum of CGST and SGST.
- It is a destination-based tax, meaning it will accrue to the state where the goods or services are consumed.
- It reduces the tax burden by imposing tax on inter-state transactions only once.
Understanding IGST: A Practical Example
Let’s review the IGST formula once again:
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IGST = CGST + SGST |
However, it’s important to note that just because IGST equals CGST plus SGST doesn’t mean it’s a more expensive tax.
Let’s consider an example involving cashew nuts.
- Interstate Transfer: When cashew nuts are transferred across state borders, they incur an IGST of 5%. For instance, if the goods are being sent from Delhi to Agra, the traders in Agra will pay the IGST, and the traders in Delhi will collect and remit the tax to the government.
- Intrastate Transfer: If the transfer occurs within the same state, it is subject to CGST of 2.5%, which is deposited to the central government, and SGST of 2.5%, which is paid to the state government. In total, the tax remains 5%.
In essence, CGST and SGST together make up the IGST. This applies to all goods and services.
Here’s another example to explain how IGST works:
Let’s say Mukesh, a registered trader in Ahmedabad, sells goods worth Rs 20 lakh to Ajay, a trader in Mumbai. Ajay, in turn, sells the goods to Anita, a registered trader in Lucknow for Rs 25 lakh.
Stage 1
Mukesh to Ajay
Mukesh collects IGST on Rs 20 lakh from Ajay.
If the applicable IGST rate is 5%, Ajay’s payment to Mukesh will total Rs 21 lakh, which includes Rs 1 lakh as GST. Ajay can claim this tax credit in the next stage.
Stage 2
Ajay sells the goods to Anita, collecting Rs 22,05,500 at 5% IGST. Out of this, Rs 1,05,000 is due to the government as tax. However, Ajay can claim the input tax credit for Rs 1 lakh paid to Mukesh, offsetting the amount. Ajay will only need to pay Rs 5,000 to the government.
Which State Receives the Tax Revenue?
It’s important to note that the tax revenue under IGST is received by the importing state.
In the example of IGST, for the transaction between Mukesh and Ajay, Maharashtra will be the state that finally receives the tax. Once Mukesh submits the total IGST to the central government, the share allocated to Maharashtra will be transferred to the Maharashtra state government.
Similarly, for the trade between Ajay and Anita, Uttar Pradesh will receive the tax revenue. After Ajay remits the tax to the central government, the central government will allocate Uttar Pradesh’s share of the IGST collected.
The IGST collected by traders at various stages is initially paid to the central government, and the central government subsequently distributes the state’s portion to the respective state governments according to the prescribed rates.
This system ensures that Ajay avoids double taxation.
In essence, the process involves IGST being paid by the recipient, collected by the seller, remitted to the central government, and then shared between the central and state governments.
Key Points to Remember About IGST
Here are two crucial points regarding IGST:
- The importing state receives the final tax revenue.
- IGST is a combination of both the state’s share (SGST) and the central government’s share (CGST) of the tax.
How are GST Rates Determined?
When the Goods and Services Tax system was introduced in 2017, replacing previous indirect taxes, a GST Council was established to oversee the system. The council is responsible for setting the rates, addressing concerns from traders and consumers, and managing the entire GST framework.
The GST Council holds periodic meetings where they discuss and announce any changes in GST rates. These decisions are made in consultation with the government and relevant ministries, considering the type of product being taxed.
Refund of IGST
- For international tourists, the IGST refund process mirrors that of export transactions. Foreign tourists who are not residents of India and stay in the country for no more than six months are eligible for a refund of the IGST paid on goods exported from India.
- If taxpayers mistakenly pay SGST or CGST instead of IGST, they are entitled to a refund. In such cases, the refund is processed after the taxpayer re-deposits the tax in the correct head.