IGST; Integrated Goods and Services Tax

IGST stands for Integrated Goods and Services Tax. IGST is one of the three components of Goods and Services Tax. IGS tax is levied when there is an inter-state transfer of goods and services.

The three 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 introduced by the central government in July 2017, the idea was to subsume all the various indirect taxes into one. The reason to implement GST was to simplify the indirect taxation system for the supply and demand side. India is a federal country and we have many levels of governance. In terms of finance, both central and state governments are permitted to collect and levy taxes. 

For the same reason, it was logistically difficult to have just one simple tax category. Therefore we have three categories to accommodate for the different levels of transactions and taxation.

How are CGST, SGST and IGST implemented?

CGST and SGST

CGST and SGST are used for intra state transfer of goods and services. Intrastate means within the same state. For example: Movement of goods from Delhi and within Delhi will attract CGST and SGST.

What is IGST?

IGST

Integrated Goods and Service Tax or IGST numerically equals= CGST+SGST. The movement of goods from New Delhi to Agra will attract IGST.

You may have a few doubts:-

• Does this mean inter-state transfer is more expensive than intrastate transfer? 
• Which state has to pay the tax?
• Which state receives the tax?
• Does the central government have any part to play in it?

We will answer all these questions in the next few segments. 

Features of IGST

• IGST is equal to CGST+SGST.
• It is a destination-based tax and it will accrue to the importing state.
• It lowers the tax burden by taxing inter-state transactions only once.

IGST Explained: An Example

Let’s look at the formula for IGST Tax once again.

IGST = CGST + SGST

But this is just a numerical game. It does not mean that IGST is more expensive.

Let’s take the example of cashew nuts. 

Interstate: Cashew nuts attract an IGST of 5% in case of interstate transfer. So if cashew nuts are being sold from Delhi to Agra, traders in Agra will pay the IGST, traders in Delhi will collect it and they pay it to the government

Intrastate: In case of transfer within the same state, it will attract a CGST of 2.5% that goes to the central government and SGST of 2.5% that goes to the central government. In total, the tax incidence is 5%.

So, CGST and SGST are two halves of the IGST. This goes the same for all the products.

Let’s have a look at an IGST example.

Say there is a registered trader, Mukesh, based out of Ahmedabad who sold goods to Ajay, a trader based out of Mumbai for Rs 20 lakh, and Ajay further sold them to Anita, a registered trader in Lucknow for Rs 25 lakh. 

Stage 1

Mukesh to Ajay

Mukesh will collect the IGST on Rs 20 lakh from Ajay.

Say the IGST tax rate applicable here was 5%. 

Ajay’s payment to Mukesh is 21 lakh inclusive of GST this extra Rs 1 lakh can be claimed in the next stage.

Stage 2:

Ajay sells these goods again to Anita at 5%. Ajay will collect a total of Rs 22,05,500. Out of which, he will have to pay Rs 1,05,000 to the government which he received as tax. 

However, Ajay can claim the input tax credit on this amount. 

Remember in Stage 1, Ajay had paid Rs 1 lakh as IGST to Mukesh. He can set this amount off with Rs 1.05 lakh and pay Rs 5,000 to the government.

Which state will receive the tax revenue?

One thing to remember in IGST is that the importing state gets the accrued benefit of taxes. 

So, in the IGST example,  for the transaction between Mukesh and Ajay, the tax will be accrued to Maharashtra finally. This is when the central government will distribute the tax to the state after receiving it from the traders.  So after Mukesh submits the total IGST tax with the central government, the state’s share will be passed on to the Maharashtra state government.

Similarly, for the trade between Ajay and Anita, Uttar Pradesh will get the accrued benefit. After Ajay files the tax he collected from the transaction with the central government, it is Uttar Pradesh that will receive its share from the total IGST paid by Ajay.

Integrated Goods and Services Tax collected at various stages by the traders is paid to the central government first, after which, the central government distributes or shares the state government’s share with them according to the rates fixed by the authorities.

This has helped Ajay to stay away from double taxation. 

Therefore, in simple words, IGST is paid by the receiving person, collected by the sender, given to the central government, and distributed between central and state governments.

Things to keep in mind about IGST

There are two important points you need to remember regarding IGST:

• The importing state gets the final tax revenue
• Integrated Goods and Service Tax or IGST is a combination of the state’s share (SGST) and the central government’s share (CGST) of the tax

How are the GST rates fixed?

With the onboarding of the Goods and Services tax regime in the year 2017 and the exit of indirect taxes the government had also put in place a GST Council. This council looks after setting the rates in consultation with the government, grievances of traders and customers, in short, it takes care of the entire GST universe.

The GST council conducts several meetings where it shares with the media important decisions that have been taken. It is in these review meetings that the GST council announces a change in GST rates if any. The rates are fixed by the council in consultation with the government and relevant ministries depending on the product. 

Refund of IGST

• The integrated tax for foreign tourists is a similar pattern to that of exports, given that international tourist s known to be non-resident of India that makes a visit to the country for a period not exceeding six months. The Indian tax law facilitates the refund of IGST paid to an international tourist leaving India on goods being taken outside the country.
• The refund to taxpayers who have remitted payments to another tax head, that is SGST or CGST instead of IGST, and it would be refunded. Such citizens must be made a re-deposit in the respective tax head.