IGST: A Comprehensive Guide for Taxpayers
Updated: Aug 28
The full form of IGST is Integrated Goods and Services Tax, an integral element of GST. When there is an interstate transfer of goods and services, the IGS tax is imposed. The three elements that make up GST are the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and IGST. The national government intended to combine all of the several indirect taxes into one when it introduced the Goods and Services Tax (GST) in July 2017. The GST was introduced to streamline the indirect tax structure for both the supply and demand sides. India is a federal nation with multiple tiers of government. Regarding financial matters, the federal government and state governments are allowed to collect taxes. In this article, we will provide a detailed explanation of ISGT.
Table of Contents
What is IGST?
In contrast to other taxes you may be aware of, the IGST is not gathered by a single government agency. Rather, it serves as a link between the federal and state governments, making sure each gets its fair part of the tax money. To put it another way, IGST facilitates a smoother flow of products and services throughout India by streamlining the tax process for interstate transactions.
Illustration: Assume that A, a Delhi-based registered trader, sold items to Mumbai-based merchant B for Rs. 20 lakh, and that B then sold them to Kolkata-based registered trader C for Rs. 25 lakh. The taxes on the transaction are calculated as follows:
Stage 1: A will get from B the IGST on Rs 20 lakh. Let's say that the local IGST tax rate was 5%. The amount that B paid A is Rs 21 lakh (GST included). An additional Rs 1 lakh may be claimed at a later time.
Stage 2: B resells these items to C at the tax rate of 5%. B will be paid 22,05,500 in total. Of which, he must provide the government the sum of Rs 1,05,000 that he was taxed on. B, however, is eligible to claim this amount as an input tax credit. In Stage 1, B sent A an IGST payment of Rs 1 lakh. He can pay the government Rs 5,000 and deduct this amount from his earnings of Rs 1.05 lakh.
In the IGST example, the tax will eventually be attributed to Maharashtra for the transaction between A and B. At this point, the tax that the federal government receives from the dealers will be given to the state. Therefore, the state's portion will be transferred to the Maharashtra state government once A files the entire IGST tax return with the federal government. In a similar vein, West Bengal will profit from the trade between B and C. West Bengal would get its portion of the total IGST that Ajay paid after he submits the tax he got from the transaction with the federal government. Combined Products and Services The central government receives the tax that the traders have collected at different points in time. The central government then pays the state governments according to the rates that have been set by the authorities. B has benefited from not paying double taxes in this example.
Key Features of IGST
Businesses and the Indian economy as a whole benefited in a number of ways from the implementation of the IGST in the country's tax structure. Let's examine a few of its salient attributes:
Applicable to Interstate Transactions: The Input-Gross Tariff (IGST) is imposed exclusively on the exchange of goods and services between two distinct Indian states. Business-to-business (B2B) and business-to-consumer (B2C) transactions are included in this.
Destination-Based Tax: The destination principle is applied to the IGST. This indicates that the consuming state, or destination state, is the place where the products or services are ultimately used, and receives the tax collected on an interstate sale. This guarantees that the state that hosts the economic activity eventually gets its fair share of tax money.
Uniform Tax Rate: The IGST has a single, unified tax rate that is determined by the GST Council, in contrast to CGST and SGST, which have various rates for each state. This guarantees predictability and transparency for companies who operate across state lines.
Mechanism of the Input Tax Credit (ITC): One important element of IGST for businesses is that it makes input tax credit (ITC) claims possible. This implies that companies can use the IGST they have already paid on purchases to reduce the IGST they would owe on future sales. This lowers the overall tax burden and facilitates credit flow across the supply chain.
Improved Revenue Sharing: Under the IGST, the federal and state governments divide the taxes gathered from interstate commerce according to a set schedule. This encourages collaboration and guarantees that the nation's economy benefits both tiers of government.
Decreased Compliance Burden: Interstate transactions entailed intricate tax computations and separate submissions for federal and state taxes prior to the implementation of the IGST. This is made simpler by IGST, which mandates that companies must file a single GST return for all interstate supplies. For businesses, this means less paperwork and administrative expenses.
Cross-Utilization of Credits
The process of using one tax component's credits against another is known as cross-utilization. In terms of GST, the total amount of Input Tax Credit (ITC) for IGST might be used to remit IGST, CGST, and SGST, in that order. Similarly, the entire amount of ITC for CGST could be used for IGST and CGST (but not SGST) remittances, respectively. Additionally, the entire amount of ITC for SGST may be used to remit IGST and SGST (but not CGST).
Process for IGST Refund
The IGST paid on items exported by a business outside of the state may be immediately reimbursed. The exporter electronically submits a shipment bill to the customs officials. This document is your export evidence. The exporter makes sure that the exported items and the IGST paid on them are appropriately shown in their GST returns (GSTR-1 and GSTR-3B). Data from the shipping bill and the details from the GST return are immediately matched by government systems. The system immediately processes the IGST refund and electronically credits it to the exporter's customs-linked bank account if there are no inconsistencies.
Conclusion
India's tax environment for interstate transactions has undergone a substantial change with the implementation of the Integrated Goods and Services Tax (IGST). The IGST has cleared the path for a more cohesive market and economic expansion by expediting the procedure, fostering transparency, and guaranteeing a more equitable allocation of tax income. Businesses that operate across state borders can benefit greatly from the IGST computation, which simplifies tax calculations and reduces compliance burdens while improving credit flow. IGST continues to be a vital component in enabling the smooth flow of goods and services throughout the country even as the GST regime changes.
FAQ
Q1. What is IGST?
A kind of GST known as the Integrated Goods and Services Tax (IGST) is levied on imports of products and services as well as interstate sales and deliveries of taxable commodities.
Q2. What are the benefits of IGST?
To enable businesses to collect tax credits for their GST payments, IGST creates an uninterrupted chain of Input Tax Credits (ITC) for interstate transactions. In contrast to certain tax regimes, the IGST streamlines the process by removing the requirement for interstate sellers and buyers to make advance tax payments.
Q3. How is IGST different from CGST and SGST?
Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) apply to intrastate transactions. The IGST operates as a combined levy for interstate transactions, merging the CGST and SGST components into a single tax rate.
Q4. Can IGST be adjusted against SGST?
Although the CGST liability cannot be satisfied with the SGST input tax credit (ITC), the SGST liability can be satisfied with the ITC under the States Goods and Service Tax (SGST). Furthermore, the IGST liability can be settled with the available SGST credit balance.
Q5. When IGST is applicable?
All transactions involving the supply of goods and services between two states are subject to the IGST. Union territories are included in this. It removes the complexity of different state taxes by guaranteeing uniformity in taxation for interstate movements.
Q6. How is IGST calculated?
IGST is the sum of CGST and SGST.
Q7. Can we claim IGST input?
If the products or services are later utilised for business and not for personal use, claims for this type of input tax credit may be made. The buyer needs to save the tax invoice, debit note, or other paperwork that proves they paid for the item.
Q8. Who will pay IGST?
The Central Government would impose IGST on all interstate sales of taxable goods and services. Money must be transferred between the corresponding accounts. Funds would need to be transferred to IGST accounts in order for "B" to use the credit of CGST and SGST to pay IGST.
Q9. What is the maximum rate at which IGST can be levied?
Using our HSN code & GST tax finder, you can determine which sin and luxury products are subject to the maximum 28% IGST tax.
Q10. What is IGST collected by the government for an interstate sale?
The federal government is in charge of collecting IGST, and it splits the proceeds with the state governments.
Q11. How can foreign tourists get an IGST refund?
Since an international tourist is defined as a non-resident of India who visits the nation for a duration of no more than six months, the integrated tax for foreign visitors is structured similarly to the export tax. When products are moved outside of India, Indian tax regulations provide for the reimbursement of IGST paid to foreign tourists departing the country, provided certain safeguards and requirements are met.
Q12. How does IGST impact e-commerce transactions between states in India?
IGST applies to inter-state e-commerce transactions. E-commerce operators must collect IGST on behalf of sellers and remit it to the government, ensuring compliance and simplifying tax collection across state borders.
Q13. Can IGST be utilized for payment of CGST and SGST?
Yes, IGST credit can be used for payment of IGST first, then CGST, and finally SGST/UTGST. This helps businesses efficiently manage their tax liabilities across different tax components.
Q14. What are the implications of IGST on drop shipment transactions?
In drop shipment scenarios where goods are supplied from one state to another but billed to a third state, IGST is levied on the transaction. The drop shipment process must adhere to IGST regulations to ensure proper tax compliance.
Q15. How is IGST calculated for services provided across multiple states?
For services spanning multiple states, the location of the supplier and recipient determines the applicability of IGST. Businesses must track the place of supply rules to correctly apply IGST on such services.
Q16. What is the procedure for claiming a refund of IGST paid on export of goods?
Exporters can claim a refund of IGST paid on exported goods by filing the relevant forms on the GST portal. The refund process requires accurate documentation of export transactions and IGST payments.
Q17. How does IGST apply to cross-border B2B and B2C transactions?
In cross-border B2B transactions, IGST is levied on imports. For B2C transactions, IGST applies to imports of services, ensuring that international transactions adhere to Indian tax regulations.
Q18. What role does IGST play in the GST composition scheme?
Businesses under the GST composition scheme are exempt from charging IGST on inter-state supplies. However, they must pay a lower, fixed rate of tax on their turnover, simplifying tax compliance for small businesses.
Q19. How does IGST affect the supply of goods to Special Economic Zones (SEZs)?
Supplies to SEZs are considered zero-rated supplies under IGST, meaning no IGST is charged on such transactions. Businesses can claim a refund of input tax credit on these supplies, promoting exports.
Q20. Can IGST be applicable on transactions within the same state under certain conditions?
While IGST typically applies to inter-state transactions, certain conditions, such as transactions involving SEZs or deemed exports, may attract IGST even within the same state.
Q21. How do businesses handle IGST on advance payments received for inter-state supplies?
Businesses must pay IGST on advance payments for inter-state supplies at the time of receipt. The advance tax liability must be adjusted against the final invoice when the supply is completed.
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