IGST: Integrated Goods and Services Tax

IGST stands for Integrated Goods and Services Tax. IGST is one of the three components of the Goods and Services Tax (GST). This tax is levied when there is an interstate transfer of goods and services.

The Three Components of GST

1. CGST: Central Goods and Services Tax

2. SGST: State Goods and Services Tax

3. IGST: Integrated Goods and Services Tax

Introduction of GST

The central government introduced GST in July 2017. It aimed to merge all indirect taxes into one unified tax. GST aims to simplify the indirect taxation system on both the supply and demand sides. India, being a federal country, has multiple levels of governance. Both central and state governments are authorized to collect and levy taxes. Thus, it was logistically difficult to implement just one unified tax category. So, the three components of GST were introduced. They accommodate different levels of transactions and taxation.

What is IGST?

Here’s a simplified understanding of IGST:

• IGST Meaning: Integrated Goods and Services Tax (IGST) is equal to CGST + SGST. For example, the movement of goods from New Delhi to Agra will attract IGST.

Common Questions About IGST

1. What is integrated goods and service tax?

2. Does this mean inter-state transfer is more expensive than intrastate transfer?

3. Which state has to pay the tax?

4. Which state receives the tax?

5. Does the central government have any part to play in it?

These questions will be answered in the following segments.

Features of IGST

1. IGST is equal to CGST + SGST.

2. It is a destination-based tax and accrues to the importing state.

3. It reduces the tax burden by taxing interstate transactions only once.

IGST Explained with an Example

To understand IGST better, let’s look at the formula:

IGST = CGST + SGST

This numerical equation does not mean that IGST is more expensive.

Example: Cashew Nuts

• Interstate: Cashew nuts attract an IGST of 5% for interstate transfer. If cashew nuts are sold from Delhi to Agra, traders in Agra will pay the IGST, traders in Delhi will collect it, and then pay it to the government.

• Intrastate: In the case of an intrastate transfer within the same state, it will attract a CGST of 2.5% and an SGST of 2.5%. Both these taxes are levied on the central government, totaling a 5% tax incidence.

CGST and SGST are effectively two halves of IGST, and this formula applies to all goods and services.

Detailed IGST Example

Let’s consider a detailed transaction example involving three traders:

1. Mukesh (Ahmedabad) sells goods to Ajay (Mumbai) for Rs 20 lakh.

2. Ajay resells these goods to Anita (Lucknow) for Rs 25 lakh.

Transaction Stages

• Stage 1: Mukesh to Ajay Mukesh collects IGST on Rs 20 lakh from Ajay. If the IGST rate is 5%, Ajay pays Rs 21 lakh (including Rs 1 lakh IGST) to Mukesh.

• Stage 2: Ajay to Anita Ajay sells the goods to Anita at 5% IGST, totaling Rs 22,05,500. Ajay must pay Rs 1,05,000 to the government. However, Ajay can claim an input tax credit. Since Ajay already paid Rs 1 lakh to Mukesh, he offsets this amount and pays only Rs 5,000 to the government.

Which State Receives the Tax Revenue?

In IGST, the importing state ultimately receives the tax revenue. For the Mukesh-to-Ajay transaction, Maharashtra (importing state) receives the tax share after Mukesh submits it to the central government. Similarly, for the Ajay-to-Anita transaction, Uttar Pradesh gets the accrued benefit after Ajay files the tax.

Tax Collection and Distribution

The central government first collects the IGST at various transaction stages. After collection, the central government distributes the states' share. It uses rates set by authorities. This avoids double taxation and simplifies the process.

Key Points About IGST

1. The importing state receives the final tax revenue.

2. IGST is a combination of the state’s share (SGST) and the central government’s share (CGST) of the tax.

How Are GST Rates Fixed?

The GST Council, established in 2017, manages GST rates. This council sets the rates with the government's input. It addresses traders' and customers' grievances and oversees the GST system. The council holds review meetings. It announces any rate changes after consulting relevant ministries.

Refund of IGST

Foreign tourists in India can get an IGST refund on goods they take outside the country, akin to the export pattern. Additionally, taxpayers who mistakenly pay SGST or CGST instead of IGST can get refunds. They must re-deposit the money into the correct tax head.

Conclusion

IGST merges different taxes into a single system. It streamlines interstate transactions, benefiting traders and governments. It also ensures a fair tax distribution.