What Is IGST? The Integrated Goods and Services Tax Explained

The Goods and Services Tax (GST) framework in India replaced a complex array of central and state-level indirect taxes to streamline collection and compliance. This unified tax system fosters a single national market, facilitating the smoother movement of goods and services. Within this integrated structure, the Integrated Goods and Services Tax (IGST) serves as a significant component, addressing various transactional scenarios.

Core Principles of IGST

Integrated Goods and Services Tax (IGST) is an indirect tax within India’s GST system, designed for inter-state movement of goods and services. It is a destination-based consumption tax, meaning revenue accrues to the consuming state. IGST enables seamless inter-state trade by ensuring a uniform tax rate across the country. This uniformity helps prevent complexities and cascading effects from previous multiple state taxes. The Central Government levies and collects IGST, distributing revenue to the appropriate consuming states.

Transactions Subject to IGST

IGST applies to the inter-state supply of goods and services within India, covering transactions where the supplier and place of supply are in different states or Union Territories. For example, sales between states or IT services across state lines incur IGST.

IGST also applies to the import of goods and services into India. For goods, it is charged in addition to customs duties. Services imported into India are also subject to IGST, ensuring fair tax treatment compared to domestic products.

Supplies to or by Special Economic Zones (SEZs) or Export-Oriented Units (EOUs) are also considered inter-state supplies, attracting IGST. Exports of goods and services from India are “zero-rated” under IGST, meaning no tax is levied on these supplies. Exporters can claim refunds for any IGST paid on inputs used for export, promoting competitiveness in global markets.

Operational Mechanism of IGST

The operational mechanism of IGST involves a centralized levy, credit utilization, and revenue apportionment. When an inter-state supply occurs, the seller charges IGST on the invoice and remits the collected tax to the Central Government. Both the seller and the buyer need a valid Goods and Services Tax Identification Number (GSTIN) for compliance.

The Input Tax Credit (ITC) system allows businesses to utilize IGST paid on purchases to offset their tax liabilities. IGST credit utilization follows a specific order: first, it offsets IGST liability. Any remaining credit then settles Central Goods and Services Tax (CGST) liabilities. Finally, any further remaining IGST credit can be applied against State Goods and Services Tax (SGST) or Union Territory Goods and Services Tax (UTGST) liabilities, in any order.

The Central Government apportions collected IGST revenue to the consuming state based on the destination principle, ensuring the state where goods or services are consumed receives its share. This settlement mechanism involves fund transfers between central and state governments, ensuring fair revenue distribution.

Relationship with Other GST Components

The Indian GST framework comprises multiple components. Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are levied on intra-state supplies, meaning transactions within the same state. For instance, if a sale happens entirely within one state, both CGST and SGST are applied, with revenue going to the central and respective state governments. In Union Territories, Union Territory Goods and Services Tax (UTGST) replaces SGST for intra-territory supplies.

In contrast, IGST is designed for inter-state transactions and imports. It consolidates central and state tax components into a single levy for these cross-border movements. This distinction is crucial for applying the correct tax type and ensuring proper revenue distribution. The rate of IGST for a particular good or service is generally equivalent to the combined rates of CGST and SGST that would apply if the transaction were intra-state.

The integration of IGST with CGST and SGST/UTGST is achieved through the Input Tax Credit (ITC) mechanism. This credit flow prevents the cascading effect of taxes, where taxes are levied on previously taxed amounts. By allowing businesses to offset IGST paid on inter-state purchases against their output tax liabilities, including CGST and SGST/UTGST, the system ensures tax is ultimately borne by the final consumer at the point of consumption. This fosters a unified tax structure across states and simplifies compliance.