What is IGST? Integrated Goods and Services Tax

IGST is a crucial part of India’s indirect taxation system, especially when it comes to buying and selling goods or services between different states. Throughout this article, we’ve explored the key features, examples, and even the process of refunds related to IGST, aiming to decode this aspect of the Goods and Services Tax (GST) system.

What is IGST?

Integrated Goods and Services Tax (IGST) is a crucial component of the Goods and Services Tax (GST) in India. It plays a significant role in regulating the taxation on the interstate supply of goods and services. Integrated Goods and Services Tax is applicable when goods or services are transferred from one state to another, ensuring a uniform tax system for interstate transactions.

Understanding the integrated tax structure is crucial for taxpayers, ensuring accurate payments and preventing penalties or fines associated with incorrect tax allocations.

Also Read More About Indirect Tax

Features of IGST

1. Applicability Across State Borders:

Integrated Goods and Services Tax is applicable when a party sends goods or services, and the tax is collected by the Central Government from the sender, streamlining the taxation process for seamless interstate commerce.

2. Tax Collection by the Central Government:

The responsibility of collecting IGST lies with the Central Government. The tax is levied on the party initiating the transfer of goods or services across state lines.

3. Equal Revenue Distribution:

One of the unique features of IGST is that the revenue collected is not retained solely by the Central Government. It is apportioned equally between the Central Government and the government of the state where the goods or services are consumed.

4. Input Tax Credit (ITC) Mechanism:

Businesses can claim Input Tax Credit while paying IGST. This feature allows businesses to offset the tax they have already paid on the inputs, preventing double taxation and promoting a seamless credit mechanism.

IGST Explained: An Example

Let’s understand the meaning of integrated tax with the help of an IGST example.

Stage 1 – Rajesh to Arjun

Rajesh, a registered trader in Jaipur, sells goods to Arjun, a trader based in Kolkata, for ₹30 lakhs. The applicable IGST tax rate, in this case, is 5%. Rajesh collects IGST of ₹1.5 lakhs (5% of ₹30 lakhs) from Arjun. Arjun’s payment to Rajesh amounts to ₹31.5 lakhs, inclusive of the IGST. Arjun can claim this extra ₹1.5 lakh in the next stage.

Stage 2 – Arjun to Sneha

Arjun, having acquired the goods, now sells them to Sneha, a registered trader in Chennai, at the same IGST rate of 5%. Arjun collects a total of ₹33,07,500 from Sneha. Out of this, he must pay ₹1,57,500 to the government, representing the IGST. However, Arjun can claim the input tax credit on this amount.

In Stage 1, Arjun paid ₹1.5 lakhs as IGST to Rajesh. He can set off this amount with the ₹1.57 lakhs he needs to pay in Stage 2, leaving him with a balance of ₹7,500 to be paid to the government.

Which State will Receive the Tax Revenue?

Let’s break down this process using an IGST example.

1. Rahul to Deepak Transaction:

Bangalore trader Rahul sells goods to Mumbai trader Deepak, collecting IGST. The IGST submitted to the Central Government benefits Mumbai, the importing state. After Rahul’s submission, Maharashtra’s share is passed on to its state government.

2. Deepak to Nisha Transaction:

Deepak sells goods to Nisha in Lucknow, collecting IGST filed with the Central Government. As Uttar Pradesh is the importing state, it receives the accrued benefit. Deepak’s total IGST payment is submitted to the Central Government, and Uttar Pradesh’s share is distributed from the overall IGST paid by Deepak.

3. Central Government’s Role:

IGST collected at various stages by traders is initially paid to the Central Government. The Central Government then distributes or shares the state government’s share based on predetermined rates set by the authorities.

Things to Keep in Mind About IGST

1. Billing of IGST:

In the case of an inter-state transaction, the seller must bill IGST on the invoice. The buyer then pays the IGST amount as indicated on the invoice. Subsequently, the seller remits the IGST collected to the central government.

2. Final Tax Revenue to the Importing State:

IGST is a combination of two components—the state’s share (SGST) and the central government’s share (CGST) of the tax. The ultimate tax revenue is accrued to the importing state, where the goods or services are consumed.

3. Simplifying the IGST Components:

The state’s share represents the tax portion that goes to the state government. The central government’s share is the portion directed to the central government. IGST ensures a fair distribution between the central and state governments.

4. Compliance and Transparency:

Adhering to the billing process ensures compliance with IGST regulations. Maintaining clear records of IGST transactions helps in transparent financial management.

How are the GST Rates Fixed?

Since 2017, the GST Council has overseen taxation, addressing concerns and setting rates by collaborating with the government. It plays a pivotal role in deciding nuanced GST rates based on product nature. Regular meetings are held to make vital decisions, making the council central in shaping and refining the GST framework for the benefit of traders, customers, and the economy.

Refund of IGST

1. Who Gets IGST Refunds?

If you’re a foreign tourist visiting India for less than six months, the process is similar to how exports work. You can get a refund of IGST paid when you take goods purchased in India back to your home country.

The integrated tax for foreign tourists mirrors the export pattern, allowing international visitors to claim a refund on IGST for goods taken out of the country.

2. Refund for Mistakes in Payment:

Sometimes, taxpayers make mistakes by paying SGST or CGST instead of IGST. In such cases, they need to re-deposit the money in the correct tax head, and the refund process starts.

3. How Does the Refund Process Work?

If you’re an international tourist leaving India, you can claim a refund on the IGST you paid for goods you’re taking out of the country.

Citizens who mistakenly paid SGST or CGST must fix the error by re-depositing the money in the right tax head.

FAQs

What is IGST?

IGST stands for Integrated Goods and Services Tax.

Can IGST Be Adjusted Against SGST?

SGST input tax credit (ITC) cannot be utilised to pay the liability of Central Goods and Services Tax (CGST). However, it can be used to pay the liability under State Goods and Services Tax (SGST). The SGST credit balance can be utilised to pay off IGST’s liability.