What is Integrated Goods and Services Tax (IGST)

In straightforward terms, IGST stands for Integrated Goods and Service Tax, and numerically, it is equivalent to CGST (Central Goods and Services Tax) plus SGST (State Goods and Services Tax). For instance, when goods move from New Delhi to Agra, IGST comes into play.

You might be curious about the following questions:

1. What exactly is integrated goods and service tax?
2. Does this imply that inter-state transfers incur higher costs than intra-state transfers?
3. Which state is responsible for paying the tax?
4. Which state receives the tax?
5. What role does the central government play in this?

Key Features of Integrated Goods and Services Tax

1. Applicability to Inter-state Transactions: IGST applies to all financial transactions involving the supply of goods and services between two states, including union territories. This ensures a standardised taxation approach for inter-state movements, eliminating the complexities associated with multiple state taxes.
2. Uniform Rate: The GST Council establishes the IGST rate, ensuring consistency across all states. This prevents confusion arising from varying tax rates for inter-state transactions.
3. Input Tax Credit (ITC): Businesses paying IGST on their purchases during inter-state transactions can claim input tax credit. This allows them to offset the IGST paid against their final tax liability, fostering a seamless tax credit mechanism.
4. Destination Principle: Under IGST, tax revenue generated from an inter-state transaction benefits the state where the goods or services are ultimately consumed (destination state). This ensures that the taxing authority of the destination state receives the tax revenue.

Understanding Integrated Goods and Services Tax with an Example

Let's revisit the IGST formula: IGST = CGST + SGST.

However, this equation is not an indication of IGST being more expensive; it's a numerical breakdown.

Consider the example of cashew nuts. In the case of interstate transfers, cashew nuts attract a 5% IGST. If sold from Delhi to Agra, traders in Agra pay the IGST, while traders in Delhi collect and remit it to the government.

For intrastate transfers within the same state, a CGST of 2.5% goes to the central government, and an SGST of 2.5% also goes to the central government, totalling a 5% tax incidence. Thus, CGST and SGST represent two halves of IGST, applicable uniformly across products.

Now, let's explore an IGST example:

Imagine a registered trader, Rakesh, in Ahmedabad, selling goods to Vijay in Mumbai for Rs. 20 lakh, and Vijay further selling them to Sunita, a registered trader in the city of Lucknow, for Rs. 25 lakh.

Stage 1: Rakesh to Vijay

Rakesh collects 5% IGST on Rs. 20 lakh from Vijay, making Vijay's payment Rs. 21 lakh (inclusive of GST).

Stage 2: Vijay to Sunita

Vijay sells the goods to Sunita at 5%, collecting a total of Rs. 22,05,500. Out of this, he pays Rs. 1,05,000 to the government as tax. Vijay can, however, claim input tax credit, offsetting the Rs. 1 lakh paid in Stage 1. Consequently, he pays Rs. 5,000 to the government.

State That Receives the Tax Revenue in Integrated Goods and Services Tax

In IGST, it's crucial to note that the importing state reaps the accrued tax benefits. In the example involving Rakesh and Vijay, the tax ultimately accrues to the state of Maharashtra.

The central government distributes this tax to the state after receiving it from the traders. Consequently, after Rakesh submits the total IGST tax to the central government, the state's share is transferred to the Maharashtra state government.

Similarly, for the trade between Vijay and Sunita, Uttar Pradesh gains the accrued benefit. After Vijay remits the tax collected from the transaction to the central government, Uttar Pradesh receives its share from the total IGST paid by Vijay.

Traders pay the Integrated Goods and Services Tax to the central government at different stages. Subsequently, the central government allocates or shares the state government's portion based on predetermined rates.

This system prevents double taxation and ensures a streamlined process, where IGST is paid by the recipient, collected by the sender, remitted to the central government, and then distributed between the central government and state government.

Things to consider regarding Integrated Goods and Services Tax

1. Integrated Goods and Services Tax Billing: In the context of inter-state transactions, it is imperative for the seller to include Integrated Goods and Services Tax (IGST) on the invoice. Subsequently, the buyer settles this amount, and the seller remits it to the central government.
2. Goods and Services Tax Identification Number Requirement: Both the seller and the buyer participating in an inter-state transaction must possess a valid Goods and Services Tax Identification Number (GSTIN) to ensure seamless compliance with IGST regulations.
3. Jurisdictional Authority: The jurisdiction for IGST falls under the purview of the central government. This framework facilitates consistent administration and tax collection for inter-state supplies.
4. Import and Export Dynamics: IGST is also applicable to goods and services imported into India or exported out of the country. The tax treatment varies based on whether it is an import or export transaction.

Determination of Goods and Service Tax Rates

With the application of the Goods and Services Tax (GST) regime in 2017, replacing indirect taxes, the government established the GST Council. This council is responsible for determining the rates in collaboration with the government, addressing concerns of traders and customers, essentially overseeing the entire GST framework.

The GST council convenes multiple meetings where it communicates crucial decisions to the media. It is during these review sessions that any alterations to GST rates are announced. The council, in consultation with the relevant ministries and the government, establishes the rates based on the nature of the product.

Integrated Goods and Services Tax Refund Process

The refund mechanism for Integrated Goods and Services Tax (IGST) aligns with the export pattern for foreign tourists, particularly those recognized as non-residents of India, visiting the country for a duration not surpassing six months. Indian tax regulations enable the refund of IGST paid by an international tourist departing from India with goods taken outside the country.

Taxpayers who inadvertently remitted payments to a different tax head, such as State Goods and Services Tax (SGST) or Central Goods and Services Tax (CGST) instead of IGST, are eligible for a refund. In such cases, individuals need to redeposit the amount into the respective tax head for proper processing of the refund.