Lets we define IGST in layman’s terms. The Integrated Goods and Services Tax (IGST) is an essential pillar of the Goods and Services Tax (GST), which has two additional pillars: CGST and SGST. On July 1, 2017, the Government of India implemented GST to replace numerous taxes under the tagline ‘One Nation, One Tax.’ Prior to the implementation of GST, a taxpayer Forms such as Central Excise, Service Tax, and State VAT needed to be filed.
Although GST is a one-stage tax system, it is classified as CGST (Central Goods and Service Tax), SGST (States Goods and Service Tax), or IGST based on intrastate or interstate transactions.
In this post, we will go over the many parts of IGST, what it implies using an IGST example, and what companies should know about IGST. Let’s get started.
What is Integrated Goods and Services Tax (IGST)
Integrated Goods and Services Tax (IGST) is a crucial component of the Goods and Services Tax (GST) system in India. GST was introduced to streamline the indirect taxation system by subsuming various taxes like central excise, service tax, value-added tax (VAT), etc. IGST specifically deals with transactions involving the movement of goods and services across state borders.
The IGST Act controls the tax, and the federal government is in responsible of collecting taxes. Every interstate transaction involving taxable products or services will be subject to the Central Government’s IGST.
The government’s IGST tax prioritizes credit cross-utilisation, where a transfer of monies is necessary between the different accounts engaged in the transaction. After collecting the taxes, the federal government allocates them among the corresponding states.
As a result, while defining IGST or understanding what is integrated GST, we may say that IGST tax is levied when goods or services are transported from one state to another.
IGST Calculation
IGST is calculated as follows:
IGST = Taxable Value * IGST Rate
Where:
- Taxable Value is the value of the goods or services supplied.
- IGST Rate is the applicable IGST rate, which varies depending on the product or service.
Also Read: What Is Integrated Goods and Services Tax (IGST)?
The following are some of the most important aspects of IGST
- Interstate vendors and buyers are not required to pay tax up front.
- Taxes paid in the exporting state are not refundable since the ITC is depleted when paying the tax.
- The IGST, or Integrated Goods and Services Tax under GST, is a computerized monitoring system.
- The only organizations participating in simplifying IGST are interstate merchants and central and state governments.
- IGST is charged in both ‘Business to Business’ and ‘Business to Consumer’ transactions, and the IGST model may account for both of these categories.
- The IGST tax includes a few additional significant components, which are as follows:
- The IGST income is distributed equally between the federal government and the state government of the state to which the good or service is given (the state of consumption of the commodity or service).
- When paying IGST, one may claim an input tax credit from any of the four GST categories.
- Dealers making interstate supplies will be electronically registered, and all communication with them will take place via email. This will considerably boost compliance.
- For interstate transactions, the Input Tax Credit (ITC) chain stays intact.
IGST on Interstate Transportation of Goods or Services
Because GST is a consumption-based tax, the money collected by the union government is distributed equally between the union and the state government of the state where the items or services are consumed.
Except for the northeastern states, the restriction applies to all dealers who have a turnover of Rs. 20 lakhs or more. Only dealers registered under the composition scheme with annual sales of less than Rs. 1.5 crore are eligible for incentives within the state.
The IGST, or Integrated Goods and Services Tax, is distinct from prior GSTs in that it applies to all interstate and intra-territorial transfers of goods and services.
Also, keep in mind that the IGST applies to transactions involving Special Economic Zones (SEZs), and that importing or exporting goods or services to or from a SEZ is considered an interstate transfer.
When making an interstate delivery, GST is charged to all sorts of supplies. It does not include the interstate commerce turnover component. However, as of Notification No. 10/2017 Integrated Tax dated October 13, 2017, the government has exempted individuals who make interstate delivery of taxable services and have an annual aggregate turnover of less than Rs. 20 lakhs from registration. When it comes to northeastern and special category states, the maximum is Rs.10 lakhs.
According to the GST Council’s rules and regulations, an annual interest rate of 18% is imposed on the GST tax that is overdue from the due date until the payment date.
After understanding how to define IGST and what it is, let us look at an example of how IGST is used.
Krishna, a dealer in Kolkata, sends Rs.10,000 in commodities to lokesh, a merchant in Hyderabad. If the items are subject to 18% GST, Ram would collect an IGST of Rs.1800 from lokesh (the merchandise will cost lokesh Rs.11800), which he will then pay to the federal government. The national government and the Telangana government will then share the money equally, with each receiving Rs. 900.
Role of IGST in interstate transactions:
Destination Principle:
IGST follows the destination principle, meaning that the tax revenue goes to the state where the goods or services are consumed. This ensures that the taxing authority of the consuming state gets its due share.
Uniformity in Taxation:
IGST helps in achieving uniformity in taxation across states. It eliminates the cascading effect of taxes, ensuring that tax is levied only on the value addition at each stage of the supply chain.
Single Tax Payment:
In interstate transactions, businesses deal with multiple states. IGST simplifies the tax payment process by requiring a single tax payment for interstate supplies. This reduces compliance burdens and administrative complexities.
Credit Mechanism:
Businesses can claim Input Tax Credit (ITC) for the IGST paid on the purchase of goods and services. This credit can be utilized against the payment of IGST on outward supplies. The seamless flow of credit across state borders promotes the concept of a common market.
Avoidance of Double Taxation:
IGST ensures that there is no double taxation on interstate transactions. Since the tax is levied and collected by the central government, the possibility of dual taxation by the originating and destination states is eliminated.
Monitoring and Control:
The integrated nature of IGST allows for better monitoring and control of interstate transactions. The central government plays a pivotal role in overseeing and regulating the taxation on interstate supplies, ensuring compliance with GST laws.
Revenue Distribution:
The revenue collected through IGST is shared between the central and state governments. The central government collects the tax, and based on a pre-determined formula, the revenue is distributed among the states. This guarantees that tax income is distributed fairly.
Reduced Tax Barriers:
IGST contributes to the creation of a unified national market by reducing tax barriers between states. This facilitates the free movement of goods and services across state borders, promoting economic integration.
Also Read: Legal Provisions and Regulatory Framework Governing IGST in the Context of Inter-state Transactions
Significance of IGST
Seamless Trade: IGST has facilitated seamless trade across India by eliminating the complexities of inter-state tax levies. Businesses can now move goods and services across state borders without worrying about multiple taxes, reducing costs and improving efficiency.
Economic Integration: IGST has promoted economic integration by removing barriers to inter-state trade. Businesses are now more inclined to expand their operations across India, contributing to the overall growth of the economy.
Streamlined Tax Administration: IGST has streamlined tax administration by centralizing the collection of tax on inter-state transactions. This has reduced the compliance burden on businesses and improved tax collection efficiency.
Revenue Sharing Mechanism: IGST ensures that the revenue generated from inter-state transactions is shared equitably among the states involved. This prevents any one state from benefiting disproportionately from inter-state trade.
IGST Registration and Payment
Businesses involved in inter-state transactions are required to register for IGST and file GST returns regularly. IGST is paid by the supplier of the goods or services and is then deposited with the Central Government. The Central Government subsequently distributes the IGST collected to the respective states involved in the transaction.
IGST Refunds
Exporters are eligible for refunds of IGST paid on goods exported out of India. This ensures that they do not bear the burden of IGST on exports.
Conclusion
Integrated Goods and Services Tax (IGST) has played a transformative role in India’s tax landscape, facilitating seamless inter-state trade, promoting economic integration, and streamlining tax administration. IGST has significantly contributed to the success of the GST regime, making India a more attractive destination for businesses and investments.
Also Read: Import Of Goods And Services And Applicability Of Integrated Goods And Services Tax (IGST)
FAQ
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What is IGST, and how does it differ from CGST and SGST?
Answer: IGST stands for Integrated Goods and Services Tax. It is a single tax imposed on interstate transactions in India. While CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) apply to intrastate transactions, IGST replaces them in transactions involving movement across state borders.
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How is IGST calculated in interstate transactions?
Answer: IGST is calculated as a percentage of the transaction value. The rate is determined by the GST Council. It is a comprehensive tax that subsumes both CGST and SGST.
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Why was IGST introduced, and what problem does it address?
Answer: IGST was introduced as part of the GST system to simplify taxation on interstate transactions. It addresses the issue of multiple taxes being levied by different states on the same transaction, avoiding double taxation and promoting uniformity.
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What is the destination principle in the context of IGST?
Answer: The destination principle means that the tax revenue from IGST goes to the state where the goods or services are consumed. This ensures that the state of consumption receives the tax revenue.
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How does IGST eliminate double taxation in interstate transactions?
Answer: IGST, being a single tax collected by the central government, eliminates the need for both the originating and destination states to separately tax the same transaction. This prevents double taxation, providing clarity and simplicity in the taxation system.
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Can businesses claim Input Tax Credit (ITC) under IGST for interstate transactions?
Answer: Yes, businesses can claim ITC for the IGST paid on their purchases during interstate transactions. The ITC can be utilized to offset the IGST liability on outward supplies, promoting a seamless flow of credit across state borders.
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How does IGST contribute to the concept of a common market?
Answer: IGST contributes to the creation of a common market by eliminating tax barriers in interstate trade. It promotes the free movement of goods and services across state borders, fostering economic integration and a unified national market.
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What is the role of the central government in the IGST framework?
Answer: The central government plays a significant role in the collection, monitoring, and distribution of IGST revenue. It ensures consistency in the application of GST laws and facilitates the equitable distribution of revenue among the states.
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Does IGST simplify compliance for businesses engaged in interstate transactions?
Answer: Yes, IGST simplifies compliance by establishing a single point of taxation for interstate transactions. Businesses only need to interact with the central government, reducing administrative complexities associated with dealing with multiple state tax authorities.
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How is the revenue collected through IGST distributed among the states?
Answer: The revenue collected through IGST is distributed among the states based on a predetermined formula. The central government plays a role in this distribution, ensuring a fair share for each state.
