Understanding IGST: What It Is, Benefits and How It Works

IGST refers to the Integrated Goods and Services Tax under the Goods and Services Tax in India. It is an important part of any business operating in India. It is applicable for all inter-state transactions. The exports and imports of goods and services also come under this.

Do you know it gives a seamless tax credit flow across all Indian States? Yes, you heard it right. This helps you to prevent paying double taxes for business. Hence, you need to know for seamless business operations.

Does it sound beneficial to you? Then sit tight. This blog is your ultimate guide to know the Integrated Goods and Services Tax, its meaning, application and benefits. Let’s read together.

What do we mean by IGST

To answer your question, what is IGST, I would like to break it down for you first. This simply means the Integrated Goods and Services Tax. It is one of the components of the GST system. IGST applies only to inter-state supplies, imports, exports, and SEZ supplies not intrastate transactions. The goal of it is to eliminate the burden of taxes. In simple words, you need to remember one simple thing. In some cases, it is a blend of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) elements.

Still feeling confused, how are you paying the Integrated Goods and Services Tax?

For example, a businessman by the name of M/S XYZ Ltd from Chandigarh has sold goods to ABC Ltd from Daman and Diu in India. Let's assume the amount of goods sold is 100000/-. Here, 18% GST refers to the Integrated Goods and Services Tax. Now, the dealer has changed 18000 to IGST. After this, it will go to the centre, and Daman and Diu (applicable if it is the ultimate consuming state).

In this way, the tax revenue from IGST and SGST differs based on the transaction type. The government involvement is another factor in this.

Who collects IGST?

IGST is levied and collected exclusively by the Central Government. States and Union Territories do not collect IGST directly, instead, they receive their respective share through the GST settlement mechanism.

In case the supply location does not belong to the specific state, the government collects the tax money through Integrated Goods and Services Tax (instead of SGST). The system then shares the revenue amount to each state equally according to its involvement.

The structure of IGST

By now, you know that IGST is the blend of Central and state GST.  Want to know how the standard rate has changed? The table below is here to help you out:

Do you know how IGST is calculated?

To make you understand the calculation, let me give you an example:

Let’s say you are a Kerala-based business and you are from the electronics industry. You have an order worth 100000/- to deliver in Mumbai to a customer. Here, you have to apply a simple formula: The price of sales x IGST rate = IGST.

Remember that the GST rate of electronics (laptops and so on) is 18%. So, here it will be 18%.

After this, the calculation is total sales price (including taxes) is the product price + IGST

So, 100000 + (100000 x 18%)

= 1, 18000.

The Centre collects the full IGST and later apportions it to the destination state through the GST settlement mechanism.

The applicability of IGST

The IGST is applicable to all types of supply or delivery of goods and services. Under GST, IGST applies to all inter-state supplies, specifically goods and services happens outside a state.

When it comes to the point of supply, IGST applies to the 4 categories of supply transactions. These are simplified for you:

(i) Interstate supplies

• The goods or services moving from one state to another or from one union territory to another
• Here, IGST is levied upon the transaction
• The seller charges the tax on the sales invoice
• After this, it is deposited with the central government

(ii) Imports and Exports

• Integrated Goods and Services Tax applies to the goods and services imported into India
• For imported goods, the central government of India levies IGST with customs duties
• However, export is zero-rated under GST. So, the party exporting the goods and services from India can pay the Integrated Goods and Services Tax.
• They can reclaim it later on after submission of shipping bills.
• Here, you need to understand that an exporter can also choose not to pay IGST. Yes, it is true. This comes under the letter of undertaking or LUT bond.

(iii) Supplies in Special Economic Zones (SEZs)

• It refers to outside India's customs territories
• Here, Integrated Goods and Services Tax applies to the delivery of goods and services to SEZs or from SEZs.

If you still have some questions, let me give you an example.

Let’s say you are the dealer from MS/ Iyer Electronics from Tamil Nadu (Chennai). You are selling electronic goods to MS/ Banerjee enterprise in West Bengal (Kolkata). Since you are transporting the products from Tamil Nadu to Kolkata, the integrated goods and services tax is applied to the total value of products delivered.

Remember that it will not be applied to a receiver of the same products inside Tamil Nadu.

Key benefits of IGST

If you have read so far, a question must have appeared in your head. What are the key benefits of the Integrated Goods and Services Tax?

One of the benefits of IGST is that it collects indirect tax on the interstate supplies of goods and services. Whether you are a buyer, seller or even the government, it benefits you a lot.

Here is how:

(i) It is a transparent process. You can monitor it yourself for the states and the central government

(ii) IGST helps in creating a tax-neutral business all over India. It means you have a lesser burden of tax now.

(iii) Earlier, indirect taxes amount differs from one state to another. It used to cause confusion about the tax revenue and its impact

(iv) You need to consider one simple fact. This equal tax rate across the country reduces the actual tax burden

(v) For the end consumers, the cost of compliance is also less.

Claiming Input tax credit (ITC) for business under IGST

Yes, you are reading it right. You can claim ITC or input tax credit on integrated goods and services tax paid on business-to-business (B2B) sales.

You must be thinking, how is it done? It is very simple.

• You need to be GST registered to claim ITC
• Your B2B invoice needs to clearly mention the IGST rate (applicable), and the total paid tax
• The HSN of the supplied items are needed
• Your buyer needs to accept the supplier invoice under the GST portal (you can find this on the GST portal)

The buyer needs to file GST returns (GSTR-2B, GSTR-2A reconciliation) for the relevant period of time (for tax).

Claiming Input tax credit (ITC) for business under IGST

Yes, you are reading it right. You can claim ITC or input tax credit on integrated goods and services tax paid on business-to-business (B2B) sales.

You must be thinking, how is it done? It is very simple.

• You need to be GST-registered to claim ITC
• Your B2B invoice needs to clearly mention the IGST rate (applicable), and the total paid tax
• The HSN of the supplied items are needed
• Your buyer needs to accept the supplier invoice under the GST portal.
• The buyer needs to file GST returns (GSTR-3B) for the relevant period of time (for tax).

What is the process of refunding IGST?

The process of integrated goods and services tax refund is essential. The business-to-business buyer can claim it when the ITC is higher than the GST liability.  This situation generally happens in the export business.

Now you may ask why? Because exports are generally Zero Rated supply under the GST act.

Hence, the tax liability is NIL while a LUT- letter of undertaking is used.

So, you need to keep in mind that exporters, EoUs, and SEZs can definitely claim a refund of IGST. 

Final Thoughts

So, to sum up our discussion, I would say that IGST is an important part of India’s goods and services tax system. It is particularly important for businesses engaged in interstate trade.

In the beginning, you might think it is complex. But once you understand how IGST works, how to calculate it, you get to know that it makes your business more tax efficient. If you want to know more connect with Online Legal India today.

FAQs

1. What do we mean by IGST in simple words?

In simple words, IGST is a tax applied to all the interstate supply of goods and services. It replaces multiple taxes on interstate transactions.

2. Can I claim ITC on IGST paid for interstate purchases?

Yes, absolutely. You can claim Input tax credits or ITC on IGST paid for goods and services.

3. Is IGST similar to CGST and SGST?

No, IGST is not similar to CGST and SGST. Intrastate supplies do not attract IGST they attract CGST + SGST.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.