IGST Explained for Beginners: Full Form, Meaning & How it Works

The Goods and Services Tax (GST) is a destination-based indirect taxation system with uniform rates, rules, and regulations across the country. It follows a robust framework for administering and collecting tax revenue in an impartial manner. This includes revenue from intra-state, inter-state, and cross-border supplies of goods and services. Integrated Goods and Services Tax (IGST) is a crucial component of that tax framework.

This blog explains what is IGST, how it works, and everything else you need to know.

What is IGST?

The full form of IGST is Integrated Goods and Services Tax. IGST is a unified goods and services tax applicable to supplies of goods or services, or both, that occur across the geographic boundary of a single state or a Union Territory (UT). In other words, IGST applies to inter-state supplies. Integrated GST also applies to cross-border supply transactions, such as imports and exports. However, exporters have the option to claim refunds on IGST paid for goods and services exported.

For domestic transactions, taxpayers can offset IGST paid on inputs against both Central GST (CGST) and State GST (SGST) liabilities on their output.

What are inter-state supplies?

Under the GST Act, an ‘inter-state’ supply refers to a transaction between a seller located in one state or Union Territory (UT) and a buyer located in another state or UT. For example, a Kolkata-based readymade garment company with a production unit in Kolkata, West Bengal, supplies a consignment of garments to a wholesaler based in Gandhinagar, Gujarat.

What is the purpose of IGST?

The two primary objectives of administering IGST are:

• Maintaining uniformity and simplicity in the administration of indirect taxes on transactions involving taxpayers from multiple states.

• Ensuring the rightful apportioning of tax revenue collected on such supply transactions between the central and state (or Union Territories) jurisdictions.

How IGST Benefits Taxpayers and the Economy?

The implementation of a unified GST on inter-state transactions has several positive implications for taxpayers, governments and consumers:

• Simplification of GST compliance
  

Before GST, businesses supplying or sourcing goods and services across state lines had to deal with multiple types of indirect taxes. For example, state-specific value-added tax (VAT), central sales taxes, octroi, and entry tax. Each tax required separate registration and documentation, making compliance time-consuming and costly. Under the GST regime, a single registration is required, and all compliance is managed through a single interface—the GST portal.

• Improved transparency in tax collection and apportioning
  

This is especially beneficial for B2B taxpayers and consumers who can now clearly understand the actual tax implications of their purchase of goods and services. Earlier, multiple layers of indirect taxes created confusion about the exact effect on final prices. IGST consolidates both the central and state’s share in a single rate structure. This also makes tax collection transparent for both taxpayers and tax authorities.

• Unification of access to geographically dispersed markets
  

India’s billion-plus population presents a large market, but it is fragmented due to regional and cultural diversities. In the pre-GST era, this fragmentation also led to a wide variety of tax implications, depending on the states and UTs involved in a transaction. This made multi-state business operations difficult, costly, and often counterproductive. Administration of a single rate through a consolidated structure helped truly unify the access to markets across the country.

• Removing cascading effects on sourcing inputs of production
  

Many of the indirect taxes, such as state-specific VAT, octroi, and entry taxes, offered no option to offset the tax paid on inputs or the distribution of finished products. Businesses had to pass on such a tax burden to end-consumers. IGST enables manufacturers, wholesalers, and distributors to claim Input Tax Credits (ITCs) on inputs used in production. This solved the problem of the cascading effect of indirect taxes on prices.

How does IGST work?

Scenario 1: A Mangalore, Karnataka-based paper manufacturer, ABC Pvt Ltd, sold its office stationery to a printing company, XYZ Ltd, with its GST-registered office in Mumbai, Maharashtra.

• The total value of the office stationary sold to XYZ is ₹5,00,000.
• The IGST applicable for the consignment is 12%.

The consignment was supplied by a seller based in Karnataka to a buyer based in Maharashtra. Therefore, it is an inter-state supply and would be subject to IGST at the applicable GST rate.

IGST to be levied on the transaction = (₹5,00,000*12%) = ₹60,000 The total invoice value of the consignment for XYZ Ltd = (₹5,00,000+₹60,000) = ₹5,60,000.

Scenario 2: Offsetting IGST paid by XYZ Ltd. As per the GST Act, credits for IGST liability on inputs can be offset first against IGST liability on output. If any extra credit remains, that can be offset against CGST and SGST.

Let’s assume XYZ supplies prints to another company based in Ahmedabad, Gujarat, during the same tax period.

• The value of consignment from XYZ (Mumbai) to Ahmedabad is ₹4,00,000. The applicable IGST was 12%.
• The IGST liability of output supply for XYZ would be (₹4,00,000*12%) or ₹48,000.

For the same tax period:

• IGST input liability (₹60,000) of XYZ Ltd for the tax period is more than its IGST output liability (₹48,000).
• The company will have an IGST credit of ₹ 12,000 (₹60,000 - ₹48,000).
• XYZ can offset this credit against its SGST and CGST liabilities on output for the period.
• For example, its SGST output liability for the said period was ₹20,000. Then, XYZ would need to pay only ₹8,000 (₹20,000 - ₹12,000) as SGST.

Conclusion

Understanding what is IGST and how it works is crucial to appreciating its role in India’s tax structure. The administration of IGST as a unified GST has resolved many challenges associated with tax collection across multiple jurisdictions. Apportionment happens at a pre-specified ratio among states involved in the transaction. This has also solved issues related to the taxable interests of state authorities, fostering a more transparent and cooperative tax environment while promoting ease of doing business. The GST regime is also keen on reducing compliance burdens, enhancing revenue predictability for both central and state governments.

Sources

Govt Website
Cleartax