The implementation of the Goods and Services Tax (GST) regime in India in July 2017 was a historic change in the history of indirect taxation. GST was meant to replace a complex structure of central and state taxes and simplify compliance, increase transparency and harmonize the fractured taxation system of the country. Out of its three significant elements that are CGST, SGST/UTGST, and IGST, it is the IGST (Integrated Goods and Services Tax) which facilitates the seamless implementation of taxation across state borders.
This blog will explore in detail what IGST is, why it is necessary in inter-state and international trade, how it is implemented and the real-life implications of IGST on Indian enterprises.
Introduction to IGST
Integrated Goods and Services Tax, abbreviated as IGST is a form of GST that is levied on the inter-state dealings and imports/exports of goods or services in India. The IGST Act, 2017 governs it and it is charged by the Central Government.
The IGST concept is able to tackle one of the most serious problems in the pre-GST regime: the taxation of inter-state trade. Previously, sellers were forced to contend with a mixture of Central Sales Tax (CST), entry-taxes and numerous paper requirements when selling across state borders. Not only did this result in tax cascading (tax on tax) but it also broke supply chains and caused regional price differences.
IGST has substituted CST and facilitated a destination-based tax system where the tax revenue collected is paid to the state where the goods or services are actually consumed.
Understanding the Concept of IGST
IGST can be applied to a supply that causes movement of goods or services between states or between a Union Territory and a state or vice versa. A transaction will be inter-state depending on the place of supply and the location of the supplier.
The main idea of IGST is to enable the flow of tax credit between states and prevent the occurrence of double taxation. It acts as a facilitator between CGST and SGST and makes sure that:
- On inter-state transactions, suppliers are allowed to claim Input Tax Credit (ITC).
- The Centre and the destination state share the revenue without subjecting the tax payer to multiple compliances.
The rate of IGST is equal to the sum of CGST and SGST rates. For instance, if CGST is 9% and SGST is 9%, the IGST rate will be 18%.
Why IGST Was Introduced
To understand the need for IGST, it’s essential to consider the problems with the earlier indirect tax regime:
- CST (Central Sales Tax) was applicable on inter-state sales, but its input credit was not available.
- Multiple taxes like octroi, entry tax, service tax, VAT, and excise duty created a layered tax system.
- Each state had its own tax laws, leading to legal and compliance inconsistencies.
IGST solves these issues through a unified structure where:
- Inter-state supply attracts a single tax, eliminating the need to comply with multiple state laws.
- Input tax credit is seamlessly transferable, thus avoiding the blockage of working capital.
- Tax revenue follows a destination-based model, ensuring fairness and equitable distribution.
How IGST Works in India
The working of IGST is governed by “place of supply” rules under the IGST Act. These rules are critical in determining whether a transaction is intra-state (attracting CGST + SGST) or inter-state (attracting IGST).
Key Components of IGST Mechanism:
- Levy: IGST is levied by the Central Government.
- Collection: The central government collects the entire IGST.
- Apportionment: The Central Government then transfers the tax share to the consuming state based on the transaction details filed by the supplier.
Example:
Let’s say, a trader in Kolkata (West Bengal) sells industrial machinery worth ₹5,00,000 to a buyer in Hyderabad (Telangana).
- Since the supplier and buyer are in different states, IGST is applicable.
- If the IGST rate is 18%, then ₹90,000 will be charged as IGST.
- The seller pays ₹90,000 to the Central Government.
- Based on the return filings, the Centre later transfers the appropriate portion to the Telangana government, where the goods were consumed.
This flow ensures transparency and traceability in tax credit movement and proper revenue allocation.
IGST vs CGST and SGST: Key Differences
| Parameter | IGST | CGST + SGST |
| Nature of Supply of Goods and Services | Inter-state | Intra-state |
| Levied By | Central Government | Centre (CGST) and State (SGST) |
| Revenue Sharing | Centre and Destination State | Centre and Originating State |
| Input Tax Credit Usage | Cross-utilizable across GST types | Limited to same jurisdiction |
| Applicability on Imports | Yes | No |
| Returns | GSTR-1, GSTR-3B | GSTR-1, GSTR-3B |
The major advantage of IGST is the cross-utilization of credits which enhances business liquidity. An example is that IGST credit can be used to pay CGST or SGST credit, whereas SGST credit cannot be used to pay CGST and vice versa.
Input Tax Credit (ITC) under IGST
It is around the ITC mechanism under IGST that tax neutrality can be achieved. It enables a taxpayer to claim the tax he or she has paid on his purchase against the tax payable on his sale, throughout the whole GST system.
Order of Utilization of IGST Credit:
- First, set off against IGST liability.
- Then, towards CGST liability.
- Finally, towards SGST/UTGST liability.
This order ensures maximum utilization of credits and prevents accumulation, especially for businesses involved in pan-India operations.
Illustrative Example:
Suppose a business has the following tax liabilities and credits:
- IGST Credit Available: ₹1,50,000
- IGST Liability: ₹50,000
- CGST Liability: ₹70,000
- SGST Liability: ₹30,000
The IGST credit will be utilized in the following manner:
- ₹50,000 against IGST liability → Balance ₹1,00,000
- ₹70,000 against CGST liability → Balance ₹30,000
- ₹30,000 against SGST liability → Balance ₹0
Thus, the business pays zero cash in tax due to proper ITC planning.
IGST on Imports and Exports
Imports:
- Imports of goods and services are deemed inter-state supplies under GST law.
- Hence, IGST is levied on imported goods along with Basic Customs Duty (BCD).
- The importer can claim ITC of the IGST paid, provided the goods are used for business purposes.
Exports:
- Exports are treated as zero-rated supplies.
- Exporters have two options:
- Export under Letter of Undertaking (LUT) without paying IGST.
- Pay IGST and claim a refund of the same.
This promotes Indian exports by ensuring that no tax burden is passed on to foreign buyers, making Indian goods globally competitive.
Registration and Compliance Requirements under IGST
Under GST law, a person making inter-state taxable supplies is required to obtain compulsory registration, regardless of turnover threshold.
Key Compliance Requirements:
- GSTIN: A valid GST registration with correct state-wise coding.
- Return Filing: Businesses must file GSTR-1, GSTR-3B, and GSTR-9, reporting inter-state supplies with IGST.
- E-Way Bills: Mandatory for inter-state movement of goods valued above ₹50,000.
- Documentation: Tax invoices must clearly show IGST charged separately, not as combined tax.
Failing to comply with IGST provisions can result in penalties, interest, and ITC blockage, severely affecting cash flow and credibility.
Impact of IGST on Indian Businesses
IGST has brought about numerous changes in the ways in which businesses consider supply chain management, prices, and compliance.
Positive Impacts:
- Promoted centralised warehousing and logistics optimisation.
- Eliminated artificial restrictions to inter-state growth.
- Facilitated pan-India procurement with flexibility in use of credit.
- Minimized the overall burden of compliance with harmonized taxation..
Challenges:
- Difficulty in identifying the place of supply of services (in particular, for digital, telecom and consulting services).
- Cost of compliance on smaller companies with operations across the states.
- Mismatch in GSTR return filing may slow the processing of ITC claims. This may call for strong ERP and accounting systems.
Final Thoughts:
IGST is a fundamental part of the GST scheme in India that keeps inter-state and cross-border business tax-neutral, effective, and fair.IGST helps the Indian tax model to be in line with international best practices by changing the tax model to a destination based consumption tax instead of the origin based tax that has been in use.
Businesses should not merely learn IGST to comply with it, but they should look to use IGST to streamline their operations, minimize tax outflow, and ensure competitive prices in the borderless Indian market. The better the implementation and knowledge of IGST, the easier will be the movement of trade and credit within the Indian economy.
