Taxes are complicated, especially while understanding where the public’s hard-earned money is being utilized.
Speaking of taxes, if you’ve ever made a purchase that crossed state lines in India, IGST was likely applied. But what is IGST, and why does it matter?
Read this blog to understand its significance in India’s tax system and the associated revenue distribution.
Table of Contents
What is IGST: Integrated Goods and Services Tax
IGST (Integrated Goods and Services Tax) is a tax charged on interstate transactions, which occur when goods or services move from one state to another. Instead of businesses paying different state and central taxes separately, the government collects IGST in a single transaction and later distributes it between the central and state governments.
For example, if a clothing brand in Gujarat ships an order to a customer in Tamil Nadu, IGST is applied instead of separate CGST (Central GST) and SGST (State GST). This ensures a smoother, uniform taxation system for inter-state trade.
It also applies to imports and exports—meaning if a business imports raw materials from another country, IGST is charged at customs before the goods enter India.
Features of IGST
Understanding the key features of IGST can make taxation feel less overwhelming. Here’s what makes IGST different from other GST components:
- Interstate transactions only – IGST applies only when goods or services move between states or across national borders.
- Simplifies taxation – Instead of businesses dealing with multiple tax filings across different states, IGST ensures a single point of tax collection.
- Prevents double taxation – Without IGST, businesses might have to pay both the origin state’s and destination state’s taxes, leading to a higher cost burden.
- Ensures fair revenue sharing – The central government collects IGST and later distributes the appropriate share to the state where the goods are consumed.
What is the Difference Between GST and IGST?
While GST is the broad tax system under which everything operates, it has three different components:
For example, if a customer in Maharashtra buys a product from a business in Gujarat, IGST is applied. But if the purchase is made within Maharashtra, CGST and SGST are applied instead.
Things to Keep in Mind About IGST
When dealing with IGST, there are a few important things to remember:
- IGST replaces CGST and SGST – You won’t see all three taxes together; it’s either IGST or CGST+SGST, depending on whether the transaction is inter-state or intra-state.
- The IGST rate is equal to CGST + SGST – If a product has a total GST rate of 18%, IGST will also be 18%.
- Businesses can claim tax credit – This means if a company pays IGST on raw materials, it can use that amount to offset its overall GST liability.
- IGST applies to imports and exports – If a business imports machinery from another country, IGST is charged at customs. Similarly, businesses exporting goods can claim a refund on IGST paid.
Example for Calculating IGST
Let’s say a furniture company in Rajasthan sells a dining table to a retailer in Karnataka. The price of the table is ₹40,000, and the GST rate on furniture is 18%.
How the Tax is Applied:
- The base price of the table: ₹40,000
- IGST rate: 18%
- IGST amount: ₹40,000 × 18% = ₹7,200
- Total cost for the retailer: ₹47,200
If the same sale happened within Rajasthan, the tax would be divided as CGST (9%) + SGST (9%), but since it’s an inter-state sale, only IGST applies.
How Are the GST Rates Fixed?
The GST Council, a governing body comprising representatives from both the central and state governments, is responsible for deciding GST and IGST rates. This council meets periodically to assess tax structures and make adjustments based on economic conditions, business sector needs, and revenue goals.
Before setting or revising GST rates, the council considers the following factors:
- Industry Demands: Different industries lobby for tax rates that reflect their operational costs, competitive pricing, and market conditions. Essential goods often have lower tax rates, while luxury items and sin goods (like tobacco or alcohol) attract higher taxes.
- Economic Impact: The government evaluates how tax changes might affect inflation, consumer spending, and overall business profitability.
- Revenue Distribution: Since GST revenue is shared between the center and states, tax rates are carefully balanced to ensure that both receive their fair share.
- Public Interest: Sometimes, the government reduces GST rates on essential commodities or services to provide relief to consumers. For example, during economic downturns or crises, tax rates on medical supplies and daily necessities might be lowered.
Refund of IGST
Yes, IGST is refundable in certain cases. Here’s when you can claim a refund:
- Exports – If you sell goods or services outside India, you can claim a refund on the IGST paid on those exports.
- Excess Payment – If a business mistakenly overpays IGST, it can file for a refund through the GST portal.
Businesses can apply for an IGST refund by submitting relevant invoices and tax payment details. The refund process usually takes a few weeks, depending on verification.
Conclusion
Knowing what is IGST helps in recognizing its role: simplification of taxation for inter-state trade, which ensures fair revenue sharing, and prevents businesses from dealing with multiple tax systems. Sellers, buyers, and even those simply reading their bills can benefit from understanding IGST, as it clarifies where their money goes and why it is important in India’s tax system.
Also, when it comes to loan products like instant personal loans, quick loans, loans for travel, loans for education, or any other emergency loans if the issuance is considered a sale, taxes are applied—not on the loan amount itself but on the associated costs, such as processing fees or service charges.
