What is IGST? Full Form, Meaning & How It Works in India

India's tax system underwent a massive transformation in 2017 with the introduction of the Goods and Services Tax (GST). Instead of having a complex web of indirect taxes, GST introduced a unified system with three components: CGST, SGST, and IGST. While CGST and SGST apply to transactions within a state, IGST is specifically designed to manage taxes on inter-state transactions. In a country like India, where goods and services frequently cross state borders, IGST plays a vital role in maintaining the integrity of the tax credit system and ensuring fair revenue distribution.

What is IGST?

IGST, or Integrated Goods and Services Tax, is levied on the interstate supply of goods and services. This tax is collected by the Central Government and later shared with the state, where the goods or services are finally consumed. It applies not just to interstate trade within India but also to imports and exports. The goal of IGST is to ensure that tax revenue is allocated to the correct state while maintaining a smooth flow of input tax credits.

Full Form of IGST

The full form of IGST is Integrated Goods and Services Tax. It is one of the three core components of the GST structure, the others being CGST (Central GST) and SGST (State GST). IGST is especially relevant for businesses that deal in inter-state trade, as it replaces the earlier Central Sales Tax (CST), which had several drawbacks, such as no input tax credit and high compliance costs.

Also Read: Home Loan Tax Benefits for Women

How IGST Works in India

When a supplier in one state sells goods or services to a buyer in another state, IGST is charged on that transaction. The seller collects IGST from the buyer and deposits it with the Central Government. Later, the Centre distributes the state’s share of tax revenue to the state where the goods or services are consumed. This model ensures that the destination state, the state where the goods are finally used, receives the tax revenue.

This structure eliminates the cascading effect of taxes and enables seamless input tax credit (ITC) flow across state lines.

Difference Between IGST, CGST, and SGST

When a product is sold within the same state, CGST and SGST are applied. But when it crosses state boundaries, IGST takes over. This split ensures that both the central and state governments receive their fair share of tax revenue.

Input Tax Credit under IGST

The IGST model supports the smooth utilisation of input tax credits. Businesses can use the IGST credit to pay off their IGST liability first. If any credit remains, it can be used for CGST or SGST in that order. This helps avoid double taxation and makes interstate trade more efficient.

For example, if a trader pays IGST on raw materials purchased from another state, they can claim that as a credit against their IGST liability on finished goods. This maintains a seamless tax credit chain across India.

Let’s break it down with an example:

A trader in Gujarat (M/s A) sells goods worth ₹1,00,000 to a dealer in Maharashtra (M/s B). The IGST rate is 18%. The bill will look like this:

1. Goods Value: ₹1,00,000
2. IGST @18%: ₹18,000
3. Total Invoice Value: ₹1,18,000

Here, M/s A collects ₹18,000 as IGST and deposits it with the Central Government. The Centre will later pass on Maharashtra’s share (SGST portion) of this amount. If M/s B further sells the goods within Maharashtra, they can claim the ₹18,000 as ITC.

Also Read: Old Tax Regime vs. New Tax Regime

Importance of IGST in GST Framework

IGST serves several important functions in India’s tax system:

1. Maintains seamless flow of ITC across state borders
2. Eliminates cascading of taxes by allowing credit adjustment
3. Simplifies tax structure for interstate transactions
4. Ensures fair revenue distribution between the Centre and States
5. Replace the outdated CST system with a more efficient mechanism

It supports the "One Nation, One Tax" vision by making tax compliance easier for businesses engaged in interstate trade.

Conclusion

The introduction of IGST marked a turning point in India's tax landscape. It eliminated the inefficiencies of the old CST system and streamlined the way taxes are collected and distributed in interstate transactions. IGST ensures that tax follows the goods or services to their final destination, aligning with the consumption-based tax principle. More importantly, it helps maintain the integrity of the input tax credit system, making business operations and processes like applying for a business loan smoother across state lines. By bridging the gap between central and state governments, IGST plays a key role in making GST a truly unified tax regime in India.

FAQs

Q.1. What is IGST in GST?

A. IGST stands for Integrated Goods and Services Tax. It is levied by the Central Government on interstate supply of goods and services, including imports and exports.

Q.2. Who pays IGST?

A. The buyer or recipient in an interstate transaction pays IGST. The seller collects it and deposits it with the Central Government.

Q.3. Is IGST applicable to exports?

A. Yes, but exports are treated as zero-rated under IGST. Exporters can claim a refund of the IGST paid or export without paying IGST under a bond.

Disclaimer:

The contents of this article are for information purposes only & not a financial advisory. For more details, please refer to the product or service document and/ or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

Financing through Godrej Finance/Godrej Housing Finance Limited. Product Terms & Conditions apply, for details visit www.godrejcapital.com