financial services · GST

IGST Act in India

Under the GST regime, a “dual GST” model has been introduced keeping in mind the federal structure of India. Instead of levying different type of taxes by both the center and the state, GST will be levied on every supply of goods and services which take place within the boundary of the state.

IGST Act in India

GST has two components:

  1. Central tax (CGST) which is levied and collected under the authority of CGST Act, 2017 as per the law passed by the Parliament.
  2. State tax (SGST) which is levied and collected under the authority of SGST Act, 2017 passed by respective states.

Breaking Down IGST

IGST means Integrated Goods and Services Tax which is the tax levied on the supply of any goods or services in the course of inter-state trade and commerce. To be very short and precise, under the new GST regime, intra-state movement of goods and services attract (CGST+SGCT) and inter-state movement of goods and services attracts IGST.

Advantages of IGST Model

Some of the main advantages of IGST model are as follows;

  • The new IGST model ensures tax neutrality while keeping the taxation system simple and uninformed.
  • The new IGST model is based on the concept of self-monitoring.
  • IGST ensures that accounting is simple and no additional burden of compliance lies on the taxpayer.
  • An unbreakable ITC chain or inter-state transactions are maintained through IGST system.
  • In IGST Model one does not have to make an upfront payment of taxes or a substantial blockage of funds for the interstate seller or buyer.

Payment Procedure for IGST

The IGST payment can be done by utilizing ITC or by Cash. The use of ITC for the payment of IGST will be done in the following manner;

  • Priority will be given to ITC of IGST for the payment of IGST.
  • If ITC of IGST is exhausted then ITC of CGST should be used for the payment of IGST.
  • In case, ITC’s of both IGST and CGST are spent-out then the dealer alone will be authorized to utilize ITC of SGST for the payment of IGST.
  • Even after the following step if there is any remaining IGST liability then it should be cleared through payment by cash.

The taxpayer must not worry about this multi-step process. GST system will ensure the maintenance of this hierarchy for payment of IGST using the credit.  

Adjustment of Input Tax Credit between the State and the Center

Let us take a situation to understand this concept

Suppose that, goods worth Rs. 20 thousand are sold by a manufacturer ‘X’ in Gujarat to the dealer ‘Y’ in Gujarat itself. ‘Y’ resells them to a trader ‘Z’ in Madhya Pradesh for Rs. 25 Thousand. Trader ‘Z’ finally sells the end user ‘P’ in Madhya Pradesh for Rs. 30 thousand.

Now, in this situation,

  • SGST = 9% and CGST = 9% which makes the IGST = 9%+9% = 18%.
  • X selling to Y is an intra-state sale hence both CGST at 9% and SGST at 9% will apply.
  • Y (from Gujarat) is selling to Z (Madhya Pradesh) and this is inter-state sales hence IGST@18% will apply.
  • Z is selling to the end user P and this is an intra-state trade, hence SGST at 9% and CGST at 9% will apply.
  • GST is a consumption based tax, which means the state where the goods were consumed will collect GST. By that logic, Gujarat (where goods were sold) should not get any taxes. Madhya Pradesh and Central both should have to pay (30,000 x 9%) = 2,700 each.
  • Gujarat (exporting state) will transfer the credit of SGST (Rs. 1,800) to the center for the payment of IGST.
  • The Centre will transfer the tax amount to Madhya Pradesh (importing state), which means Rs. 450 for IGST.

From the above example, it is clear that there is a breakup of three taxes but together they serve the purpose of GST only.

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