What is IGST?
IGST stands for Integrated Goods and Service Tax. GST (Goods and Service Tax), CGST and SGST make up the IGST. The introduction of GST in India in 2017 was a significant change in the collection of indirect taxes in the country. Before the reforms, the States and the Centre had their own separate laws which created lots of problems and complexities for traders working across multiple states. As part of the one nation one tax restructure, one Goods and Services Tax (GST) was introduced which allowed value-added tax to be collected for both services and goods, or a combination of both.
We can better understand this with a simple example. If one was to move some goods or services from one state to another, Integrated Goods and Service Tax will be payable on them. The State government and the Central government each keep a percentage of this tax according to the regulations set out by the tax authorities.
The question that comes to mind here is who pays the tax – the sender or receiver? Since the tax is based on the destination, it is the person consuming the product or the service who has to pay the tax. The party receiving the tax is the State where the product is consumed, not the State where it was created or manufactured. In the case of exports, the seller has an exemption from payment of tax.
Basically what the GST does is that it removes the issue of applying a tax on something that has already been taxed. This is also where the IGST, CGST, and SGST become relevant.
Here is a quick recap of what these terms stand for:
- IGST: Integrated Goods and Service Tax
- SGST: State Goods & Services Tax
- CGST: Central Goods & Services Tax
Which taxes did GST replace?
Before GST was introduced, the country had multiple types of taxes. These included taxes such as Service Tax, Central Excise, State VAT among many other similar taxes. To avoid managing these multiple taxes for both the consumers and the governments, GST was introduced. some of the various taxes that GST replaced are listed below.
- Entertainment tax
- Sales tax/VAT
- Purchase tax
- Luxury tax
- Tax imposed on gambling or betting or games of luck
- Additional Excise Duty
- Central Excise Duty
- Special Additional Duty of Customs
- Additional Customs Duty
- Excise duties imposed on Medicinal & Toiletries preparations
- Service tax
Which of the three types of taxes applies and what determines this?
In order to determine which of the three different taxes (IGST, SGST or CGST) apply in to a transaction, the first thing you need to determine is whether the transaction that will take place is Inter-State or Intra-State.
Intra-State: A supply of services or goods is considered Intra-State when both the buyer and the seller are located within the State. In such a transaction, the buyer pays both the SGST and CGST. The SGST goes to the government of the State whereas the CGST is collected by the Central Government.
Inter-State: A supply of services or goods is considered Inter-State when the place (destination) of supply and the location where the supplier is are in two different States. Special Economic Zones are also considered as Inter-State transactions for the purpose of tax collection.
IGST in case of an Inter-State transaction is collected by the seller from the buyer.
What is CGST?
CGST refers to the tax collected by the Central government. It is collected on all Intra-State transfers of goods or services. The scope of this tax comes under India’s CGST Act.
On these goods or services, the SGST will also be levied. This way, both the Central government and State collect taxes.
What is SGST?
On all Intra-State transfers of goods or services, the SGST is levied. This tax is collected as per the SGST Act.
A trader A based in a State sells goods to another trader B in the same State. The worth of the goods is exactly Rs. 1000. In this case, a GST of 18% is collected, which comes down to a total of Rs. 180. The collector is trader A who then pays 9% CGST(Rs. 90) to the Central government and 9% SGST (Rs. 90) to the State.
How does IGST work?
This type of tax is levied on every Inter-State supply of services and goods. It comes under the IGST Act. It applies not just to the imports coming into India but also to exports going out. However, according to the IGST rules, exports are zero-rated. Tax collected is shared by the State and the Central governments.
A trader based in State A sells goods to a trader based in another State B. The goods are worth Rs. 1000. The GST rate applicable to it is 18% which comprises entirely of IGST. Therefore, the dealer levies an 18% tax (Rs. 180) on the buyer and pays that tax to the Central Government. The collected tax would be shared with the State government according to rules set out by the authorities.
What is the reason behind splitting GST into three types of taxes?
In India, the individual States, as well as the Central Government, have the power to collect taxes from the public. These taxes need to be collected so that the States and the Centre can perform their respective duties. The problem that often arises in such a system is that a trader has to pay multiple taxes on a single transaction. Even with the introduction of the single GST, the problem was not solved as traders would then end up paying GST both to the Central and to their own State. Matters were even more complicated if more than one State was involved. The introduction of the three types of taxes helped separate the taxes and eliminate “tax on a tax”, ensuring a fair amount of tax was collected with the revenue shared between the States and the Centre.