What is IGST in India, Meaning, Objectives, Types, Process, Advantages, Importance, and Calculation

June 21, 2025

What is IGST in India?

Integrated Goods and Services Tax (IGST) is a cornerstone of India’s unified indirect tax framework launched on July 1, 2017. Under the GST regime, three main levies govern the taxation of goods and services: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). While CGST and SGST apply to intra-state supplies (i.e., transactions within the same state), IGST is levied on transactions that cross state boundaries or involve imports/exports.

Administered by the Central Government, IGST ensures a seamless flow of input tax credit (ITC) across state lines, thereby eliminating the cascading effect of taxes and promoting a truly destination-based consumption tax system. Its implementation replaced the earlier complex web of multiple indirect taxes (like Central Excise, Service Tax, VAT, etc.), streamlining taxation for businesses engaged in inter-state trade.

Types of IGST in India

IGST can be broadly classified into four key categories, each corresponding to a different nature of supply:

Inter-State Supply of Goods: When goods move from one state to another for example, from Karnataka to Maharashtra IGST is levied.
Inter-State Supply of Services: When services are provided by a supplier in one state to a recipient in another state for example, a consultancy service from Delhi rendered to a client in Tamil Nadu.
Import of Goods: Goods brought into India from outside its territorial waters attract IGST at the point of entry (typically the customs port), replacing the earlier Customs Duty plus CVD and SAD.
Import of Services: When services are availed of by a person in India from a service provider located outside India (such as software development or online advertising services), IGST is payable under the reverse charge mechanism.

How Does IGST Work? The Process

Determination of Supply Type: Place of Supply Rules identify whether a transaction is intra-state or inter-state.
Tax Invoice and Payment: A registered supplier issues a tax invoice indicating IGST charged on the taxable value. The buyer (in case of imports or reverse charge on services from abroad) deposits the IGST via the GSTN portal.
Input Tax Credit (ITC) Utilization: Registered businesses can utilize IGST paid on inputs to offset IGST liability on output supplies. Any residual IGST can be used to offset CGST first, then SGST.
Filing Returns: Suppliers file monthly (GSTR-1/GSTR-3B) and annual returns detailing IGST charged and IGST paid on imports.
Revenue Sharing: While IGST is collected by the Centre, revenues are apportioned between the Centre and the destination state according to rules set by the GST Council.

Objectives of IGST

Eliminate Cascading of Taxes: By allowing cross-state ITC, IGST prevents tax-on-tax accumulation, reducing costs.
Simplify Compliance: A single tax on inter-state trade replaces multiple state-level levies, reducing administrative burden.
Promote Free Flow of Goods and Services: Uniform tax treatment encourages businesses to expand across state boundaries without extra tax hurdles.
Destination-Based Taxation: Ensures that the revenue from consumption accrues to the state where goods/services are ultimately consumed.
Enhance Transparency: Standardized rates and return formats increase clarity, making it harder to evade taxes.

Importance of IGST

IGST plays a pivotal role in India’s GST framework by:

Fueling National Market Integration: It transforms the fragmented state-wise market into a unified national market, making it easier for businesses to operate pan-India.
Ensuring Fair Competition: By applying the same tax burden on local and out-of-state suppliers, IGST creates a level playing field.
Boosting Revenue for States: The destination principle under IGST guarantees that states receive their rightful share of tax revenue, strengthening state finances.
Reducing Transaction Costs: With ITC seamlessly available across states, businesses face lower working capital requirements and compliance costs.
Supporting Export Competitiveness: IGST on inputs can be claimed back in exports, ensuring Indian exports remain tax-neutral and competitive globally.

Advantages of IGST

Single Tax Structure: Replaces multiple levies like CST, excise duty, and service tax on inter-state transactions, simplifying accounting.
Uniform Rates Nationwide: A common IGST rate eliminates rate disparities between state GSTs, reducing disputes and confusion.
Improved Cash Flow: Cross-utilization of IGST credit accelerates refunds and reduces tax outflows.
Ease of Doing Business: A harmonized tax system with centralized administration reduces logistical and legal complexities for traders.
Stronger Compliance Ecosystem: Standardized invoicing, returns, and audit processes foster greater transparency and reduce tax evasion.

Examples of IGST in India

Manufacturing Firm Shipping Goods: A Mumbai-based manufacturer sells machinery to a Bangalore factory. The invoice shows IGST at the applicable rate, say 18%, on the taxable value.
Software Services: A Hyderabad IT company provides cloud services to a client in Kolkata. IGST is charged at 18% under the forward charge mechanism.
Import of Electronics: An importer brings in mobile phones from China through Chennai port. Customs authorities levy IGST at 12% on the assessable value, replacing previous CVD/SAD levies.
Cross-Border Service (Reverse Charge): A Delhi firm hires a graphic design agency in the UK. Under reverse charge, the Delhi firm pays IGST at 18% on the invoice amount and then claims ITC.

Components of IGST

IGST levy comprises three essential elements:

Taxable Value: The price of goods or services on which tax is calculated, inclusive of incidental charges (packaging, freight, etc.) but exclusive of GST.
Integrated Tax: The actual IGST amount, arrived at by applying the relevant IGST rate on the taxable value.
Compensation Cess (if applicable): On certain high-value or luxury goods such as automobiles, tobacco, and aerated drinks an additional cess is levied over and above the IGST rate to compensate states for revenue loss during GST rollout.

How to Calculate IGST?

Calculating IGST involves a straightforward sequence:

Determine Taxable Value: Sum up the transaction price and any additional charges (packing, insurance).
Identify the Applicable IGST Rate: Refer to the current IGST rate schedule (0%, 5%, 12%, 18%, 28%).
Compute Integrated Tax: Multiply the taxable value by the IGST rate: IGST=Taxable Value × (IGST Rate/100)
Add Compensation Cess (If Applicable): If the supply involves a cess-able item, compute it separately and add it to the IGST amount.
Generate Invoice: The invoice must clearly show the taxable value, IGST amount, and any cess, ensuring compliance.

IGST Calculation Formula

The basic formula for IGST is:

IGST Payable = Taxable Value × (Applicable IGST Rate ÷ 100)
Taxable Value: Net price before taxes.
Applicable IGST Rate: One of the standard slabs (e.g., 18%).

For items attracting compensation cess:

Total Tax = IGST Payable + Compensation Cess

Example:

If the taxable value of a consignment of electronic components is ₹500,000 and the IGST rate is 18%:

IGST = 500,000 × 18/100 = ₹90,000
If a cess of 1% applies: Cess = 500,000 × 1/100 = ₹5,000
Total Tax = ₹90,000 + ₹5,000 = ₹95,000

IGST Rates Slabs in India

India adopts a five-slab rate structure under GST, which also applies for IGST on inter-state supplies and imports:

0% (Exempt): Essential commodities (e.g., unprocessed food grains, fresh milk).
5% (Lower Rate): Items such as packaged food, footwear (< ₹500), and essential services.
12% (Standard Lower-Mid Rate): Products like computers, certain textiles.
18% (Standard Rate): Majority of goods and services, including IT services, consumer durables.
28% (Higher Rate): Luxury and sin goods (e.g., automobiles, tobacco products, aerated drinks).

Certain goods attract a Compensation Cess (ranging from 1% to 22%) to fund state transition costs.

IGST Rates in India

IGST rates are determined by the GST Council, comprising representatives from Centre and States. Salient points:

Uniform Application: The same IGST rate applies across all states and union territories for a given item or service.
Periodic Updates: The GST Council may revise rates via notifications (e.g., might adjust rates for COVID-relief items).
Transparency: Rate lists are publicly available on the GSTN portal and the Central Tax website.
Special Categories: Exports are zero-rated (0% IGST) to ensure tax neutrality; destinations like SEZs may be treated as exports for IGST purposes.

When is IGST Applicable?

IGST is payable in the following scenarios:

Inter-State Supply: When the supplier’s location and recipient’s location are in different states or union territories.
Import of Goods: At the time of customs clearance for goods entering India.
Import of Services: Availment of services from a provider outside India, under the reverse charge mechanism.
Supply to SEZ: Supplies from a domestic unit to a Special Economic Zone are treated as exports, hence zero-rated IGST applies.

In contrast, intra-state supplies (supplier and receiver within the same state) attract only CGST and SGST.

What are IGST Rules?

The IGST Act, 2017, and the Integrated Goods and Services Tax Rules, 2017, govern IGST. Key provisions include:

Place of Supply Rules: Determine whether a transaction qualifies as inter-state or intra-state.
Time of Supply Rules: Establish when tax liability arises based on invoice date, payment receipt, or due date.
Valuation Rules: Provide methods to determine the taxable value when open market value, related party transactions, or freebies are involved.
Reverse Charge Mechanism: Specifies when the recipient must pay IGST instead of the supplier (common for import of services).
ITC Utilization Rules: Lay down the sequence for utilizing IGST credit against IGST, CGST, and SGST liabilities.
Refund Rules: Outlines the procedure for claiming refunds on IGST paid, especially for exports and inverted duty structures.

IGST Full Form

IGST stands for Integrated Goods and Services Tax, reflecting its role as a single, integrated levy on inter-state supplies and imports within India’s GST framework.

Features of IGST

Destination-Based Tax: Revenue accrues to the state where consumption occurs, promoting equity among states.
Unified Levy: Combines former Central and State taxes on inter-state trade into one levy, simplifying compliance.
Credit Flow: Seamless ITC flow across state boundaries enhances working capital efficiency.
Automated Settlement: The GSTN portal automates IGST collection and distribution between Centre and states.
Harmonized Rates: Common rate structure reduces disputes and litigation.

Definition of IGST

Legally, IGST is defined under Section 5 of the IGST Act, 2017 as the tax levied on all inter-state supplies of goods and services and imports into India. It encompasses both the tax on the value of supply and any applicable compensation cess, collected by the Central Government on behalf of the Union and the states.

Meaning of IGST

In practical terms, IGST represents a unified tax charge for any transaction crossing state lines within India or involving cross-border dealings. By charging IGST instead of separate central and state taxes, India ensures that the tax system is simpler, more transparent, and aligned with global destination-based VAT models.

How can Businesses Claim Input Tax Credit (ITC) on IGST?

Eligibility: The recipient must be a registered taxpayer with a valid tax invoice showing IGST paid.

Utilization Sequence (Rule 88A of CGST Rules):

First against IGST liability.
Then against CGST liability.
Finally, against SGST liability.

Compliance Steps:

Invoice Upload in GSTR-2B/ GSTR-2A: Ensure outward supplies listing includes IGST paid.
Reconciliation: Match inward supplies and ITC available in GSTR-2B.
Claim in GSTR-3B: Declare IGST credit utilization in the monthly summary return.

Refund for Exports: For zero-rated exports, unutilized IGST credit can be claimed as a refund under common refund rules.

Documentation: Maintain invoices, transport documents, and proof of payment to substantiate ITC claims during audits.

Summary

IGST is a central levy on inter-state supplies and imports under India’s GST regime.
Four main types of IGST: inter-state goods, inter-state services, import of goods, import of services.
Process involves tax invoice issuance, payment, ITC utilization, return filing, and revenue sharing.
Objectives: eliminate cascading, simplify compliance, promote national market, and enable destination-based taxation.
IGST’s importance lies in market integration, fair competition, state revenue protection, and export competitiveness.
Advantages include a single tax structure, uniform rates, improved cash flow, ease of doing business, and stronger compliance.
Examples span manufacturing shipments, software services, imports at ports, and reverse-charge services.
Components: taxable value, integrated tax, and compensation cess (where applicable).
Calculation follows a simple formula: IGST = Taxable Value × (Rate/100) plus any cess.
Five rate slabs apply: 0%, 5%, 12%, 18%, 28%, with additional compensation cess on select items.
IGST rates are uniform nationwide and periodically updated by the GST Council.
Applicability: inter-state transactions, imports, and SEZ supplies; intra-state supplies use CGST+SGST.
Governed by the IGST Act and Rules, covering place/time of supply, valuation, reverse charge, ITC, and refunds.
Features include destination-based revenue allocation, unified levy, seamless credit flow, automated settlement, and harmonized rates.
Definition per Section 5 of IGST Act; meaning emphasizes a single tax on cross-border transactions.
Businesses claim ITC on IGST by following the eligibility criteria, utilization sequence (IGST → CGST → SGST), and documented compliance.