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Understanding Integrated GST: Definition, Application, Calculation, Tax Rates, and Refund Procedures

Integrated Goods and Services Tax (IGST) is a key component of India's indirect tax system, levied on the inter-state supply of goods and services. This comprehensive guide clarifies IGST's definition as a combination of CGST and SGST, details its applicability to various transactions including imports, exports, and supplies to SEZs/EOUs, and outlines its structured rate system. The article also provides clear instructions on calculating IGST, highlights its benefits for transparency and simplified Input Tax Credit claims, and explains the conditions under which IGST refunds are processed.

📖 4 min read read🏷️ Integrated Goods and Services Tax (IGST)

Understanding Integrated GST: Definition, Application, Calculation, Tax Rates, and Refund Procedures

When discussing or calculating Goods and Services Tax (GST) for products or services, a single tax rate is frequently cited. However, the GST framework is not a single, unified tax. Instead, it incorporates three levels of indirect taxation, determined by where the goods and services are supplied: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). This article provides a comprehensive overview of IGST.

What is Integrated Goods and Services Tax (IGST)?

Integrated Goods and Services Tax, or IGST, is a tax imposed and gathered on the movement of goods and services between different states in India. It essentially combines the Central GST (CGST) and State GST (SGST) components for a given good or service. The formula for IGST is therefore:

IGST = CGST + SGST

The method for distributing tax revenue from IGST differs from SGST. The Central GST authority (CBIC) collects IGST and then transfers the appropriate state's portion of the revenue to the GST authority of the state where the supply took place. In contrast, SGST is collected and retained by the state GST authority itself. If the place of supply cannot be linked to a single state, the SGST equivalent of the collected IGST revenue is divided equally among all involved states.

IGST Applicability

Integrated Goods and Services Tax (IGST) is levied on all inter-state supplies of goods and services. An inter-state supply, within the GST framework, refers to the movement of goods and services beyond the borders of a single state. IGST is relevant for four main types of supply transactions:

  1. Interstate Transactions: When goods or services are supplied from one state or union territory to another, IGST is applied. The seller includes this tax on the sales invoice and remits it to the Central Government.
  2. Imports and Exports: IGST is applicable to goods and services brought into India (imports) or sent out of India (exports). For imports, the Central Government collects IGST in conjunction with customs duties. Exports are considered zero-rated under GST. This means exporters can either pay IGST and later claim a refund upon submitting shipping bills, or they can opt not to pay IGST by utilizing a Letter of Undertaking (LUT) or bond, effectively making exports tax-exempt under GST.
  3. Special Economic Zones (SEZ) Supplies: SEZs are treated as being outside India's customs jurisdiction. Consequently, IGST is levied on the supply of goods and services to or from an SEZ, even if the actual place of supply is within the same state.
  4. Export-Oriented Units (EOU) Supplies: As defined by the Foreign Trade Policy, EOUs are manufacturing entities that export their entire output. Similar to SEZs, supplies of goods and services to and from EOUs are also subject to IGST.

To illustrate, consider an electronics company in Chennai (Tamil Nadu) selling laptops to a customer in Mumbai (Maharashtra). Since the goods are transported between Tamil Nadu and Maharashtra, IGST would apply to the total value of the laptops. Conversely, if the same Chennai-based seller supplied goods within Tamil Nadu, IGST would not be applicable.

IGST Rate Structure

Integrated GST merges the Central GST and State GST components. The typical IGST rate framework is presented below:

Type of ItemsIGST Rates
Daily essential commodities and educational services5%
Processed and packaged foods, mobile phones, computers12%
Semi-luxury items such as ice cream, pasta, and capital goods18%
Luxury items like cars, consumer durables, and 'sin goods'28%

Features of Integrated GST

Key characteristics of Integrated GST include:

  • Applicability to Inter-state Transactions: IGST is levied on supplies moving between different states, between a state and a Union Territory (UT), from a UT to a state, or between two UTs.
  • Uniform Tax Rate Across India: Unlike the taxation system before GST, IGST ensures a consistent indirect tax rate for inter-state supplies throughout India.
  • Input Tax Credit (ITC) for Buyers: Businesses that procure inputs via inter-state supplies are eligible to claim the Input Tax Credit for the IGST paid.
  • Revenue Distribution on Destination Principle: In accordance with the IGST Act, the Central Government allocates the state's portion of the revenue to the state where the supply occurs or where the goods/services are ultimately consumed.

How to Calculate IGST?

Using our previous illustration, imagine an electronics company in Chennai supplies products valued at ₹1,00,000 to a customer in Mumbai. The formula for determining the total IGST payable is:

IGST = Sales Price × IGST Rate

For electronics such as laptops, the overall GST rate is 18%, meaning the IGST rate is also 18%. Therefore, the total sale price including tax will be: Product Price + IGST, which calculates to ₹1,00,000 + (₹1,00,000 × 18%) = ₹1,18,000

From the collected IGST of ₹18,000, the Central Government will keep 50%, or ₹9,000, in its GST account, and the remaining ₹9,000 will be transferred to Maharashtra's GST account.

Benefits of IGST

The IGST framework for collecting indirect tax on inter-state goods and services supplies offers advantages to the government, suppliers, and consumers.

  1. The IGST system enhances transparency and simplifies self-monitoring for both state and central governments.
  2. It has fostered a tax-neutral commercial environment throughout India. Previously, varying indirect taxes across states led to complexities in tax revenue allocation and associated consequences.
  3. The standardized tax rate nationwide has decreased the actual tax burden and compliance costs for purchasers and final consumers.
  4. For registered businesses, claiming Input Tax Credit (ITC) on purchased inputs is now more straightforward, as both tax collection and ITC claims are centrally processed.

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

Claiming Input Tax Credit (ITC) for IGST paid on business-to-business (B2B) sales follows a process similar to claiming ITC for SGST and CGST. Nevertheless, specific conditions must be met to claim ITC:

  • The entity seeking ITC must be GST registered.
  • The B2B invoice must explicitly state the applicable IGST rate, the total tax amount paid, the Harmonized System of Nomenclature (HSN) code for the supplied items, and any other necessary information.
  • The buyer needs to acknowledge the supplier's invoice within the GST portal's Invoice Management System (IMS) dashboard.
  • The buyer must submit their GST returns, such as GSTR-3B, for the pertinent tax period punctually.

IGST Example

Consider 'Creative Creations,' a Kolkata-based company in West Bengal that sells handcrafted sarees nationwide via an online platform. In March 2025, a customer in Chennai, Tamil Nadu, placed an order for sarees valued at ₹10,000. The Integrated Goods and Services Tax (IGST) rate for sarees is 12%.

  • Inter-state supply: The transaction involves 'Creative Creations' in West Bengal supplying goods to Chennai in Tamil Nadu.
  • IGST applicability: Yes, IGST is applicable.
  • IGST rate: For inter-state supplies of sarees, the Integrated Goods and Services Tax (IGST) rate is 12%.
  • IGST calculation: 12% of ₹10,000 amounts to ₹1,200.
  • Collection: 'Creative Creations' collected ₹1,200 as IGST from the Chennai customer.

Refund of IGST

An IGST refund is typically required when a business-to-business (B2B) buyer's Input Tax Credit (ITC) claim surpasses their GST liability. This scenario frequently arises in export operations. Exports are generally zero-rated under the GST Act, meaning the tax liability for exports is zero when a Letter of Undertaking (LoU) is utilized. Consequently, exporters, Special Economic Zones (SEZs), and Export-Oriented Units (EOUs) are eligible to claim a refund for IGST paid on their inputs.

Frequently Asked Questions

What is the main purpose of IGST in the Indian tax system?
The primary purpose of IGST is to facilitate a seamless tax regime for the inter-state movement of goods and services, ensuring that the tax is collected by the Central Government and then appropriately disbursed to the destination state based on the consumption principle.
How does IGST differ from CGST and SGST?
IGST is levied on inter-state transactions, encompassing both the central and state components of GST, collected by the central government. In contrast, CGST and SGST are levied on intra-state transactions, with CGST going to the central government and SGST to the respective state government.
Are services also subject to IGST, or only goods?
Yes, both goods and services supplied across states are subject to IGST. The Integrated Goods and Services Tax applies equally to the inter-state supply of both.
Can a small business operating within a single state be affected by IGST?
A small business operating strictly within a single state typically deals with CGST and SGST. However, if that business procures inputs from another state or supplies goods/services to customers in other states, it will be affected by IGST.
What happens to the IGST collected if the final consumption state is different from the selling state?
When IGST is collected, the Central Government first receives it. Subsequently, the Central Government remits the state's portion of the tax revenue to the state where the goods or services are ultimately consumed, adhering to the destination-based taxation principle.

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