With the GST Bill recently passed and the introduction of the Integrated Goods and Services Tax Act (IGST) Act 2016, it is important to specifically understand the concept of IGST that has emanated out of the concept of GST. Although, we have earlier discussed the concept of GST, and its advantages and disadvantages, but one must fully grasp the concept of IGST as well.
What is IGST?
Integrated Goods and Services Tax (IGST) is the integrated tax that the Government of India will collect as per the provisions of the Constitution (122nd Amendment) Bill, 2014 or the GST Bill 2014. This integrated tax will be imposed in the same manner as GST will be imposed, on each stage of sale and purchase in the supply chain, only in this case, it will be levied on sale and purchase that form a part of Inter-State Transactions of goods and services under Article 269A (1) of the Constitution of India. In other words, IGST is a rough equal to CGST plus the SGST. The framework of IGST is managed by the IGST Act, 2016.
How IGST Method will work in case of Inter-State Transactions?
The IGST Method has been designed to create a seamless inflow of input tax credit from one state to another. This mechanism will help serve the aims of the GST Bill. For instance, the GST Bill aims at boosting India’s economic development by breaking tax barriers amongst States and integrating India through a uniform tax rate. The IGST will serve this purpose in a very systematic way without being a burden on the tax payers. In this light, it is important to note that IGST will not be additionally levied with CGST and SGST; IGST is a rough sum of the two. It is a seemingly complicated mechanism but we can understand it easily by breaking it down.
Firstly, let’s say that the dealing States are West Bengal and Bihar, while the CGST is 15% and the SGST is 12%. The IGST payable is 27% as the IGST is the addition of the CGST and SGST.
Secondly, let’s now assume that the Inter-State Transaction is of timber making and furniture making on the one hand and furniture retailing and selling to consumers on the other hand. West Bengal makes timber and furniture, making it the seller State; while Bihar purchases the furniture in retail and sells them to final consumers, making it the purchaser State. Thus, West Bengal will collect the IGST from Bihar on the Inter-State Transaction, i.e., furniture maker to furniture retailer being the transaction in question.
Thirdly, while depositing the IGST, seller in West Bengal will take credit of the CGST and SGST paid by him (the furniture maker) at the time of purchasing the timber within the state.
Fourthly, the seller, i.e., the selling state (West Bengal) will transfer to the Centre the credit of SGST used in the payment of the IGST. Thus, the selling State will not get any revenue out of the transaction.
Fifthly, the buyer, i.e., the Buyer State (Bihar) will take credit of IGST while he is discharging his tax liability, i.e., the CGST and SGST paid by him when he is selling the furniture to the consumers in Bihar.
Finally, the Centre will transfer the credit of IGST used in the payment of SGST by Bihar, thus, all the SGST will be accrued by the buyer State – Bihar.
Further, the entire IGST mechanism is to be based on Information Technology. Both the states will report their interstate transactions to a portal controlled by a central agency at the Centre.