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The Goods and Services Tax (GST) changed Indian trade in significant ways. The 'One Nation, One Tax' idea made it easier for goods and services to cross borders by eliminating the complex system of central and state taxes. The Integrated Goods and Services Tax or IGST ensures that inter-state transactions are taxed smoothly without disrupting the flow of credit between states. Whether you are a business owner, a logistics professional, or a consumer purchasing from another state, understanding how IGST works is essential for accurate tax compliance and efficient financial planning.
In this blog, we break down what IGST means, when it is applicable, the rates at which it is charged, and how it is calculated with practical examples. We also explain how IGST helps eliminate cascading taxes while ensuring fair revenue distribution between the Centre and states, making it a crucial pillar of India’s GST system.
Key Takeaways
IGST is a single tax levied on inter-state trade, designed to replace the older, more complex Central Sales Tax system
While collected by the Central Government, the revenue is shared with the destination state where goods are consumed, ensuring a fair distribution of tax income based on usage
The IGST rates in India are equal to the combined sum of CGST and SGST, ensuring that the total tax burden on inter-state sales remains identical to local transactions
Imports are legally treated as inter-state supplies; therefore, they attract IGST alongside basic customs duty to keep domestic and imported goods on a level playing field
Exports are classified as 'zero-rated,' allowing businesses to either export without paying tax via a Letter of Undertaking (LUT) or claim full refunds on IGST paid to maintain global competitiveness
What is IGST?
The full form of IGST is Integrated Goods and Services Tax. The Central Government charges IGST on the sale of goods and services that happen between two states (inter-state) or between a state and a Union Territory. It also applies to trade between countries (imports and exports). The centre collects IGST, a single tax, and then apportions the state’s share where the goods or services are actually used. This differs from CGST and SGST, which are collected simultaneously on local sales. IGST is the sum of the components of Central GST (CGST) and State GST (SGST) for a given product or service.
IGST = CGST + SGST
For example, if a seller in Gujarat supplies goods worth ₹1,00,000 to a buyer in Rajasthan, and the applicable GST rate is 18%, IGST will be levied on the transaction instead of CGST and SGST.
Here’s how it works:
CGST component: 9%
SGST component: 9%
IGST (9% + 9%): 18%
IGST charged = ₹18,000
The seller collects ₹18,000 as IGST from the buyer and remits it to the Central Government. The Centre then transfers the SGST portion (₹9,000) to Rajasthan, the state where the goods are ultimately consumed. This mechanism ensures seamless input tax credit and correct distribution of tax revenue to the destination state.
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Why was IGST Introduced?
Taxes paid on purchases from other states weren't 'refundable' or 'adjustable' against the tax owed on sales under the CST system. This eliminated the input tax credit, requiring businesses to pay the tax as a cost. This reduced the competitiveness of Indian goods and increased the final price for customers.
The need to fix these basic problems led to the introduction of IGST:
Removal of the Cascading Effect: One of the biggest wins of the IGST model is the elimination of the 'tax-on-tax' effect. IGST ensures that tax is charged only on the actual value added at each stage of the supply chain, enabling an uninterrupted flow of input tax credit for inter-state supplies.
Destination-Based Taxation: IGST is based on destination-based taxation, whereas CST is based on the place of origin (the state where the goods were manufactured). By sending tax revenue to the state where goods or services are actually used, it strengthens the GST framework's focus on consumption and helps ensure that wealth is more evenly distributed across states.
Simplified Administration:Logistics struggled to navigate 29 different state tax laws. The Union Government's centralised collection and payment of IGST has made things much easier for everyone. Instead of having to follow different rules in each state, businesses operating in multiple states now have to follow a single set of rules.
Creation of a Unified National Market: IGST has acted as the glue for a 'One Nation, One Tax' economy. It eliminated many state-level tax barriers, which made cross-state trade more efficient, streamlined logistics (no more long queues at state border checkpoints), and improved supply chains across India.
Applicability of IGST: When is it Levied?
Understanding the applicability of IGST is essential to avoid the common mistake of paying the wrong tax, which can lead to blocked funds and lengthy refund processes. IGST is used in the following important situations:
Inter-State Supply of Goods and Services- When the location of the supplier and the place of supply are in two different states or Union Territories, IGST is most often used.
For example, if a textile wholesaler in Gujarat (State A) ships goods to a boutique owner in Maharashtra (State B), this constitutes an inter-state supply. The wholesaler will charge only one IGST rate in India, which depends on the product type. For example, it could be 5% or 12%.
Imports into India (Treating the World as a State)- The GST system has a different approach to international borders. When goods or services come into India, the law treats the transaction as an inter-state supply. The Customs Department collects both the Basic Customs Duty (BCD) and the IGST when a shipment arrives at an Indian port. This ensures imported goods are taxed at the same rate as domestically produced goods, keeping the playing field level for local manufacturers.
The Zero-Rated Advantage for Indian Exports-Exports are treated as zero-rated supplies to keep Indian goods competitive in the global market. However, they remain subject to IGST. There are two things exporters can do.
They can either pay the IGST when they export and then get a full refund from the government, or
They can export without paying any tax by giving the government a Letter of Undertaking (LUT) or a Bond.
Supplies to and by Special Economic Zones (SEZs)- SEZs are special areas treated as 'foreign territories' for tax purposes, even if they are physically located within a state.
For example, a software company in Chennai that sells services to an SEZ unit in Tamil Nadu is not considered to have made a sale within the state. Instead, it is seen as a transaction between states, and IGST applies. Like exports, these are usually not taxed at all to help export-oriented businesses grow.
Inter-State Stock Transfers- Often, a business moves goods from its warehouse in one state to its branch in another. The GST law treats this as a supply, even though no 'sale' has occurred between two different parties. IGST must be paid on these stock transfers. The branch that gets them can later claim them as Input Tax Credit (ITC).
Did You Know?
GST collections hit ₹1.75 lakh crore in December, 2025, up 6.1% YoY, reflecting booming e-commerce inter-state trade
Source: Economic Times
Understanding IGST Rates in India
One common point of confusion among individuals is how IGST rates in India are determined. In simple terms, the IGST rate is the sum of the CGST and SGST rates for a particular product. For instance, if a product has an 18% GST, it is divided into 9% CGST and 9% SGST for sales in the area. When goods are sold between states, the full 18% is charged as IGST.
Semi-luxury goods like ice cream, pasta, and capital goods
28%
Luxury goods like cars, consumer durables, and sin goods
What are the Key Challenges in IGST Compliance?
While IGST (Integrated Goods and Services Tax) plays a crucial role in supporting the “One Nation, One Tax” framework, its practical implementation requires careful attention from businesses. Understanding these aspects helps organisations manage inter-state transactions smoothly, maintain financial discipline, and stay aligned with regulatory requirements.
The 'Wrong Tax Head' Error- One of the most common mistakes that sellers make is charging local taxes (CGST + SGST) for sales that are actually between states. Section 19 of the IGST Act does not allow for money to be 'transferred' from one head to another. The company has to pay the right amount of IGST out of its own pocket first, and then it can ask for a refund of the taxes it paid incorrectly. This process can temporarily use up working capital.
E-way Bill Mandatory Requirements - When goods cross state lines, compliance goes beyond just the invoice. You must have an E-way bill if the value of the consignment is more than ₹50,000. The IGST rates in India that apply to the goods must be correctly shown in this digital document. If the E-way bill and the tax invoice don't match, vehicles can be held up, and heavy fines can be imposed while they are in transit.
How to Calculate IGST?
Calculating IGST is straightforward because it encompasses the total GST rate. The formula for IGST is:
For example, a furniture manufacturer in Rajasthan sells a dining table worth ₹50,000 to a customer in Delhi. The GST rate for furniture is 18%.
Base Value: ₹50,000
IGST Rate: 18%
Calculation: (50,000 × 18) / 100 = ₹9,000
Total Invoice Value: ₹59,000
The manufacturer will collect ₹9,000 as IGST and deposit it with the Central Government, which will later transfer a portion to the Delhi State Government.
Conclusion
Understanding indirect taxes such as IGST is increasingly important in an economy where interstate movement of goods and services is routine. As more and more businesses and people do business with each other across borders in the country, knowing the rules that govern these transactions can help things go more smoothly and make better decisions.
But financial success isn’t just about getting the taxes right today; it is about making sure your hard work turns into a secure future. Whether you are running a growing business or managing a professional career, the ultimate goal is the same: stability and long-term peace of mind for yourself and your family.
Glossary
Inter-State Supply: Any transaction where the location of the supplier and the place of supply are in two different states or UTs
Zero-Rated Supply: Supplies like exports, where the tax rate is 0%, and the supplier can claim a refund on the taxes paid on inputs
Place of Supply: A legal destination used to determine whether a transaction is intra-state or inter-state for tax purposes
Import of Services: The supply of a service where the supplier is outside India, and the recipient is located within India
Customs Duty: A tax imposed on goods when they are transported across international borders, collected by the central authority
FAQs
The IGST full form is Integrated Goods and Services Tax. It is the tax levied on all inter-state supplies of goods and services in India.
No, IGST is one of the three components of GST. While CGST and SGST apply to local sales, IGST applies to sales between different states and imports.
The IGST rates in India are generally 5%, 12%, 18%, and 28%. The rate for a specific item is the sum of its CGST and SGST rates.
IGST is collected by the Central Government. However, the revenue is eventually shared between the Centre and the state where the goods/services were consumed.
Yes, all imports are treated as interstate supplies. You must pay IGST, which can later be claimed as Input Tax Credit (ITC) for your business.
If you pay the wrong tax, you must pay the correct tax (IGST) to the government and then apply for a refund of the wrongly paid CGST/SGST.
Exports are 'zero-rated.' You can either export without paying IGST by using a Letter of Undertaking (LUT) or pay IGST and claim a full refund later.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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