Integrated Goods and Services Tax, or IGST, is the single tax the Central Government charges on any supply of goods or services that crosses a state or Union Territory border inside India, and on anything imported into the country. It is levied under the IGST Act, 2017, and the rate is always equal to the Central GST (CGST) plus State GST (SGST) rate that would have applied to the same transaction within one state. So the buyer pays the same total tax either way; what changes is who collects it and how the revenue is shared afterward.
Where IGST Sits in the GST Structure
GST in India has three components, and only one of them applies to any given transaction. Sell to a buyer in your own state and two taxes apply together: CGST goes to the Centre, SGST goes to your state. Sell to a buyer in another state or Union Territory and a single tax, IGST, replaces both.
The arithmetic is designed to be neutral. An item in the 18% slab attracts 9% CGST plus 9% SGST on an intra-state sale, or a flat 18% IGST on an interstate sale. The total tax the buyer pays is identical. What IGST does is let the Central Government act as a clearinghouse: it collects the full amount, keeps the share equivalent to CGST, and passes the SGST-equivalent share to whichever state actually consumed the goods or services. Before 2017, interstate trade was tangled up with entry taxes, octroi, and a central sales tax whose credit did not travel well across borders. IGST was built to remove that friction and let input tax credit flow across state lines as smoothly as it flows within a single state.
When IGST Applies
Section 7 of the IGST Act treats a supply as interstate whenever the location of the supplier and the place of supply fall in two different states, two different Union Territories, or one state and one Union Territory.1CBIC Tax Information. IGST Act Section 7 – Inter-State Supply The same test applies to services.
A few categories are classified as interstate automatically, regardless of where the parties actually sit:
- Imports. Goods brought into India are treated as interstate supplies until they cross the customs frontier, and imported services are treated as interstate too.
- Exports. When the supplier is in India and the place of supply is outside India, the transaction is interstate (though exports are zero-rated, covered further down).
- Supplies to or by Special Economic Zone developers and units. These are compulsorily interstate even when both parties are physically in the same state.1CBIC Tax Information. IGST Act Section 7 – Inter-State Supply
E-commerce operators have an extra layer. Platforms that facilitate interstate sales must collect Tax Collected at Source at 1% IGST on the net taxable value of supplies made through the platform, deducting it before paying the seller, who can later claim credit for it.
Place of Supply Decides Which Tax You Charge
The whole system turns on the “place of supply.” Get it wrong and you charge the wrong tax, which means paying the wrong government and leaving your buyer unable to claim proper credit. Sections 10 through 14 of the IGST Act set out the rules.
For goods moving within India, the general rule is simple: the place of supply is where the goods are delivered. A manufacturer in Maharashtra shipping to a warehouse in Karnataka has its place of supply in Karnataka, which makes the sale interstate and brings IGST into play.
Services are more complex. The default rule places the supply at the recipient’s location when both parties are in India, but several categories override that default. Services linked to immovable property (construction, architecture, interior design) are placed where the property sits. Restaurant and catering services are placed where the food is served. Passenger transport is placed where the passenger boards. Each override exists because the recipient’s location would not reflect where consumption actually happens for that kind of service.
For imported goods, the place of supply is the importer’s location. For imported services, it is the recipient’s location in India. Both rules push imports consistently into the IGST column rather than any state-level tax.
Rates and How IGST Is Calculated
IGST uses the same slab structure as the rest of GST: 0%, 5%, 12%, 18%, and 28%. Essential items like unprocessed food and healthcare services sit at the lower end; luxury items and vehicles attract 28%, sometimes with an additional compensation cess. Whatever the slab, the IGST rate on an interstate sale always equals the combined CGST and SGST rate for the same item domestically.
Calculation on a domestic interstate sale is a single multiplication. Office furniture at 18% sold to a buyer in another state attracts 18% IGST on the taxable value. Had the buyer been in your own state, the same amount would have split into 9% CGST and 9% SGST. The buyer pays the same total.
IGST on Imports
Imports work differently because IGST is layered on top of customs duties. The formula applies the IGST rate to the sum of the assessable value, Basic Customs Duty, and any applicable surcharges such as the Social Welfare Surcharge. Take electronics with an assessable value of ₹1,00,000, a 10% BCD of ₹10,000, and a 10% Social Welfare Surcharge on the BCD of ₹1,000. The 18% IGST is calculated on ₹1,11,000, giving ₹19,980.
One point matters for recovery: the IGST paid at customs is available as input tax credit, but the Basic Customs Duty is not. For a business using imported goods in taxable supplies, the IGST component is recoverable; the BCD stays a cost.
Input Tax Credit and Why IGST Credit Is Valuable
Input tax credit stops tax from cascading at every stage of a supply chain. IGST you pay on purchases sits in your electronic credit ledger and can be set off against your outgoing tax liabilities, but the law prescribes a strict order for using those credits.2Goods and Services Tax. Utilization Principles
- IGST credit must first be used against IGST output liability. Whatever remains can be applied to CGST liability, SGST liability, or both, in any proportion you choose.
- CGST credit is used next, first against CGST liability and then against IGST liability. It can never be used against SGST liability.
- SGST credit follows the mirror rule: first against SGST, then against IGST, and never against CGST.
The wall between CGST credit and SGST liability (and the reverse) is absolute. That is what makes IGST credit the most useful of the three: it is the only credit type that can cross-subsidize both central and state liabilities. A business with heavy interstate purchases and a mix of interstate and intra-state sales will usually find its IGST credits doing the most work.2Goods and Services Tax. Utilization Principles
Exports Are Zero-Rated, Not Exempt
Exports of goods and services, together with supplies to SEZ units, are zero-rated under Section 16 of the IGST Act.3CBIC Tax Information. IGST Act Section 16 – Zero Rated Supply Zero-rated is not the same as exempt. The output tax rate is zero, but you still get to claim credit on your inputs, so Indian exports are not weighed down by embedded domestic taxes. Exporters have two routes.
- Export under a Letter of Undertaking. You file Form GST RFD-11 on the GST portal, commit to export without paying IGST, and claim a refund of the accumulated input tax credit on your purchases. The LUT runs for one financial year and has to be renewed.
- Pay IGST and claim a refund. You charge IGST on the export invoice as if it were a normal interstate sale, then claim a refund of the IGST paid. Under Rule 96 of the CGST Rules, the shipping bill itself is treated as the refund application; once your GSTR-3B is filed and the export manifest matches your GSTR-1 details, the system processes the refund and credits it to your bank account.4CBIC Tax Information. CGST Rules – Rule 96 – Refund of Integrated Tax Paid on Goods Exported Out of India
Established exporters usually prefer the LUT because it avoids tying up working capital in IGST while waiting on a refund. The pay-and-refund route suits businesses that want a simpler paper trail or have not yet qualified for an LUT.
Registration and E-Way Bill Rules That Follow
Making even a single interstate taxable supply triggers mandatory GST registration under Section 24 of the CGST Act, regardless of turnover.5CBIC Tax Information. CGST Act Section 24 – Compulsory Registration in Certain Cases The usual turnover threshold (₹20 lakh for services in regular states, ₹10 lakh in special category states) does not apply. A freelance designer earning ₹5 lakh who would normally sit below the limit becomes liable to register the moment they take on a client in another state.
Any interstate movement of goods with a consignment value above ₹50,000 also requires an electronic waybill, generated on the GST portal before the goods start moving.6Goods and Services Tax. CGST Rules – Rule 138 – E-Way Bill The e-way bill links invoice, transporter, and vehicle details into a single trackable document. Goods found in transit without one can be detained, with tax recovery and penalties on top. States may set lower thresholds for movement within their own borders, but the ₹50,000 rule applies uniformly across state lines.
Interstate sales are reported invoice-by-invoice in GSTR-1, which auto-populates the buyer’s GSTR-2A and GSTR-2B. Totals and credit utilization are then declared in the monthly GSTR-3B summary return.7GST Portal. Creation of Outward Supplies Return in GSTR-1 A mismatch between GSTR-1 and GSTR-3B triggers automated discrepancy alerts, and if the GSTR-1 is wrong the buyer cannot claim the credit, so reconciling the two before filing matters each month.
One compliance pitfall is worth flagging. Paying CGST plus SGST on a sale that should have attracted IGST (or the reverse) means the correct tax is unpaid in the government’s books, even though you deposited the full amount. Late payment carries interest at up to 18% per annum under Section 50 of the CGST Act.8CBIC Tax Information. CGST Act Section 50 – Interest on Delayed Payment Identifying the place of supply correctly at the invoicing stage is the only reliable fix.
How IGST Revenue Reaches the Right State
IGST is not just a tax rate. It is the fiscal plumbing that moves revenue from the point of collection to the state where consumption happened. The Centre collects all IGST on interstate transactions and then settles accounts monthly: it keeps the CGST-equivalent share and transfers the SGST-equivalent share to the consuming state.
On an 18% IGST collection of ₹1,800, the Centre retains ₹900 as its 9% CGST share and transfers ₹900 to the state where the goods or services were consumed. The destination state, where a consumer actually used the product, receives its revenue, rather than the state where the manufacturer or seller is based.
Settlement is not always instant. Cross-utilization of credit between IGST, CGST, and SGST creates situations where the exact apportionment can only be worked out later. For any IGST that remains un-apportioned at the end of a month, the Centre and the states split it provisionally on a 50:50 basis until the final reconciliation catches up.