IGST, or Integrated Goods and Services Tax, is the single tax the Central Government levies whenever goods or services move between two states or Union Territories in India, or when they enter the country as imports. It is collected under the IGST Act, 2017, and its rate equals the combined CGST and SGST rate that would apply if the same transaction happened within one state. The point of having a separate integrated tax is practical: it lets input tax credits flow smoothly across state borders, so a business trading with another state is not worse off than one selling next door.
How IGST Fits With CGST and SGST
India’s GST has three components working in parallel. Sell within your own state, and two taxes apply on the same invoice: CGST goes to the Central Government and SGST goes to the state government. Sell to a buyer in a different state or Union Territory, and one consolidated tax replaces both. That tax is IGST.
The total burden on the buyer does not change. On something taxed at 18%, an intra-state sale splits into 9% CGST plus 9% SGST. An interstate sale of the same item attracts 18% IGST as one line. The Central Government acts as a clearinghouse: it collects the full IGST, keeps the CGST-equivalent share, and passes the SGST-equivalent share to the state where the goods or services were actually consumed.
Before GST came into effect in 2017, interstate transactions in India were tangled up in entry taxes, octroi, and central sales tax, with credits that rarely traveled cleanly between states. IGST replaces that patchwork with a single mechanism and full credit portability.
When IGST Applies
The IGST Act defines an interstate supply as one where the supplier’s location 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.
Beyond straightforward state-to-state trade, several categories are treated as interstate supplies regardless of where the parties sit:
- Imported goods are treated as interstate supplies until they clear the customs frontier. Imported services are similarly classified.
- Exports, where the supplier is in India and the place of supply is outside India, count as interstate (though they are zero-rated, discussed further down).
- Any supply made to or by a Special Economic Zone developer or unit is compulsorily an interstate supply, even if both parties are physically in the same state.1CBIC Tax Information. IGST Act Section 7 – Inter-State Supply
E-commerce operators sit in a slightly different position. Platforms facilitating interstate sales collect Tax Collected at Source at 1% IGST on the net taxable value moving through the platform, deduct it before paying the seller, and the seller later claims credit for it.
Place of Supply: The Rule That Decides Which Tax You Pay
Place of supply is the single most important idea inside the IGST framework, because getting it wrong means charging the wrong tax altogether. Apply CGST plus SGST on what should have been an interstate sale, and the correct tax remains unpaid while the buyer struggles to claim credit. Charge IGST on a local sale, and the same problem shows up in reverse.
Sections 10 to 14 of the IGST Act set out the rules. For domestic goods transactions, 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 a place of supply in Karnataka, so the transaction attracts IGST.
Services are more layered. The default rule places the supply at the recipient’s location when both parties are in India. But specific categories override this. Services connected 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 type 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 firmly into IGST territory rather than state-level taxes.
IGST Rates and How the Tax Is Calculated
IGST always matches the combined CGST and SGST rate for the same item. India’s rate structure runs across five main slabs: 0%, 5%, 12%, 18%, and 28%. Essentials like unprocessed food and healthcare sit at the low end; luxury items and automobiles attract 28%, sometimes with an additional compensation cess on top.
For a domestic interstate sale, the calculation is straight multiplication. Selling office furniture taxed at 18% to a buyer in another state means 18% IGST on the taxable value. Had the buyer been in your own state, the same invoice would show 9% CGST plus 9% SGST. The total does not change.
IGST on Imports
Imports work differently because IGST layers on top of customs duties rather than being applied to the product value alone. The formula: IGST equals the applicable rate multiplied by the sum of the assessable value, Basic Customs Duty, and any applicable surcharges such as the Social Welfare Surcharge.
Take electronics imported 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, working out to ₹19,980.
One important consequence for importers: the IGST paid at customs is available as input tax credit, but the Basic Customs Duty itself is not. So the IGST portion is recoverable for a business using the imported goods to make taxable supplies, while the BCD stays a cost.
Input Tax Credit Under IGST
Input tax credit is what stops tax from cascading at every stage of a supply chain. IGST paid on your purchases sits in your electronic credit ledger and can be set off against your outgoing tax liabilities. The law prescribes a fixed order for using those credits, and the GST portal enforces it.
The utilization sequence runs like this:2Goods and Services Tax. Utilization Principles
- IGST credit is used first, and it must clear your IGST output liability before anything else. Any IGST credit still left can be applied against your CGST liability, your SGST liability, or both, in whatever proportion you choose.
- CGST credit comes next, once IGST credit is exhausted. It pays down CGST liability first, and any remainder can go against IGST liability. It can never be used against SGST liability.
- SGST credit works the same way in reverse. It clears SGST liability first, then can offset IGST liability, but never CGST liability.
The wall between CGST credit and SGST liability, and vice versa, is absolute. That is what makes IGST credit the most useful kind to hold: it is the only credit that can flow to both central and state liabilities. Businesses with heavy interstate purchases and mixed interstate and intra-state sales tend to see their IGST credits doing the heaviest lifting.2Goods and Services Tax. Utilization Principles
Zero-Rated Exports and IGST Refunds
Exports of goods and services, along 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 the exporter still claims credit on inputs, so domestic taxes do not stay embedded in export prices. Exporters have two routes:
- Export under a Letter of Undertaking. You file Form GST RFD-11 on the portal, commit to exporting without paying IGST, and claim a refund of the accumulated input tax credit on your purchases. The LUT is valid for one financial year and needs renewal. For FY 2026-27, it is filed under Rule 96A of the CGST Rules.
- Pay IGST and claim refund. You charge IGST on the export invoice as though 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 you file a valid GSTR-3B and the export manifest data matches your GSTR-1 details, the system processes the refund and credits it electronically to your bank account.4CBIC Tax Information. CGST Rules – Rule 96 – Refund of Integrated Tax Paid on Goods Exported Out of India
Most established exporters prefer the LUT route because it avoids tying working capital up in IGST payments while waiting for a refund. The pay-and-refund route suits businesses that want a simpler paper trail or have not yet qualified for an LUT.
Registration, E-Way Bills, and Returns
Even a single interstate taxable supply triggers mandatory GST registration. Section 24 of the CGST Act overrides the usual turnover thresholds (₹20 lakh for services in regular states, ₹10 lakh in special category states) for anyone making interstate supplies.5CBIC Tax Information. CGST Act Section 24 – Compulsory Registration in Certain Cases A freelance designer earning ₹5 lakh a year serving only local clients would not normally need to register. Take on one client in another state, and registration becomes mandatory.
Interstate movement of goods with a consignment value above ₹50,000 needs 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 ties together the invoice, transporter details, and vehicle information into a single trackable document. Goods found in transit without a valid one can be detained, with penalties and tax recovery to follow.
IGST transactions get reported through two main returns. GSTR-1 carries invoice-level details of outward supplies, including interstate sales that attracted IGST. What you file there flows automatically into your buyer’s GSTR-2A and GSTR-2B, which is how they verify and claim credit. Errors in your GSTR-1 do not just affect you; they block your buyer’s credit as well.7GST Portal. Creation of Outward Supplies Return in GSTR-1 GSTR-3B is the monthly summary where you declare total IGST output liability and show how you used IGST, CGST, and SGST credits against it. The portal auto-drafts GSTR-3B from your GSTR-1 data, and any mismatch triggers automated discrepancy alerts.
How IGST Revenue Is Settled Between Governments
IGST is also the fiscal plumbing that keeps revenue flowing to the right government. The Centre collects all IGST on interstate transactions and then settles accounts with the states monthly, based on where the goods or services were consumed. It keeps the portion equivalent to the CGST rate and transfers the SGST-equivalent share to the consuming state.
On an 18% IGST collection of ₹1,800, the Centre retains ₹900 as its CGST-equivalent share and transfers ₹900 to the state where the goods were consumed. The destination state receives its revenue, not the state where the seller happens to be located.
In practice the settlement is not always instant. Cross-utilization of credits between IGST, CGST, and SGST creates situations where the exact apportionment cannot be pinned down straight away. Any IGST that stays un-apportioned at month’s end is split provisionally between the Centre and the states on a 50:50 basis until final reconciliation catches up.
What Goes Wrong When You Get It Wrong
Late payment of IGST attracts interest under Section 50 of the CGST Act at up to 18% per annum, calculated from the day after the due date until actual payment.8CBIC Tax Information. CGST Act Section 50 – Interest on Delayed Payment
The costlier mistake is often the classification one: paying CGST plus SGST on a transaction that should have attracted IGST. It happens when a business fails to notice that the place of supply is in a different state. Technically, the correct tax (IGST) remains unpaid, so authorities can issue a demand notice with interest and penalties. Courts have shown some leniency where the full tax was already deposited (just under the wrong head) and the mistake was clearly unintentional, sometimes allowing a shift to the correct head without penalty. Relying on that is a gamble. Working out whether a transaction is interstate or intra-state before you invoice it avoids the problem entirely.