Legal Provisions and Regulatory Framework Governing IGST in the Context of Inter-state Transactions

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Published Date:  13-02-2024   Author:   trishla-tyagi
captainbiz legal provisions and regulatory framework governing igst in the context of inter state transactions

Introduction 

The implementation of the Goods and Services Tax (GST) is a substantial overhaul of our country’s indirect tax system. The Goods and Services Tax (GST) will replace many taxes levied and collected by the Centre and the States. GST is a multi-tiered value-added tax applied on the purchase of products, services, or both.

Given our country’s federal structure, a “Dual GST” approach has been established.

The Centre and States will both impose GST on every supply of goods or services that occurs inside a State or Union Territory. As a result, there will be two components of GST:

  •  Central tax (CGST)
  •  State tax (SGST)

Why is there a third tax called IGST?

Before delving into the IGST Model and its characteristics, it is critical to understand how interstate trade or commerce is governed under the current indirect tax system. It is worth noting that the Central Sales Tax Act, 1956 now controls inter-state trade or commerce (hence referred to as “CST”), the power for which is derived constitutionally from Article 269 of the Constitution. Furthermore, under Article 286 of the Indian Constitution, no State may charge a sales tax on any sale or purchase of products that occurs outside the State or during the importation or exportation of commodities into or out of India’s territory. Only the Parliament has the authority to levy a tax on such a transaction.

The CST carries the following flaws:

  1. The origin State collects and retains CST, which is an anomaly. Any indirect tax is, by definition, a consumption tax, the burden of which falls on the consumer. Logically, the tax must be levied on the destination State that has authority over the customer.
  2. CST Input Tax Credit (hereafter referred to as ITC) is not given to the buyer, resulting in tax cascading (tax on tax) in the supply chain.
  3.  Various accounting forms, including C Form, E1, E2, F, I, J Forms, and so on, are required to be submitted in CST, which increases the compliance cost of the firm and impedes the free flow of commerce.
  4. Another disadvantage of CST is the possibility of “arbitrage” due to the large disparity in tax rates charged on intra-state and inter-state sales under VAT and CST, respectively.

The IGST approach would address all of these flaws

The IGST is a system for monitoring inter-state commerce in goods and services and ensuring that the SGST  component is paid to the consumer state. It would keep the ITC chain in interstate supplies intact. The IGST rate is equivalent to the CGST rate plus the SGST rate. The Central Government would levy IGST on all inter-state transactions involving taxable goods or services.

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Integrated Goods and Services Tax (IGST)

IGST rate= CGST rate + SGST rate (more or less)

 Cross-utilization of credit: It necessitates the transfer of funds across accounts. The use of CGST and SGST credit for IGST payment by “B” would need the transfer of monies to IGST accounts. Similarly, using IGST credit to pay CGST and SGST via “C” would be prohibited. Entail the transfer of monies from the IGST account. As a consequence, the CGST and SGST accounts have been combined. (for example, Gujarat) would have Rs. 1300/- apiece, whereas there would be no amount. After the transfer of ITC, there is a lag in IGST and SGST (say, in Karnataka).

Order in which IGST/CGST/SGST credits must be used: The ITC can be used to make the IGST payment. The amount of ITC owing to IGST may be applied to the payment of IGST, CGST, and SGST in that order.

Nature of Supply: It is critical to ascertain the nature of the supply – whether it is interstate or intrastate – since the type of tax to be paid (IGST or CGST+SGST) is dependent on this.

Inter-State Supply: Subject to the laws governing place of supply, if the supplier’s location and the place of supply are in

 (a) two distinct states

(a) Two separate Union territories

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(c) A state as well as a union territory

Such supplies should be considered interstate trade or commerce supplies of commodities or services. Any provision of goods or services in the taxable territory that is not an intra-state supply is presumed to be a supply in the course of inter-state trade or commerce. Interstate supply is defined as supplies to or from SEZs. Furthermore, the supply of commodities imported into India until they pass India’s customs borders or the supply of services imported into India must be considered as supplies in the course of inter-state trade or commerce. Furthermore, goods for overseas visitors must be classified as inter-state supplies.

Intra-State supply: It has been defined as any supply where the location of the supplier and the place of supply is in the same State or Union Territory.

  •  Goods supplied within the same state or union territory
  •  Services supplied within the same state or union territory

Inter-State supply :

  •  Supply of products from one state or union territory to another state or union territory
  •  Supply of services from one state or union territory to another state or union territory
  •  Service imports
  •  Goods or services exported
  •  Provision of goods/services to/by SEZ
  •  International tourist supplies
  •  Any other supply made in the taxable territory that is not an intra-State supply.

As a result, the type of supply is determined by the location of the supplier and the location of the consumer supply. The IGST Act defines both of these words.

Location of Supplier: In general, it is the supplier’s registered place of business or fixed establishment from which the supply is made. A service provider may be required to go to a client’s location to deliver service. However, such a site would not be considered the supplier’s location. It must be either a regular location of business or an established establishment with adequate permanency and an appropriate structure in terms of human and technical resources.

Place of supply:

  • Provisions for places of supply for products and services have been developed with the destination/consumption concept in mind. In other words, the location of supply is determined by the location of consumption of products or services. Because things are tangible, determining their location of supply based on the consumption principle is simple. In most cases, the point of delivery becomes the place of supply. However, because services are ethereal, pinpointing the precise location where they are obtained, enjoyed, and consumed is difficult. Certain kinds of services have their place of delivery identified through the use of a proxy.
  • There is a contrast between B2B (Business to Business) and B2C (Business to Consumer) transactions, as B2B transactions are wash transactions since the ITC is used by the registered person (receiver) and no real money is generated for the government.
  • Separate arrangements have been developed for the supply of products and services to determine their site of delivery. Separate provisions for determining the place of source for domestic and cross-border supplies have been enacted and framed.

Place of supply of goods other than import and export

S.No Nature of Supply Place of Supply
1 Where the supply involves the movement of goods, whether by the supplier, the recipient, or by any other person. Location of the goods at the time at

which the movement of goods terminates for delivery to the recipient

2 Where the goods are delivered to the recipient, or any person on the direction of the third person by way of transfer of title or otherwise, it shall be deemed that the third person has received the goods The principal place of business of such

person.

3 Where there is no movement of goods either by supplier or recipient Location of such goods at the time of

delivery to the recipient

4 Where goods are assembled or installed at

site

The place where the goods are

assembled or installed

5 Where the goods are supplied on board a conveyance like a vessel, aircraft, train, or motor vehicle The place where such goods are taken on-board the conveyance

 Place of supply of services in case of Domestic Supplies

Where both the supplier of services and the user of services are located in India.

The site of supply for the 12 types of services listed below is established using a proxy. A default provision controls the remaining services.

S. No. Nature of Service  Place of Supply
1 Immovable property related to services, including hotel accommodation Location at which the immovable property or

boat or vessel is located or intended to be

located If located outside India: Location of the

recipient

2 Restaurant and catering

services, personal grooming,

fitness, beauty treatment, and

health service

Location where the services are actually

performed

3 Training and performance

appraisal

B2B: Location of such Registered Person

B2C: Location where the services are actually

performed

4 Admission to an event or

amusement park

Place where the event is actually held or where

the park or the other place is located

5 Organization of an event B2B: Location of such Registered person

B2C: Location where the event is actually held. If the event is held outside India: Location of the recipient

6 Transportation of goods,

including mails

B2B: Location of such Registered Person

B2C: Location at which such goods are handed

over for their transportation

7 Passenger transportation B2B: Location of such Registered Person

B2C: Place where the passenger embarks on the

conveyance for a continuous journey

8 Services on board a

conveyance

Location of the first scheduled point of departure

of that conveyance for the journey

9 Banking and other financial

services

Location of the recipient of services on the

records of the supplier

Location of the supplier of services if the location

of the recipient of services is not available

10 Insurance services B2B: Location of such Registered Person

B2C: Location of the recipient of services on the

records of the supplier

11 Advertisement services to the

Government

The place of supply shall be taken as located in

each of such States Proportionate value in case

of multiple States

12 Telecommunication services Services involving fixed line, circuits, dish, etc., and the place of supply is the location of such fixed

equipment. In the case of mobile/ Internet post-paid services, it is the location of the billing address of the recipient. In the case of the sale of pre-paid vouchers, the

place of supply is the place of sale of such vouchers. In other cases, it is the address of the recipient in the records.

A default provision has been provided for the remainder of the services other than those indicated above:

Also Read: What are the different rules that apply to the place of supply of goods?

Default Rule for the services other than the 12 specified services

S. No. Description of Supply Place of Supply 
1 B2B Location of such Registered Person
2 B2C (i) Location of the recipient where the address on record exists, and (ii) Location of the supplier of services in other cases

Place of supply of services in case of cross-border supplies:

(Where the supplier of services or the user of services is located outside of India)

(i) The site of supply is established with respect to the following service categories:

A reference to a proxy. A default provision controls the remaining services.

SNo. Nature of Service Place of Supply
1 Services supplied for goods that are required to be 2made physically available from a remote location by way of electronic means (Not applicable in case of goods that are temporarily imported into India for repairs and exported) The location where the services are actually performed, The location where the goods are situated.
2 Services supplied to an individual and requiring the physical presence of the receiver The location where the services are actually performed
3 Immovable property-related services, including hotel accommodation Location at which the immovable property is located 
4 Admission to or organization of an event The place where the event is actually held 
5 If the said, three services are supplied at more than one locations. i.e., (i) Goods & individual related, (ii) Immovable property-related, (iii) Event-related
5.1 At more than one location, including a

location in the taxable territory

Its place of supply shall be the location in the taxable territory where the greatest proportion of the service is provided
5.2 In more than one State Its place of supply shall be each such

State in proportion to the value of

services provided in each State

6 Banking, financial institutions, NBFC Intermediary services, hiring of vehicles’ services etc. Location of the supplier of service 
7 Transportation of goods  The place of destination of the goods
8 Passenger transportation  Place where the passenger embarks on the conveyance for a continuous journey

 

9 Services on-board a conveyance  The first scheduled point of departure of that conveyance for the journey
10 Online information and database access or retrieval services The location of recipient of service

Also Read: How Is The Place Of Supply Determined For Services?

(ii) For the rest of the services other than those specified above, a default provision has been prescribed as under:

Default Rule for the cross border supply of services other than nine specified services

S.no. Description of supply Place of Supply
1 Any Location of the recipient of service If not available in

the ordinary course of business: The location of the

supplier of service

Supplies in territorial waters

Where the supplier’s position is in territorial waters, the place of supply is presumed to be in the coastal State or Union Territory where the nearest point of the applicable baseline is located.

Export/Import of services

If specific requirements are met, a supply is classified as import or export. These are the conditions:

Export of services  Import of services 
Means the supply of any service, where (a) the supplier of service is located in India, (b) the recipient of service is located outside India, (c) the place of supply of service is outside India, (d) the payment for such service has been received by the supplier of service in convertible foreign exchange, and (e) the supplier of service and the recipient of service are not merely establishments of a distinct person Means the supply of any service, where (a) the supplier of service is located outside India, (b) the recipient of service is located in India, and (c) the place of supply of service is in India

Zero rated supply

Exports and supplies to SEZs are treated as ‘zero-rated supplies,’ meaning no tax is due. However, ITC is permitted under certain criteria, safeguards, and procedures, and refunds in respect of such supplies may be sought.

one of the following options:

(i) Supply made without paying IGST under Bond and claiming reimbursement of unutilized or  ITC

(ii) Supply made after paying IGST and claiming a refund

Also Read: Export and Zero-Rated Supply: Taxation and Compliance Requirements

Refund of integrated tax paid on supply of goods to tourist leaving India

Section 15 of the IGST Act allows for the return of IGST paid by a foreign tourist departing India on products carried outside of India, subject to the circumstances and safeguards stipulated. An international tourist is defined as a nonresident of India who visits India for less than six months. IGST would be levied. On such goods as the same during export.

Conclusion

Integrated Goods and Services Tax Act, 2017 (IGST Act): The IGST Act is a comprehensive piece of legislation that governs the levy, collection, and distribution of IGST in India. It specifically deals with transactions involving the supply of goods and services between different states or Union territories.

Goods and Services Tax (Compensation to States) Act, 2017: This act provides for compensation to states for any revenue loss arising due to the implementation of GST, including IGST.

FAQ

  • What is IGST?

IGST stands for Integrated Goods and Services Tax. It is a tax imposed by the Indian government on the interstate supply of goods and services.

  • How is IGST different from CGST and SGST?

CGST (Central Goods and Services Tax) is levied by the central government on intra-state supplies, while SGST (State Goods and Services Tax) is levied by state governments on intra-state supplies. IGST is applicable to interstate supplies, and it is collected by the central government.

  • When is IGST applicable?

IGST is applicable when there is a supply of goods or services between different states or union territories in India.

  • Who is responsible for collecting IGST?

The central government is responsible for collecting IGST.

  • How is IGST calculated?

IGST is calculated as a percentage of the transaction value and is included in the overall cost of the goods or services.

  • What is the place of supply in the case of IGST?

The place of supply for IGST is the location of the recipient of the goods or services in case of interstate transactions.

  • Is IGST applicable on imports?

Yes, IGST is applicable on the import of goods and services into India. It is collected by the central government.

  • Can input tax credit be claimed for IGST?

Yes, businesses can claim Input Tax Credit (ITC) for IGST paid on the purchase of goods or services, which can be set off against their output tax liability.

  • What is the role of the GSTN (Goods and Services Tax Network) in IGST?

The GSTN is responsible for the administration and processing of IGST transactions. It facilitates the seamless flow of information between the central and state governments.

  • What are the compliance requirements for IGST?

Businesses engaged in interstate transactions are required to file GST returns and comply with the rules and regulations set by the GST Council. Compliance includes timely filing of returns, payment of taxes, and adherence to other statutory requirements.

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Trishla Tyagi

Trishla Tyagi is a Cryptophile and a Content Writer of Cryptocurrency, Blockchain, Finance and Fintech News, SEO writing,Article writing,Internet research,Memes,Infographics.She is a keen investor in crypto-currencies and is bullish on the era of crypto-currencies as a whole.

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