Overview: IGST and Compensation Cess in GST | Tax Law - CLAT PG PDF Download

Integrated Goods and Services Tax (IGST)

GST is a multi-stage value-added tax on the consumption of goods or services or both. In India, a "dual GST" model has been adopted, where both the Centre and the States simultaneously levy GST on every supply of goods or services within a State or Union territory. 
This approach is in line with the federal structure of the country.

Rationale for IGST

Before delving into the IGST Model and its features, it's essential to understand how inter-state trade or commerce was regulated in the previous indirect tax system. The Central Sales Tax Act, 1956, played a crucial role in this regard.

Central Sales Tax Act, 1956

• The Central Sales Tax Act, 1956, was enacted to regulate inter-state trade or commerce (referred to as "CST") and was based on the constitutional authority derived from Article 269 of the Constitution of India.
• Article 286 of the Constitution prohibited States from levying sales tax on sales or purchases of goods that occurred outside the State or during the import or export of goods. Only Parliament had the authority to levy tax on such transactions.
• The Central Sales Tax Act provided principles for determining when a sale or purchase of goods takes place in the course of interstate trade or commerce. It also outlined the levy and collection of taxes on such sales.

Shortcomings of CST

• CST was collected and retained by the origin state, which was inconsistent with the nature of indirect tax as a consumption tax. Indirect taxes should ideally accrue to the destination state where the consumer is located.
• Input Tax Credit (ITC) of CST was not allowed to the buyer, leading to cascading tax effects (tax on tax) within the supply chain.
• The requirement of various accountal forms in CST, such as C Form, E1, E2, F, I, J Forms, increased compliance costs for businesses and hindered the free flow of trade.

Introduction of IGST

• The IGST model was introduced to address the shortcomings of the CST system.
• IGST is designed to monitor inter-state trade of goods and services and ensure that the SGST component accrues to the consumer state.
• It aims to maintain the integrity of the Input Tax Credit (ITC) chain in inter-state supplies.
• The IGST rate is generally equal to the sum of the CGST rate and the SGST rate.
• IGST is levied by the Central Government on all inter-State transactions of taxable goods or services.
• For example, if the CGST rate is 9% and the SGST rate is 9%, the IGST rate would be 18% (9% + 9%).

Nature of Supply

• Determining the nature of supply, whether inter-state or intra-state, is crucial as it dictates the type of tax to be paid (IGST or CGST+SGST).
• Inter-State Supply refers to supplies where the location of the supplier and the place of supply are in different States, different Union territories, or a State and a Union territory. Such supplies are considered as inter-State trade or commerce.
• Examples of inter-State supply include:
  • Supply of goods or services from one State to another State.
  • Supply of goods or services from one Union territory to another Union territory.
  • Supply of goods or services from a State to a Union territory, or vice versa.
  • Import of goods into India until they cross the customs frontiers.
  • Import of services into India.
  • Export of goods or services.
  • Supply of goods or services to or by a Special Economic Zone (SEZ).
  • Supplies to international tourists.
  • Any other supply in the taxable territory that is not classified as intra-State supply.
• Intra-State supply is defined as any supply where the location of the supplier and the place of supply are in the same State or Union territory. The determination of intra-state or inter-state supply depends on the location of the supplier and the place of supply, both of which are defined in the IGST Act.

Compensation Cess in GST

• The Goods and Services Tax (Compensation to States) Act, 2017 was enacted to impose a Compensation cess aimed at compensating States for revenue losses resulting from the implementation of the Goods and Services Tax (GST).
• This cess came into effect from July 1, 2017, coinciding with the enforcement of the Central Goods and Services Tax Act.
• The duration of the cess is initially set for five years, but it may be extended based on recommendations from the GST Council.
• For goods imported into India, the Compensation cess is levied and collected according to the provisions of section 3 of the Customs Tariff Act, 1975. This occurs at the point when customs duties are imposed on the goods under section 12 of the Customs Act, 1962, and the value of the goods is determined under the Customs Tariff Act, 1975.
• Compensation Cess is not applicable to goods exported by an exporter under bond. In such cases, the exporter is entitled to a refund of the input tax credit related to Compensation Cess for the exported goods.
• If goods are exported with the payment of Compensation Cess, the exporter is eligible for a refund of the Compensation Cess paid on the exported goods.
• Compensation Cess is not applicable to supplies made by a taxable person who opts for the composition levy.