IGST, SGST and UTGST, the impact of GST on State revenue, and compensation to States

1. The power of the Centre to levy IGST

Article 246A(2) gives Parliament exclusive power to make laws on GST where the supply takes place in the course of inter-State trade or commerce. Article 269A provides that GST on such supplies is levied and collected by the Government of India and apportioned between the Union and the States as Parliament provides on the GST Council’s recommendation; the Explanation to Article 269A(1) treats supplies in the course of import into India as inter-State supplies. Parliament exercised this power in the Integrated Goods and Services Tax Act, 2017. The reason for central levy is practical: a supply from Karnataka to Kerala concerns both States, and only the Centre can collect the tax and send the State share to the consuming State.

2. Levy of IGST: section 5 of the IGST Act

• IGST is levied on all inter-State supplies of goods or services or both, except alcoholic liquor for human consumption, on the value determined under section 15 of the CGST Act, at rates not exceeding 40% notified on the Council’s recommendation (section 5(1)).
• IGST on imported goods is levied under section 3 of the Customs Tariff Act, 1975 at the point when customs duty is levied (proviso to section 5(1)).
• Petroleum products only from a notified date (section 5(2)); reverse charge and e-commerce operator liability as under the CGST Act (section 5(3) to (5)).
• Exemption power (section 6).

3. Inter-State and intra-State supply

Inter-State supply (section 7): supply of goods or services where the location of the supplier and the place of supply are in (a) two different States, (b) two different Union territories, or (c) a State and a Union territory. Also inter-State: imports of goods till they cross the customs frontier; imports of services; supplies where the supplier is in India and the place of supply outside India (exports); supplies to or by an SEZ developer or unit; and any supply in the taxable territory not otherwise intra-State.

Intra-State supply (section 8): location of the supplier and place of supply in the same State or Union territory, except supplies to or by SEZ units and certain others.

Place of supply (sections 10 to 13): for goods, generally where movement ends for delivery to the recipient, or where the goods are installed or delivered; for services, generally the location of the recipient if registered, with specific rules for immovable property, restaurants, events, transport, telecom and banking.

Apportionment and settlement (section 17): IGST collected is apportioned; the State share goes to the State where the supply is consumed. Where IGST credit is used to pay SGST of a State, or SGST credit to pay IGST, funds are transferred between the accounts.

4. The State Goods and Services Tax law

Each State has enacted its own SGST Act under Article 246A(1), mirroring the CGST Act (in Karnataka, the Karnataka Goods and Services Tax Act, 2017). SGST is levied on intra-State supplies at a rate equal to CGST, administered by the State tax department, with the same definitions, registration, returns and procedures on the common portal. A taxpayer is assigned to either a Central or a State administration for audit and enforcement, but one officer’s action binds for both taxes under the cross-empowerment provisions. Delhi, Puducherry and Jammu and Kashmir, being Union territories with legislatures, are “States” for GST (Article 366(26B)) and levy SGST.

5. UTGST: the Union Territory Goods and Services Tax Act, 2017

For Union territories without a legislature (Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli and Daman and Diu, Ladakh, Chandigarh), Parliament enacted the UTGST Act. Section 7 levies Union territory tax on all intra-State supplies (within the Union territory) of goods or services, except alcoholic liquor for human consumption, on the value under section 15 of the CGST Act, at rates not exceeding 20% notified by the Central Government on the Council’s recommendation. UTGST is levied alongside CGST, at the same rate as SGST would be, so that the combined burden is the same everywhere. Most procedural provisions of the CGST Act apply.

6. Impact of GST on State revenue

• Loss of independent taxes. States gave up VAT on most goods, entry tax, octroi, luxury and entertainment taxes and many cesses, and with them the freedom to set rates. Rates are now decided collectively in the Council.
• Gain of a new base. States can tax services for the first time, and the base widens with better compliance.
• Destination principle. Producing States (with large manufacturing) feared loss, since tax now goes to the consuming State; consuming States expected to gain.
• Dependence on settlement. A part of State revenue now comes through IGST settlement from the Centre.
• Remaining State taxes: alcohol, petroleum products, electricity duty, stamp duty, motor vehicles tax, land revenue and professional tax.

7. Indemnifying State revenue loss: the GST (Compensation to States) Act, 2017

Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 required Parliament to provide compensation for loss of revenue for five years. The Compensation Act does so:

• Transition period: five years from the date GST came into force (1 July 2017 to 30 June 2022) (section 2).
• Projected growth rate of 14% a year on the revenue subsumed (section 3), on the base year 2015–16 (section 4) and the base year revenue of each State (section 5), giving the projected revenue for each year (section 6).
• Compensation = projected revenue minus actual revenue (SGST collected, apportioned IGST, and certain other taxes); released provisionally every two months and finally settled each year on CAG-audited figures (section 7).
• Compensation cess (section 8) levied on specified supplies (luxury and demerit goods such as tobacco, pan masala, aerated drinks, motor cars and coal) for five years or such period as prescribed, credited to the GST Compensation Fund (section 10).

When collections fell short during the pandemic, the Centre borrowed and passed the money to the States as back-to-back loans, and the levy of cess was extended beyond June 2022 to repay those loans. The 56th Council meeting (September 2025) kept the cess on tobacco and pan masala only until those obligations were discharged; according to the GST Council’s December 2025 newsletter, compensation cess on those products was withdrawn with effect from 1 February 2026, when they moved to the 40% GST rate.

How this is examined

January 2026 (80-mark paper) Q. 4(a): the law relating to imposition of GST in Union territories; alternative Q. 4(a): impact of GST on State revenue and indemnifying the State revenue loss; Q. 4(b) (alternative): short note on integrated GST. February 2025 Q. 4(a) (alternative): define UTGST and explain the impact of GST on State revenue.

For the IGST note, give Articles 246A(2) and 269A, section 5 and section 7 of the IGST Act, and apportionment. For the compensation question, give the five elements of the Compensation Act in order (period, 14%, base year, formula, cess).