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What Is Indirect Tax?
There are two types of taxes – direct tax and indirect tax. An indirect tax is levied on the consumption of goods and services. The burden of paying indirect tax is not on the manufacturer or service provider but on the consumer using those products or services.
Indirect tax is not paid to the Government directly by the taxpayer. Hence, the name “Indirect Tax”.
Indirect Tax in India
The Government of India collects various types of indirect taxes, and the percentage of tax applicable was not uniform. To eliminate any confusion that could have arisen, the Government of India launched the Goods and Services Tax (GST) on 1 July 2017. The GST has replaced several minor indirect taxes.
Different Types of Indirect Tax
The Government of India levies different types of indirect taxes, including:
Service Tax
Service tax is levied on a specific list of services provided or agreed to be provided by service providers in India. Service providers collect this tax from their customers or clients.
Excise Duty
Excise duty is imposed on the sale of goods that are manufactured or produced in India. The Government collects this tax from manufacturers, who enforce it on their consumers.
Value-Added Tax
Value-Added Tax or VAT is collected on the sale of products during each stage of their distribution cycle. The rate at which VAT is compiled may differ from one state to another.
Custom Duty
This tax is charged on goods manufactured outside India but imported to the country. Sometimes, custom duty is also levied on products exported from India.
Stamp Duty
Stamp duty is levied when there is a transfer of ownership of immovable property in India. It is also levied on all legal documents and collected by State Governments.
Entertainment Tax
Entertainment tax is imposed on all products and services related to the entertainment of citizens. For example, movie screenings, comedy shows, etc. State Governments also collect it.
Securities Transaction Tax
Securities Transaction Tax or STT is applicable on the sale or purchase of stocks through the stock exchanges of India.
Features of Indirect Tax
Below are the key features of indirect taxes in India:
Tax Liability
Although manufacturers and service providers pay indirect taxes to the government, the tax liability is passed on to the end users or final consumers.
Payment of Tax
The responsibility for paying indirect taxes lies with the manufacturers, sellers, or service providers. They collect these taxes from their customers and deposit them with the Government.
Nature of Tax
The nature of indirect tax was to help generate revenue for the government and apply to goods and services used by all. However, it was said that it impacted the poorer sections of society more than the affluent ones. In 2017, various indirect taxes were scrapped to make way for GST.
Saving and Investment
Indirect taxes do not impact your savings and investments. They are levied on the goods and services you utilise, irrespective of your savings.
Evasion
The evasion of indirect taxes is not possible and is considered an unruly act. These taxes are levied on the sale or purchase of goods and services, unlike direct taxes, which are levied on your income.
Benefits of Indirect Tax
The following are the primary benefits of indirect taxes:
Convenience
Indirect taxes are convenient. As a consumer, you do not have to pay these taxes to the Government, but manufacturers or service providers collect them at the time of sale.
Ease of Collection
As compared to direct taxes, indirect taxes are collected very easily. There are no stringent rules for collecting indirect taxes like income or other direct taxes.
Collection from Poor
Indirect taxes are collected from consumers irrespective of their financial status. Unlike income tax, indirect taxes are paid by all citizens on the goods and services they buy or consume.
Equitable Contributions
The income tax rate is different for individuals falling into different income brackets. However, there is no such complexity with indirect taxes. The contributions are equitable for every Indian citizen irrespective of gender, age, income, etc.
Why Is GST an Indirect Tax?
The Government of India launched the Goods and Services Tax or GST on 1st July 2017. It has replaced several indirect taxes, including VAT, service tax, etc. After implementing the GST, India's indirect taxation structure has become much more simplified. GST is the biggest indirect tax in India and is levied on the sale of all goods and services that come under the pursuit of the GST. The GST Council has prescribed various GST rates for different goods and services – 0%, 3%, 5%, 12%, 18%, and 28%.
Frequently Asked Questions on Indirect Tax
1. Can indirect taxes change?
Yes. It is up to the Government of India to revise the rates at which indirect taxes are levied.
2. Will I have to pay indirect tax to watch a movie?
Yes. You will have to pay an entertainment tax on your movie ticket.
3. Will I be charged customs duty if I bring food items from outside?
Food items up to Rs. 12,000 intended for personal use are exempted from customs duty.
4. What if I do not want to pay indirect tax?
Indirect taxes are included in the selling price of products or billing amount. There are no provisions to escape them.
5. What products are kept outside the ambit/scope of GST?
Commodities like alcohol, petrol, diesel, natural gas, turbine fuel, etc., have been kept outside the ambit/scope of GST as of now.
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