There are two types of taxes levied on the residents on India – Direct Taxes and Indirect Taxes. Both these taxes are imposed to generate revenue for the government. This revenue is then used to finance government projects for nation’s development.
What is Indirect Tax?
Indirect tax meaning – Indirect tax is the tax levied on the consumption of goods and services. By the very definition, indirect tax is neither levied on your income directly, nor do you pay for it at separately. Indirect taxes are included in the final price of the goods or services you purchase.
These taxes are added at every stop of the production of the goods, right from the start, and at every step are paid from the manufacturer to the wholesaler to the retailer and end with the consumer.
The burden of these taxes paid at every step is shifted to the end-consumer by including in the final price or MRP of the goods or services.
Types of Indirect Taxes in India
The following are the different types of indirect taxes in India:
- GST – Goods and Services Tax or GST is newly implemented form of indirect taxes. Before 2017, there were multiple indirect taxes that were levied on goods and services at various levels. GST subsumed the following indirect taxes:
- Central GST – Central Excise Duty, Duties of Excise (Medical & Toilet Preparations), Additional Duties of Excise (Goods of Special Importance AND Textiles and Textile Products), Additional Duties of Customs (commonly known as CVD), Special Additional Duty of Customs (SAD), Service Tax, Cess and Surcharge (related to the supply of goods and services only). It is levied alongside State GST.
CGST is collected by the central government and benefits the same.
E.g. Delhi – Here, CGST and SGST, both are levied.
- State GST – State Value Added Tax (VAT), Luxury Tax, Purchase Tax, Central Sales Tax, all types of Entry Tax, Tax on Advertisements, Entertainment Tax and Amusement Tax (not including taxes levied by local bodies), Tax on lotteries, Betting & Gambling, and State Cess and Surcharge (related to the supply of goods and services only)
SGST is collected by the state government and benefits the same
- Integrated GST – IGST is applicable on the transaction of goods that happen inter-state. This means if a good, say a car, is manufactured in Tamil Nadu, and sold in Delhi, Integrated GST or IGST, will be levied
IGST is collected by the central government and benefits the central and the state government, both.
Important: Please note that not all the goods are covered under the gambit of GST. GST is not applicable on products like petrol and alcohol for consumption.
- Custom Duty – This tax is levied on import and export of goods, i.e. when good are transported across international borders. The idea behind levying custom duty is to regulate import/export of goods along with the revenue generation and safeguarding domestic industries (custom duty increases the price of imported products which benefits the demand of domestic goods as their prices are less as compared to imported goods).
- Central Excise – However most of the goods on which excise duty was levied are now covered under GST, goods like petrol and liquor are still levied with excise duty. This tax is levied on the manufacturing of such goods.
Service Tax – This was a tax that was levied on the consumption of services in India. After the implementation of GST in India, service tax was abolished and subsumed in the purview of GST. However, service charge is still applicable. This is a voluntary charge, i.e. you can deny paying service charge to the service provider like your restaurant if you prefer.
DID YOU KNOW?
GST was enforced on the 22nd of July 2017 in India while the idea of GST in India was first time proposed in 1999 by the then PM Atal Bihari Vajpayee and his economic advisory panel. That’s how long it took to implement GST in India – 18 years.
Indirect Tax Examples
Some of the common indirect tax examples are listed below:
GST – 0%, 5%, 12%, 18% and 28% on goods and services
VAT – On petrol, diesel and liquor (inclusive list)
Custom Duty – On a mobile you bought in London and took with you in India
Benefits & Features of Indirect Taxes in India
The following are the features of Indirect Taxes in India:
- Levied on the consumption of every good and service
- Not paid directly to the government by a person
- Collected by intermediaries like manufacturer, wholesaler, trader and service provider
- Person who pays tax to government and the person bearing the burden of it – not the same
- Regressive in nature – burden falling on the end-consumer
- Paid by the goods/service provider (at various stages of production/procurement) – liability transferred to the consumer by including all these taxes in the final price paid by the consumer
Benefits of Indirect Taxes in India:
- Indirect taxes are beneficial for the government since the transfer of taxes happens as soon as transaction takes place
- Collection of indirect taxes is convenient – no TDS or form filling required from you, i.e. the end-consumer (Please note that returns for indirect taxes are to be filed regularly by the seller of goods or the service-provider)
- Everyone pays the same amount of indirect tax – no disparity in the final selling price
- Tax evasion is cut down considerably – indirect taxes already included in the price of goods or services – indirect tax is automatically paid as soon as a purchase is made
- High indirect tax on harmful goods like tobacco and liquor – this increases the price of such products which somehow discourages people to buy these products
Difference between Direct and Indirect Taxes
The following table enlists all the difference between direct and indirect tax in India:
|Particulars/Details||Direct Tax||Indirect Tax|
|Applicable On||Income or profits||Goods and services|
|Who pays?||Individual resident, HUF, organisations||– End-consumers pay as it’s included in the final price – Remittance by businesses selling these goods & services|
|Transferability||Has to be borne by the person on which tax is levied||Yes, burden can be transferred to the end-consumer (e.g. MRP – Maximum Retail Price, inclusive of all taxes, on daily goods like bread and butter)|
|Nature||Progressive – Burden increases as the income increases, i.e. those with lower income pay less tax as compare to those earning higher income||Regressive – Burden usually falls on those in lower-income group rather than higher income earners Example: Meal of Rs. 500 per day may be okay for someone with an income of Rs. 50,000 but someone with a Rs. 30,000 salary, this is a heavy bill|
|Examples||Indirect tax examples: Income Tax – payable by employees Corporate Tax – payable by organisations (both Indian and foreign) Capital Gains Tax (CGT) – payable by the owner of an asset on the sale of it (CGT = Sale Value – Purchase Value)||Direct tax examples: GST – payable by the end-consumer (applicable on restaurant bills, goods and services alike) Service Tax – tax paid on taking services of agents, cab drivers, hotel staff, etc. This is remitted to the govt. by the service providers and is included in the MRP of the service that you, as a consumer pay|
Who Should Pay Indirect Tax every Year?
Everyone pays indirect tax whenever they purchase any goods or services – regardless of the time of the year. These taxes, however paid by the providers, are ultimately paid by the end-consumer of these goods and services.
However, the goods producers and the service providers are required to file GST returns on 15th of every month. E.g. For the month of August 2022, a statement of all the inward supplies received needs to be filed by 15th September 2022.
Important: A business exceeding Rs. 20 lakh of turnover has to register itself under the GST Act, 2017. This capping is of Rs. 10 lakh for the states of North East and hilly states identified under the special category states.
GST or the Goods and Services Tax, is an indirect tax because this tax is not directly charged from you – the end-consumer. It’s included in the final price you pay for the goods or services you consume.
Also, GST is like an umbrella tax in which various other indirect taxes like VAT (except some products like petrol and liquor), central excise duty, additional custom duty, etc.
Indirect tax definition – It is a type of tax which is levied to the consumer of goods and services indirectly. This means that you, as a consumer, do not separately pay indirect tax for the goods you consume, but the price you pay for such goods and services is already inclusive of all the taxes.
Example: GST on restaurant bill
VAT or the Value Added Tax is an indirect tax.
This tax, upon the introduction of GST in our tax system, from 2017, was included in GST. But there are certain goods like petrol, diesel or liquor (i.e. alcohol for consumption) that are not included in the purview of GST. On these goods, VAT is still applicable.
Simply speaking, net indirect tax is the difference between the total indirect tax and subsidy.
Formula for finding out net indirect tax is:
NIT = NDP at Market Price – NDP at Factor Cost
NIT: Net Indirect Tax
NDP: Net Domestic Product
News Related to Indirect Taxes in 2022
6th July, 2022
Procedural changes in in GST Rules – Businesses now allowed to make tax payments via IMPS and UPI payment modes on the online GSTN portal
For filing annual returns for the 2021-22 fiscal year, certain procedural changes have been introduced by the government. This facilitates businesses to now make tax payments using the UPI and IMPS modes of payments – on the GSTN portal.
Also, organisations with a total turnover of Rs. 2 crore or less are exempt from filing IT returns for FY 2021-22.
8th July, 2022
No additional excise + basic excise duty on jet fuel for int’l flights
The Union Finance Ministry has exempted additional excise of Rs. 6 per litre on ATF exports (refueling for international flights) and the 11% Basic Excise Duty (BED) for the airline industry.
This comes after the many requests made by the Indian carriers to lower the excise duty to combat the inflated ATF prices that have been increased by 120% since June 2021.