written by Khatabook | November 22, 2021

What is Indirect Tax? - Meaning, Types and Advantages

There are two types of tax - Direct Tax and Indirect Tax. So, what is indirect tax? Indirect Tax is a tax levied by the government on a taxpayer for goods and services supplied. Unlike direct taxes, indirect taxes are not assessed on the taxpayer's income, revenue, or profit, and they can be handed down from one person to the next. It is not imposed directly on a person's income. Instead, people must pay the tax in addition to the price of the products or services purchased from the vendor. The person who pays the tax to the government and the person responsible for paying the tax are thus two distinct individuals. The responsibility to pay Indirect Tax falls on the final customers as they are the ones who buy the items. These, unlike direct taxes, are imposed on tangible things. The features, benefits, and types of Indirect Tax have been given below in detail.

What are the Different Types of Indirect Taxes?

The Indian government imposes several indirect taxes. Manufacturing, sale, import, and even acquisitions of products and services are all subject to taxes. In India, there are several forms of indirect taxes. After adopting the Goods and Services Tax (GST), all of these indirect taxes were combined into a single tax for Indian residents. 

We'll look at the many forms of indirect taxes in India:

Indirect Taxes Before the Implementation of GST

  1. Service Tax- It is an indirect tax levied by the government on certain transactions which are borne by customers. The service tax is collected and deposited by the Government of India.
  2. Customs Duty- This is a tax on products imported into India. Customs duty is sometimes also charged on items that are exported out of India.
  3. Excise Duty- The firms in India have to pay an indirect tax on manufacturing a product or an item. This tax is known as excise duty. The manufacturing business pays the tax on the goods, which they then charge from their customers.
  4. Value Added Tax- This form of indirect tax, often known as VAT, is imposed on any moveable goods sold directly to a consumer. VAT comprises two parts: central sales tax, which is paid to the Indian government, and state sales tax, which is paid to the state governments.
  5. Entertainment Tax- The state government levies an entertainment tax, which is levied on all items and transactions in the entertainment industry. Entertainment Tax is levied on the purchase of video games, movie shows, sports activities, arcades, amusement parks, etc.
  6. Stamp Duty- This is an indirect tax levied on the transfer of any immovable property in the state of India. Stamp duty tax is charged in the state in which the property is located. Stamp tax is also applicable on all legal documents too.
  7. Securities Transaction Tax- This indirect tax is imposed when securities are traded on the Indian Stock Exchange.

Goods and Services Tax 

  • The Goods and Services Tax (GST) is a tax on goods and services. It is an indirect tax that has mostly superseded several other indirect taxes in India, such as excise duty, VAT, and services tax. 
  • The Goods and Service Tax Act was enacted by Parliament on March 29, 2017, and came into effect on July 1, 2017. 
  • Due to the implementation of the new tax regime, formerly mandatory levies have been abolished. One of the most significant advantages of GST is that it eliminates the tax's cascading impact, guaranteeing that the end consumers do not have to pay for every value addition.
  • Service tax, state excise duty, countervailing duty, excise duty, and special additional custom charges are all included in the GST at the state level. 
  • Sales tax, central sales tax, purchase tax, entertainment tax, luxury tax, octroi and entrance tax, and taxes on betting and lottery gaming are all included in the GST at the central level. 

The four types of GST are:

  • Central Goods and Service Tax (CGST)
  • State Goods and Service Tax (SGST)
  • Integrated Goods and Services Tax (IGST)
  • Union Territory Goods and Services Tax (UTGST)

 The GST council has set several rates for different products and services, ranging from 0% to 5%, 12%, 18%, and 28%. Certain items have been exempted from being taxed under the GST regime.

In India, the Goods and Services Tax (GST) is a multi-stage, destination-based tax charged on every value addition. GST is a single domestic indirect tax law that applies to the entire country.

Also Read: Types of GST in India - What is CGST, SGST and IGST?

Features of Indirect Tax

Indirect Tax has various features, such as:

  1. Nature: Indirect taxes were initially regressive, but they are now relatively progressive due to the adoption of the Goods and Services Tax.
  2. Liability of Tax: The seller pays indirect tax to the government and, thus, liability is transferred to the consumer.
  3. Evasion of the tax: The tax is directly taken through products and services; therefore, it is difficult for anybody to evade the tax.
  4. Tax Payment: The tax is given to the government 
  5. Saving and Investment: Indirect taxes are growth-oriented as they encourage consumers to save and invest.

Advantages of Indirect Tax

The primary benefits of indirect taxation are: 

  1. Collection ease: Indirect taxes are less difficult to collect than direct taxes. Because indirect taxes are collected whenever people make purchases, the government doesn't have to worry about them.
  2. Convenience: Indirect taxes do not burden the taxpayer and are simple to pay because they are only collected when a purchase is made. Furthermore, state governments find indirect taxes easier to impose because they are collected immediately at the stores/factories, saving time and effort.
  3. Fair Contributions: Indirect taxes are proportional to the price of goods and services. This effectively implies that fundamental requirements are taxed at lower rates, whilst luxury products are taxed at higher rates, ensuring fair contributions.
  4. Collection from everyone: Those earning less than Rs.2.5 lakh per year are free from paying income tax, implying they do not contribute to the government. Because indirect taxes are collected at the point of sale, all persons contribute to the economy's growth regardless of their income tax bracket.

Example of Indirect Tax- Calculation and Working

Let us understand the working of Indirect Taxation through a simple example. The rate of tax used in the given an example is 10%:

Particulars

The Manufacturer Mr A

The Retailer Mr B

Sale Price

Rs. 100

Rs. 110

Tax @ 10%

Rs. 10

Rs. 11

Sale price with tax

Rs. 110

Rs. 121

Tax Paid on Purchase

Rs. 0

Rs. 10

Tax to be paid to Government

Rs. 10

Rs. 1

Mr A will collect taxes of Rs 10 on the selling price of Rs 100 from Mr B, as shown in the table above. Mr A hasn't paid any taxes in the past. As a result, he will pay the government the whole Rs 10 he has collected.

Mr B will then sell the products to the buyer for Rs 110, 10% taxes, for a total selling price of Rs 121. Mr B will only pay the government the remaining  Rs 1 (11– 10) because he has already paid Mr A Rs 10 in taxes.

As a result, the government has received a total tax of Rs 11 (Rs. 10 from Mr A and Rs.1 from Mr B). Mr B has received a payment of Rs 121 from the customer, which is divided into Rs 110 for the selling price and Rs 11 for taxes. As a result, the buyer is ultimately responsible for the whole tax burden on the items purchased.

Difference Between Direct and Indirect Taxes

There are several differences between Direct and Indirect Taxes:

Direct Tax

Indirect Tax

The burden to pay tax cannot be transferred in the case of Direct Tax.

The burden can be transferred in the case of Indirect Tax.

Tax evasion is feasible due to a lack of administration in collecting direct taxes. 

In contrast, indirect taxes cannot be evaded because they are levied on products and services.

Direct Tax is paid by the individuals, companies, businesses, Hindu Undivided Family or HUF, and other entities that earn the Income. 

However, indirect tax needs to be paid by the end consumer who will consume the products and the services.

Inflation can be reduced with the help of direct taxes.

Indirect Tax leads to an increase in inflation.

Direct taxes reduce the inequalities as they are progressive. 

Indirect taxes are regressive, which leads to an increase in inequalities.

Direct taxes have numerous exemptions and have more significant administrative expenses.

Indirect taxes have fewer exemptions and have more steady collections.

Direct taxes are only levied on those who fall into certain tax bands.

Indirect taxes have a broader reach since they are levied on all members of society via the sale of goods and services.

Direct taxes deter investment and diminish savings.

Indirect taxes are more growth-oriented since they discourage spending and encourage saving. 

Lastly, direct taxes have greater allocative effects than indirect taxes because direct taxes impose a lower burden on collection than indirect taxes, which disperse collection across parties and alter consumers' preferences for items owing to price fluctuations caused by indirect taxes.

Also Read: How To File ITR (Income Tax Returns) Online – Income Tax E-filing Guide For FY 2020-21

Conclusion

Indirect Tax is a tax levied by the government on a taxpayer for goods and services supplied. The responsibility to pay Indirect Tax falls on the final customers as they are the ones who buy the items. Indirect taxes are less difficult to collect than direct taxes. Because they are only collected when people make purchases, the government doesn't have to worry about them. Moreover, Indirect Taxes help in decreasing the consumption of harmful goods like cigarettes, alcohol, etc. In this way, they benefit the country socially.

We hope through this article, we have cleared your queries regarding the definition and meaning of Indirect Tax and its characteristics and examples.

For regular updates about the Indirect Tax and GST, download the Khatabook app.

FAQs

Q: What is the significant difference between Direct and Indirect Tax?

Ans:

Some of the significant differences between Direct and Indirect Tax are:

Individuals, Hindu undivided Families (HUF), businesses, companies, and other entities pay direct tax, whilst the end-consumer of products and services pays indirect tax. The burden to pay tax cannot be transferred in the case of Direct Tax. However, the burden can be transferred in the case of Indirect Tax.

There are several other differences that have been given above in the article.

Q: What are the different rates of GST?

Ans:

The GST council has set several rates for different products and services, ranging from 0% to 5%, 12%, 18%, and 28%. Certain items have been exempted from being taxed under the GST regime.

Q: Which were the taxes that were subsumed into GST?

Ans:

GST is an indirect tax that has mostly superseded several other indirect taxes in India, such as excise duty, VAT, and services tax.

Q: When was the Goods and Service Tax (GST) introduced in India?

Ans:

The Goods and Service Tax Act was enacted by Parliament on March 29, 2017, and came into effect in India on July 1, 2017.

Q: Which were the different types of Indirect Taxes before the Introduction of GST?

Ans:

Before the introduction of GST, the different types of Indirect Taxes were Service Tax, Value Added Tax, Customs Duty, Excise Duty, Entertainment Tax, Stamp Duty, and the Securities Transaction Tax.

Q: On whom does the burden to pay tax in Indirect Tax fall?

Ans:

The responsibility to pay Indirect Tax falls on the final customers as they are the ones who buy the items.

Q: What is Indirect Tax?

Ans:

Indirect Tax is a tax levied by the government on a taxpayer for goods and services supplied.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.