What are Indirect Taxes?

Defining Indirect Tax

You may have heard of the terms direct and indirect tax. This article seeks to focus on the latter. Indirect tax refers to those taxes that are capable of being passed on to other entities or individuals. These taxes remove the burden associated with having to pay for the same on the original entity charged. Suppliers and manufacturers ordinarily have indirect taxes levied on the goods they make which they then pass on to the final consumer of their goods. Indirect tax examples include but aren’t limited to value added tax (or VAT), customs duty and excise duty.

Exploring the Role of Indirect Tax in India

The Government of India is responsible for levying a wide range of indirect taxes. These taxes are applicable to the manufacture, import, sale and purchase of goods and services. Rather than being outlined in a set of well-defined acts, indirect tax rules are made clear in orders, circulars and notifications that varied government bodies are responsible for issuing. Owing to this very fact, attempting to understand the intricacies pertaining to indirect taxes in India can be daunting.

The introduction of the goods and services act (or GST) in 2017, was aimed at streamlining the income tax process. Continue reading to learn more.

Understanding the Different Types of Indirect Tax

Listed below are the different types of indirect tax applicable in India that have now been bracketed under the singular goods and services tax.

Custom Duty – Goods imported into the country have this tax applicable to them. The same tax is also levied on products that are exported out of the country.

Entertainment Tax – State governments are responsible for charging this tax which is added to products and transactions associated with entertainment. Entertainment here refers to a wide variety of purchase ranging from movie show tickets to sporting activities.

Excise Duty – Manufactured or produced goods have a tax levied on them called excise duty. While manufacturers and producers may pay the tax applicable on their goods, they recover the sum they pay by adding it to the price of their goods.

Securities Transaction Tax – Securities traded on an Indian stock exchange have this tax applicable to them.

Service Tax – This tax is levied by entities to compensate for the services they provide. The Government of India collects this tax.

Stamp Duty – In the event immovable property transfers owners, this tax is applicable. The state government within which the property is located is responsible for issuing this tax which applies to legal documents as well.

Value Added Tax – CAT is applicable to movable products that are directly sold to consumers.

Features of Indirect Tax

Features associated with indirect tax are as follows.

Tax Liability – While the provider or seller of a good or service may be responsible for paying indirect taxes to the government, the liability of paying this money lies on the consumers of said good or service.

Tax Payment – The payment of indirect taxes is transferred to the consumer although the seller is responsible for ensuring that the government gets this money.

Nature – The goods and services tax has helped make indirect taxes fairly progressive.

Saving and Investment – Owing to the fact that these taxes encourage consumers to save their money and invest it, they are often viewed as following a growth-oriented strategy.

Evasion – Since indirect taxes are directly implemented via goods and services it isn’t easy to evade paying them. 

Merits Associated with Indirect Tax

Indirect taxes have the following advantages associated with them.

Convenient – Taxpayers aren’t burdened with having to go through loops in order to pay these taxes as they are paid solely at the time they make a purchase. Furthermore state authorities find the process of levying indirect taxes easy as they are directly collected from the stores (or factories) which helps save time and effort.

Collection is Easy – Unlike direct taxes, indirect taxes are easy to collect as they are only collected at the time a purchase is made.

Income no Bar – Individuals that earn below INR 2.5 lakh per annum are exempt from having to pay income tax which means they don’t help contribute to the government. However, owing to the fact that indirect taxes are charged at the time of sale, regardless of what income tax slab an individual may fall under, all individuals help contribute towards the country’s growth.

Allow for Equitable Contributions – These taxes are directly linked to the costs tethered to goods and services which means that the more basic and necessary an item is, the lower the indirect tax levied to it. In contrast, luxury goods and services have higher indirect taxes attached to them thereby ensuring equitable contribution.

Disadvantages Associated with Indirect Tax

Indirect taxes have the following shortfalls tethered to them.

For starters, sometimes these taxes charged can be cumulative which means that middlemen involved may levy their own service tax which may result in the overall price of a good or service increasing.

Next, these taxes ca be regressive as they remain the same for the rich and the poor. 

Finally, this kind of tax isn’t industry friendly as taxes apply to raw goods and materials which in turn raise the cost of production and ultimately curtails industries from expanding as their competitive capacity is minimized.

Wrapping Up

To conclude, indirect taxes simply refer to those that manufacturers and producers of goods and services must pay wherein the burden lies on the end consumer who is responsible for purchasing the final product or service. Applicable to materialistic goods, they remain consistent regardless of the consumer’s income bracket and apply to all consumers. The indirect tax levied, however, varies in relation to the nature of the product. This means that while basic necessities incur lower indirect taxes, luxury goods incur higher indirect taxes.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.