What are Indirect Taxes?

There are two types of taxes collected by the Government which is known as Direct Tax and Indirect Tax. An Indirect Tax is the tax levied on the consumption of goods and services and it is not directly levied on the income of the person. So it is the tax paid along with the goods and services price.  Examples of indirect tax include sales tax, entertainment tax, excise duty etc.   They are levied on the sellers of goods or the providers of service. 

What Are Indirect Taxes?

Indirect tax is a tax which is generally passed on to the other person. The sellers are required to pay these taxes to the government. But since they sell goods to the consumers, then the consumer needs to pay the tax. Thus the consumer pays the tax to the seller and seller pays it to the government. 

Example Of Indirect Tax

Suppose Mr. A goes to a hotel. In the bill, you may see your total amount plus the GST (Indirect Tax). Let’s say the bill was Rs 3000 and GST rate is 18%. Then you have to pay 3000 + 540 = 3540/- This Rs 540 is passed on to the consumer by the service provider.

Different Types Of Indirect Taxes In India

There are different types of Indirect taxes In India.

1. Goods and Service Tax

The GST was implemented in 2017 by the central and state governments.  It was implemented by integrating various taxes such as Service Tax, Central Excise Duty, VAT, central sales tax among others. But there are certain exceptions when it comes to liquor and petroleum products as they are still taxable under excise duties and VAT.

On state level the taxes under GST include

1. State Excise Duty
2. Additional Excise Duty
3. Service Tax
4. Countervailing Duty
5. Special Additional Customs Duties

At the Central Level it covers

1. Sales Tax
2. Entertainment Tax
3. Central Sales Tax
4. Octroi and Entry Tax
5. Purchase Tax
6. Luxury Tax
7. Taxes on Lottery Gambling and Betting

     2. Sales Tax:

Sales tax means tax levied on the sales of goods.  The Union Government imposes this sales tax on the Inter State sale.  Intra state sale tax is levied by the state government.

3. Value Added Tax

The State Government collects the category of taxes.  For instance when a person buys a product an additional tax is paid known as Value Added Tax.

4. Custom Duty and Octroi Tax

Custom Duty is imposed on goods imported in to the country from abroad. The tax of custom duty is paid at the entry port of a country such as the airport. Octroi is charged upon the goods entering a municipal zone.

5. Excise Duty

Excise Duty is an indirect tax form that is charged on the goods produced inside a country. This duty is different from the custom duty. This is also known as CVAT or Central Value Added Tax.

6. Anti-Dumping Duty

This is levied upon goods that are exported at a rate less than the standard rate by the nation to some other nation. This tax is levied upon by the Central Government.

Features Of Indirect Taxes

1. Streamlined Tax Liability :

Indirect Tax are borne by the consumers of the product or service. The tax is collected by the manufacturer and seller from the consumer.

2. Payment of Tax :

The responsibility of payment of tax to the government under indirect tax is on the seller of the product who collects tax on the behalf of the consumer.

3. Nature

Before the implementation of GST the nature of indirect taxes was regressive, and after the introduction of GST it became Progressive.

4. Saving and Investment

Indirect Tax encourages saving and investment as it is not charged on the income but on the expenses done by the consumer.

Advantages Of Indirect Tax

1. Convenience of Payment

Indirect taxes do not burden the taxpayer and are convenient as they are paid only at the time of the purchase. Moreover state authorities find it convenient to levy indirect taxes because they are collected directly at the stores/factories which helps in saving a lot of time and effort.

2. Ease of tax collection

Indirect taxes are easy to collect than direct taxes. Since indirect taxes are collected at the time of purchase the authorities need not worry about their collection.

3. Contribution by the financially weak segments of society

Those who earn less than Rs 2.5 lakh p.a. are exempt from income tax which means they do not contribute to the government. Since indirect taxes are charged at the point of sale, all individuals regardless of the income tax slab under which they fall, contribute towards the growth of the economy.

4. Equitable collection as per product/ service cost

Indirect taxes are directly related to the costs of products and services. What this essentially means that the basic necessities attract lower rates of tax while luxury items are charged at higher tax rates, thereby ensuring that contributions are equitable.

Disadvantages Of Indirect Tax

1. Cumulative in Nature Sometimes

Indirect taxes are sometimes cumulatively charged.  This means that in point based transaction system, middlemen involved are likely to charge their own service tax which may result in the overall price of the product increasing.

2. Regressive in Nature

Indirect taxes are regressive in nature. For example, salt tax remains the same for both poor and rich. However if a rich person defaults the payment the penalty will be higher.

3. Production Cost

Indirect tax are not industry friendly. Taxes levied are on raw materials and goods which in turn increases the cost of production, thus not allowing industries to expand as their competitive capacity.

Conclusion

Indirect taxes are subject to changes and it depends on the economy and various factors based on which the Government of India can decide to cut or increase the tax rates.  It has both advantages and disadvantages but no one can deny that they are important to generate revenue. While direct taxes can be collected from the rich, direct taxes give an opportunity to the poor to contribute in their own small way.