What is Indirect Tax | Types Of Indirect Taxes | Features Of Indirect Tax | Indirect Tax Example | Different Types of Indirect Taxes
The tax imposed by the government on a taxpayer for goods and services delivered is known as Indirect Tax. Unlike Direct Taxes, Indirect Taxes are not assessed on the taxpayer’s revenue, income, or profit, and they can be handed down from one person to the next. An Indirect Tax is a payment made by a manufacturer to his country’s government. Because the end consumer is the one who buys the products, so the burden of tax payment is on the end consumer. These, unlike direct taxes, are imposed on material products.
What is Indirect Tax?
A tax that can be passed on to another person or business is known as an Indirect Tax. Indirect Taxes are levied on suppliers and producers, who then pass them on to the eventual consumer. Indirect Taxes include excise duty, customs duty, and VAT (Value-Added Tax).
The tax placed on the consumption of goods and services is known as Indirect Tax. It is not levied directly on a person’s income. Instead, he or she must pay the tax in addition to the price of the products or services purchased from the seller. The person who pays the tax to the government and the person who is responsible for paying the tax are thus two distinct individuals.
Let’s take a look at an example to see how indirect taxes work. The Indirect Tax Rate is assumed to be 10% in this case.
|Particulars||Mr X, The Manufacturer||Mr Y, The Retailer|
|Selling price||₹ 1,000||₹ 1,100|
|Tax @ 10%||₹ 100||₹ 110|
|Selling price with tax||₹ 1100||₹ 1210|
|Taxes paid on the purchase||₹ 0||₹ 100|
|Total tax to be paid to the government||₹ 100||₹ 10|
- Mr. X will collect taxes of 100 on the selling price of 1,000 from Mr. Y, as shown in the table above. Mr.X hasn’t paid any taxes in the past. As a result, he will pay the government the entire ₹100 he has collected.
- Mr.Y will then sell the goods to the customer for ₹1,100 + 10% taxes, for a total selling price of ₹1,210. Mr.Y will only pay the government the remaining 10 (110 – 100) because he has already paid Mr.X 100 in taxes.
As a result, the government has received a total tax of ₹110 (₹100 from Mr.X and ₹10 from Mr.Y). Mr.Y has received a payment of ₹1210 from the customer, which is divided into 1100 for the selling price and 110 for taxes. As a result, the customer is ultimately responsible for the total tax liability on the products purchased.
Indirect Tax in India
The Indian government has applied a variety of indirect taxes. Manufacturing, sale, import, and even procurement of goods and services are all subject to taxes. These laws aren’t well-defined in terms of government Acts; instead, relevant government organizations issue instructions, circulars, and notices for this purpose.
As a result, trying to comprehend every aspect of India’s indirect taxes can be difficult. Following the implementation of the unified Goods and Services Tax, indirect taxes are expected to be simplified (GST). The key elements will help you learn more about the many types of indirect taxes and when they apply to you as a customer.
Different Types of Indirect Taxes
In India, Indirect Taxes are of different types. After the advent of GST, however, all of these indirect taxes were consolidated into a single tax for Indian people. We’ll look at the several categories of indirect taxes in India:
- Service Tax:This is the most basic sort of indirect tax. The supplier is liable to collect service tax on the services he or she provides. It’s similar to excise duty, when a certain amount of money is collected on a factory-made goods.It’s a type of tax that the government collects when people use taxable services such as travel agents, restaurants, cable providers, cab services, and so on. The Finance Act of 1994 established the service tax as a part of section sixty-five of the Finance Act.
- Value Added Tax: This sort of tax, sometimes known as VAT, is imposed on any transportable object sold directly to a client. This is based on the price increase during the sale of products.VAT is made up of two parts: central sales tax, which is paid to the Indian government, and state sales tax, which is paid to the state governments. As an example when a wholesaler sells items to a retailer.
- Custom Duty:It’s one of the indirect taxes that applies to the transportation of foreign goods into the country. This levy, for example, could be imposed on exported goods. The Customs Act of 1962 regulates the imposition and collection of duties, as well as import and export processes, penalties, restrictions, and offenses.
- Excise Duty:When a company in India manufactures a product or a thing, the excise duty charged on those commodities is known as Excise Duty. In other words this tax is used to pay for the production of goods. The manufacturing company pays the tax on the goods, which they then recoup from their customers.
For example-: if a person makes automobiles, he must pay excise duty on those automobiles.
- Stamp Duty:This is a tax imposed on the transfer of any immovable property within an Indian state. This form of tax is imposed by the state government where the property is located. Stamp duty is also levied on all legal papers.
- Securities Dealing Tax (STT):This tax is imposed when securities are traded on the Indian Stock Exchange i.e this tax is imposed when stocks are oversubscribed or acquired on an Indian stock exchange. STT was established in 2004 and applies to stock, mutual fund, futures, and choices transactions. STT was required in order to reduce short-term capital gains tax and eliminate long-term capital gains tax.
- Entertainment Tax:The state government levies this tax, which is levied on any products or transactions related to entertainment. Entertainment Tax is levied on the purchase of video game, movie shows, sports activities, Tickets to movies, arcades, stage events, amusement parks, exhibitionsand other similar items.
Features of Indirect Tax
The following are the main characteristics of indirect taxes:
- Tax liability: The service provider or seller is responsible for paying indirect taxes to the government, which is then passed on to the customer.
- Taxation: The vendor pays indirect taxes to the government, which are then passed on to the customer.
- Nature: Indirect taxes were originally regressive, but they are now rather progressive thanks to the establishment of the Goods and Services Tax.
- Saving and investment: Because they encourage consumers to save and invest, indirect taxes are often growth-oriented.
- Evasion: Because indirect taxes are now implemented directly through products and services, it is impossible to escape them.
Benefits of an Indirect Tax
The following are the primary benefits of indirect taxation.
- 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 simple to impose because they are collected immediately at the stores/factories, saving time and effort.
- Ease in collecting the tax: Indirect taxes are less difficult to collect than direct taxes. Because indirect taxes are only collected when people make purchases, the government doesn’t have to worry about their collection.
- Poor people are exempted:Those earning less than Rs.2.5 lakh per year are excused from paying income tax, which implies they do not contribute to the government. Because indirect taxes are collected at the point of sale, all persons, regardless of their income tax bracket, contribute to the economy’s growth.
- Fair contribution:Contributions that are equitably distributed: Indirect taxes are directly tied to the costs of goods and services. This effectively means that fundamental essentials are taxed at lower rates, whilst luxury items are taxed at higher rates, ensuring that contributions are fair.
Drawbacks of Indirect Tax
The following are some of the downsides of indirect taxation:
- Indirect taxes are sometimes charged in a cumulative manner. This indicates that in a point-based transaction system, middlemen are likely to impose their own service tax, potentially raising the product’s overall price.
- Indirect taxes are unfavorable to business. Taxes are placed on raw materials and goods, which raises the cost of manufacturing and prevents industries from expanding due to a lack of competitive capacity.
- These Indirect taxes have the potential to be regressive. For example, the salt tax is the same for affluent and poor people. However, if a rich person fails to pay, the fines levied are also larger.
Is GST an Indirect Tax?
The Goods and Services Tax, or GST, was established on July 1st, 2017 to bring all of the country’s indirect taxes under one umbrella. Due to the implementation of the new tax regime, previously mandatory taxes have been abolished. One of the most significant advantages of GST is that it eliminates the tax’s cascading effect, ensuring that they do not have to pay for every value addition.
Service tax, countervailing duty, state excise duty, supplementary excise duty, and special additional custom charges are all included in the GST at the state level. Sales tax, purchase tax, central sales tax, luxury tax, entertainment tax, octroi and entry tax, and taxes on betting and lottery gaming are all included in the GST at the central level.
Regressive Nature of an Indirect Tax
The government frequently uses and imposes indirect taxes in order to create income. They are essentially fees that are imposed on all taxpayers, regardless of income, thus rich or poor, they must all pay them. However, many people believe they are regressive taxes since they impose a huge burden on people with lower incomes, who end up paying the same amount of tax as those with higher incomes.
For example, regardless of the income of the person purchasing the television, the import duty on the television from Japan will be the same amount. Because the tax is unrelated to a person’s income, someone earning ₹25,000 a year will have to pay the same duty on the same television as someone earning ₹150,000; clearly, the former will bear a greater burden.
Indirect Tax & Direct Tax Difference
The Key difference between Direct Tax and Indirect Tax is shown below:
- Companies,Individuals, Corporations, Hindu undivided Families (HUF), and other entities pay Direct Tax, whilst the end-consumer of goods and services pays Indirect Tax.
- Direct taxes reduce inequities and are regarded as progressive, whereas indirect taxes exacerbate inequalities and are regarded as regressive.
- Direct taxes have many exemptions and have higher administrative costs, whereas indirect taxes have fewer exemptions and have more reliable collections.
- Tax burdens cannot be shifted in the case of direct taxes, but they can be shifted in the case of indirect taxes.
- Indirect taxes are more growth-oriented since they discourage spending and encourage saving. Direct taxes, on the other hand, deter investment and reduce savings.
- Indirect taxes have a broader reach because they are levied on all members of society through the sale of goods and services, whereas direct taxes are only levied on those who fall into specific tax brackets.
- Tax evasion is feasible due to a lack of administration in the collection of direct taxes, while indirect taxes cannot be evaded because they are levied on products and services.
- Direct taxes can help to lower inflation, whereas indirect taxes can raise it.
- Direct taxes have better allocative effects than indirect taxes because direct taxes impose a lower cost on collection than indirect taxes, which disperse collection across parties and affect consumers’ preferences for items due to price differences caused by indirect taxes.
- Additional indirect taxes put on dangerous commodities such as cigarettes, alcohol, and other similar items discourage overconsumption, ultimately benefiting the country socially.
The ability of the end taxpayer to pass the tax burden to someone else is the difference between direct and indirect taxes. Direct taxes allow the government to collect taxes directly from consumers and are progressive in nature, allowing the economy to cool off from inflationary pressures.
GST In Light Of Indirect Taxes
Because of the different indirect taxes imposed within the country, the buyer is forced to pay higher costs for goods and services. The government has combined a number of levies into a single tax called the Goods and Service Tax (GST). Multiple taxes have been combined, and governance has improved while complications deriving from multiple rules, compliance, and regulations have been reduced.
There are also concerns that indirect taxes can be used to promote a specific government policy by taxing certain industries while leaving others untaxed. As a result, some economists claim that indirect taxes create an inefficient market and cause market prices to deviate from their equilibrium.
Yes, indirect taxes might alter at any time. The government of India can opt to raise or lower tax rates based on the economy and a variety of other factors.
When you buy a ticket to a cricket match, you will be charged Entertainment Tax. It will, however, be incorporated into the GST system.
A person of Indian origin (British passport holder) is entitled to a duty-free allowance of up to Rs.12, 000.
Food goods will not be subject to customs duty if they are intended for personal consumption. Food products valued up to Rs.12, 000 would be exempt from customs duty.
To pay your Excise Duty, you do not need a license. Simple registration with the Department of Central Excise will suffice.