Indirect Tax Explained: Meaning, Types & Features

Indirect taxes form an essential part of a nation’s revenue system, impacting consumers, businesses, and the economy at large. Indirect taxes are different from direct taxes in their method of collection. Indirect taxes are imposed on goods and services at various stages of production, distribution, and consumption. They are embedded in the prices of goods and services, ultimately paid by the end consumer.

What is an Indirect Tax?

In simple terms, an indirect tax is applied when people consume goods or services. While purchasing a product or a service, a consumer must pay the tax along with the cost of goods to the seller. Manufacturers, retailers, or sellers collect this tax from the consumer and remit it to the government. In the case of direct taxes, however, consumers have to pay the tax directly to the government. 

Indirect tax means that the tax burden is transferred to another person or entity. In other words, while the initial payer (e.g., manufacturer or seller) remits the tax to the government, they recover this amount by including it in the price of the goods or services. Consequently, when the end user purchases the product or service, they ultimately bear the cost of the tax, which the seller then forwards to the government.

Read more: Difference Between Direct Tax and Indirect Tax

Different Types of Indirect Taxes and their Collectors

Common Types of Indirect Tax

1. Goods and Services Tax (GST)

GST is an indirect tax that is applied to the supply of goods and services. Before the introduction of the Goods and Services Tax on 1st July 2017, different types of indirect taxes were paid to different tax authorities. However, many of these taxes are now subsumed under GST. The GST rates for various goods and services vary between 0% and 28%.

The GST is further divided into four categories – CGST (Central Goods and Services Tax), IGST (Integrated Goods and Services Tax), SGST (State Goods and Services Tax), and UTGST (Union Territory Goods and Services Tax). 

• CGST is levied on the supply of goods and services within the same state (intrastate supplies). 
• IGST is levied on the supply of goods and services between two or more states (interstate supplies).
• SGST is levied and collected by the state government on intrastate supplies of goods and services.
• UTGST is charged on goods and services sold in Union Territories and collected by their respective governments.

Read more: Types of GST in India: CGST, SGST and IGST

2. Value Added Tax (VAT)

Value Added Tax (VAT) is a consumption tax levied on the value added at each stage of production and distribution of goods and services. In India, VAT is primarily imposed by state governments on certain goods such as petroleum products and alcoholic beverages, which are currently outside the purview of GST. While producers or sellers collect this tax from consumers, they remit it to the respective state government. Registration for VAT is generally mandatory for businesses exceeding specific turnover thresholds.

3. Custom Duty

Customs Duty is an indirect tax levied on goods imported into and exported from India. This is further classified as import duty and export duty. By imposing this tax, the central government regulates the movement of goods across international borders. This helps the government generate revenue, regulate trade, and protect domestic industries. It also plays a role in controlling the movement of prohibited or restricted goods across borders.

4. Service Tax

Service Tax was an indirect tax levied by the central government on services provided to customers. It applied to most services, except those specified in the ‘Negative List of Services’ or those falling under certain exemptions, such as for entities providing services worth less than Rs. 10 lakh in a financial year. With the introduction of GST in 2017, Service Tax was largely subsumed under the new indirect tax regime.

5. Stamp Duty

State governments levy stamp duty on the transfer of property ownership between a seller and a buyer. The payment receipt of stamp duty serves as proof of legal property ownership. When purchasing a property, individuals must pay stamp duty along with registration charges. This tax is payable for different types of property purchases – newly completed property, property under construction, and property for reselling. Stamp duty is also imposed on various other types of legal documentation.

6. Excise Duty

Excise duty is a tax levied by the central government on goods manufactured domestically within the country. While manufacturers are responsible for remitting this tax to the government, the cost is typically passed on through the supply chain and ultimately borne by the end consumer. Following the introduction of GST, most excise duties were subsumed. Consequently, excise duty now applies only to a few specific domestic goods, such as petroleum products and alcoholic beverages for human consumption.

7. Securities Transaction Tax (STT)

STT is a type of indirect tax charged on the purchase or sale of securities through the stock exchanges. This tax applies to securities such as – mutual funds, shares, F&O transactions, etc. The main reason for introducing this tax was to simplify the collection of taxes on securities market transactions and to rationalize capital gains taxation for certain equity-related investments.

8. Entertainment Tax

Entertainment Tax was levied by state governments on various entertainment-related transactions. Examples included charges for movie tickets, exhibitions, stage shows, amusement parks, sports events, and video gaming complexes. With the implementation of GST, Entertainment Tax, except for local body levies, was largely subsumed under the new regime.

Features of Indirect Tax

1. Streamlined Process

The indirect tax system ensures a streamlined taxation process. First, the consumer pays the tax when purchasing a product or service, and then the seller or producer collects the tax and remits it to the government.

2. Reduced Evasion Potential

Indirect taxes are generally harder to evade as they are collected at the point of sale or purchase of goods and services. This inherent mechanism reduces the opportunities for taxpayers to avoid paying the tax, contributing to greater transparency in the tax system compared to some direct taxes.

Central and state governments collect indirect taxes to fund public services and support economic stability. This system is often considered more transparent than direct tax systems due to its built-in collection mechanism at the point of transaction, making it challenging for individuals to entirely avoid their tax liabilities when consuming goods or services.