What is Indirect Taxes? Let’s Understand Its Meaning and Types

byDilip PrasadLast Updated: January 23, 2024

Indirect taxes are imposed by governments on goods and services rather than directly on income or wealth. These taxes, like sales tax or value-added tax (VAT), are paid by consumers as part of the purchase price and collected by businesses, serving as a significant revenue source for governments.

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 the most simple words, 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. The manufacturers, retailers, or sellers collect this tax from the consumer through the seller and pay 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, manufacturers initially pay the tax to the government, but they pass on this responsibility to the end user. So, when the end user buys the product, they pay the tax to the manufacturers. The manufacturers then send this tax to the government.

Read more: Difference Between Direct Tax and Indirect Tax

Different Types of Indirect Taxes and their Collectors

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. But now, all these taxes come 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). 

  • The CGST is levied when the goods and services supply process happens within the same state (intrastate supplies). 
  • The IGST is levied on supplying goods and services between two or more states (interstate supplies).
  • The SGST is levied and collected by the state government on the goods and services where the transaction takes place.
  • The UTGST is charged for the goods and services sold in the union territories and collected by the respective governments.

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

  1. Value Added Tax (VAT)

Value-added tax or VAT is imposed on the manufacturers or producers for selling goods and services to the customers. The producers have to pay this tax to the central government. Therefore, they collect the tax from the customers when they purchase a product and pay for it. VAT is applied at different stages of production. Hence, the registration for VAT is mandatory for all the producers who are individually involved in the production of goods.

  1. Custom Duty

This indirect tax is paid for importing and exporting goods and services within and outside India. This is further classified as import duty and export duty. By imposing this tax, the central government regulates the movement of goods and services across the international borders. In this way, the government secures the country’s employment, economy, and environment. Also, the government controls the movement of prohibited goods among the countries through this tax.

  1. Service Tax

Service tax is charged for providing a service to the customers by the service provider and is then paid to the Indian government. This tax is levied on all types of services apart from the ones specified in the ‘Negative List of Services’. It must be noted that an exemption of service tax is provided to entities that offer services worth less than Rs. 10 lakh in a financial year.

  1. Stamp Duty

The state government charges stamp duty during the time of transfer of property ownership between a seller and the buyer. The payment receipt of the stamp duty works as proof of property ownership. For example, when someone purchases a housing property, they must pay the stamp duty along with the registration charge for buying. This tax is payable for different types of property purchases – newly completed property, property under construction, and property for reselling. Stamp duty is imposed on all types of legal documentation.

  1. Excise Duty

Excise duty is applied to the goods manufactured domestically within the country. The manufacturers pay this tax to the central government but collect the tax from the consumers of the goods. After the introduction of GST, it is included in most of the excise duties. Hence, it applies only to a few domestic goods, such as – petroleum, liquor, etc.

  1. Securities Transaction Tax (STT)

STT is a type of indirect tax charged during the time of purchasing or selling securities through the stock exchanges. So, the tax becomes applied to securities such as – mutual funds, shares, F&O transactions, etc. The main reason behind introducing this tax is to streamline the taxation on securities transactions and capital gains from it.

  1. Entertainment Tax

The state government levies this tax for all the transactions related to entertainment. The indirect tax examples for entertainment are the charges for movie tickets, exhibitions, stage shows, parks, sports events, and video gaming complexes.

Features of Indirect Tax

  1. Streamlined Process

The indirect tax system ensures a streamlined taxation process. First, the consumer pays the tax for availing of any product or service, and then the seller or producer collects tax and finally sends it to the government.

  1. Zero Tax Evasion

Indirect taxes eliminate the issues of tax evasion because it’s collected at the time of selling and purchasing. Thus, there are no such chances available to avoid paying this tax, which makes it more transparent.

The central and state governments collect indirect taxes to maintain a well-organized economy. This taxation system is more transparent than the direct tax system because every individual has the liability to pay the indirect tax while purchasing a product or service.

Disclaimer: This blog is written to make it easy for readers to understand complicated processes. Some information and screenshots may be outdated as government processes can change anytime without notification. However, we try our best to keep our blogs updated and relevant.


What is the VAT rate in India?

The VAT rate in India is 18%.

Is GST a direct or indirect tax?

GST, short for Goods and Services Tax, is an indirect taxation system that has superseded numerous other indirect taxes in India, including excise duty, VAT, services tax, and more.

Which is India’s biggest indirect tax?

The Goods and Services Tax (GST)

What are the six indirect taxes?

Indirect taxes are typically placed on suppliers or manufacturers, who then transfer the tax burden to the end consumer. Examples of the six indirect taxes include Excise Duty, Customs Duty, Entertainment Tax, Service Tax, Sales Tax, Gross Receipts Tax, and Value-Added Tax (VAT).

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