Demystifying the World of Indirect Taxes: A Comprehensive Guide

Taxes paid by the citizens of a country help the government earn funds that are then used for the infrastructural development of the nation. The same is also applicable to India. Here, citizens usually pay two types of taxes: direct and indirect.

The direct tax entails the likes of income tax, which the government collects directly from the individuals. However indirect taxes are different as they are not paid directly to the government. Instead, the end user of a product or service is responsible for paying the taxes.

So, let’s dive in and understand more about this taxation system and all its particulars.

Indirect Tax Definition

Indirect tax is levied when people consume any goods or services. When 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 taxation, they have to pay the tax directly to the government. 

In contrast, indirect tax means the tax liabilities are passed to the other individual or entity. That means, initially, the manufacturers of the product are responsible for paying the tax to the government. But they forward the responsibility of this tax payment to the end user. So, the end-user pays the tax to the manufacturers when they purchase the product. After collecting this tax, the manufacturers send it to the government.

Read more: Difference Between Direct Tax and Indirect Tax

Overview of Different Types of Indirect Tax

Types of Indirect Tax

1. Goods and Services Tax (GST)

GST is an indirect tax which is levied upon the supply of goods and services. This tax was introduced on 1st July 2017. It has shifted major indirect taxes in India. Previously, 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 are varied between the range of 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 for 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

2. 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 that. The VAT is applicable for different stages of the production. So, the registration for VAT is mandatory for all the producers who are individually involved in the production of goods. 

3. Custom Duty

This indirect tax is paid for importing and exporting goods and services within and outside India. This is also known as the 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.

4. Service Tax

Service tax is charged for providing a service to the customers by the service provider and 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’.

Having said that, the exemption of service tax is provided to the entities that offer services less than Rs.10 lakh in a financial year.

5. 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. Moreover, this tax is imposed on all types of legal documentation.

6. Excise Duty

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

7. 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, and more. The main reason behind introducing this tax is to streamline the taxation on securities transactions and capital gains from it.

8. 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 system. 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.

2. Zero Tax Evasion

It eliminates 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, making it more transparent.

3. Progressive in Nature

The indirect taxes are progressive and offer several benefits to the government, sellers, and buyers. It also reduces tax fraud.