What is Indirect Tax?

Indirect tax is the tax levied on the consumption of goods and services. It is not directly levied on the income of a person but instead, he/she has to pay the tax along with the price of goods or services bought to the seller. The person paying the tax to the government and the person bearing the liability to pay the tax are thus two different people.

To understand how indirect tax works, let’s look at an example. The indirect tax rate here has been assumed to be 10%.

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 purchase ₹ 0 ₹ 100
Total tax to be paid to the government ₹ 100 ₹ 10

As seen in the above table, Mr X will collect taxes of Rs 100 on selling price of ₹ 1,000, from Mr Y. Since Mr X has not paid any taxes earlier, he will pay the entire Rs 100 collected to the government.

Mr Y will then sell the goods to the customer at ₹ 1,100 plus 10% taxes i.e. total selling price is ₹ 1210 for Mr Y. Since Mr Y has already paid taxes of ₹ 100 to Mr X, he will only pay the balance ₹ 10 (₹ 110 – ₹ 100) to the government.

Hence, the government has received a total tax of ₹ 110 (₹ 100 from Mr X and ₹ 10 from Y). The customer has paid ₹ 1210 to Mr Y which is bifurcated as ₹ 1100 selling price and ₹ 110 of taxes. It is thus ultimately the customer who is bearing the entire tax liability on the goods purchased.

Different Types of Indirect Taxes in India

Earlier, different types of indirect taxes were imposed as follows:

  • Service Tax: This is charged on the services availed by the customer. For example, if the person books a hotel accommodation, service tax is charged on the hotel booking amount.
  • Excise Duty: This is paid for the manufacturing of goods. For example, if a person manufactures cars, he is liable to pay excise duty on manufactured cars.
  • Value Added Tax (VAT): This is paid on the value addition in price during the sale of goods. For example, when the wholesaler sells goods to a retailer.
  • Custom Duty: This is paid on the goods imported from outside India.
  • Stamp Duty: This is paid on the sale of immovable property. In addition, stamp duty is mandatory on all types of legal documents.
  • Entertainment tax: This is levied on every transaction related to entertainment. For example, movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.

Goods and Service Tax (GST)

From 01st July, 2017, Goods and Service Tax (GST) was implemented in place of major indirect taxes. The various types of indirect taxes which were paid to various tax authorities were now under the purview of one tax. In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services.

GST is majorly divided into four types: Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST), Integrated Goods and Services Tax (IGST) and Union Territory Goods and Services Tax (UGST).

Different rates have been prescribed by the GST council from 0%, 5%, 12%, 18% and 28% for different goods and services. Certain goods have been exempted from the purview of GST taxability.

People like you also read...


Tax laws are subject to amendments made thereto from time to time.