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. Instead, he/she has to pay the tax along with the price of goods or services bought by 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.
Let’s look at an example to understand how indirect tax works. 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 ` 100/- on the selling price of ₹ 1,000/-, from Mr. Y. Mr. X has not paid any taxes earlier. So he will pay the entire ` 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 Mr. 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. Also, 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.
Features of indirect tax
Streamlined tax liabilityProper implementation of indirect taxes ensures a streamlined tax system. The customer pays tax for the product or service purchased. The seller or manufacturer collects this tax and forwards it to the government.
Progressive natureWith better implementation of uniform taxes across the country, indirect taxes are progressive and offer several benefits to buyers, sellers, and the government. It has reduced confusion or overlapping. Tax frauds have also been reduced.
Reduced tax evasionSince taxes are now directly implemented on the sale and purchase of goods and services, tax evasion has been reduced. This makes the administration and collection of taxes transparent.
Goods and Service Tax (GST)
From July 01, 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, 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).
The GST council has prescribed different rates from 0%, 5%, 12%, 18% and 28% for different goods and services. Certain goods have been exempted from the purview of GST taxability.