Indirect tax is something that a manufacturer pays to the Government of his country. The burden of tax payment is on end consumer as they are the ones purchasing the products. Unlike direct taxes, these are levied on materialistic goods!
What is Indirect Tax?
Indirect tax is basically a tax that can be passed on to another individual or entity. Indirect tax is generally imposed on suppliers or manufacturers who pass it on to the final consumer. The excise tax applicable to alcohol and cigarettes is a common instance of indirect tax. Another example would be Value Added Tax (VAT).
Types of Indirect Taxes
Almost every product that is consumed comes with indirect tax. Here are a few of the indirect taxes in India:
1. Sales Tax
Every time you go to a department store or a mall to shop, you will mostly end up paying indirect taxes. Products such as clothes, household items and basic commodities come with indirect taxes. When you purchase an item and pay for it at the counter, you end up paying the sales tax along with the price of the product; and the tax, which is collected by the store, is then remitted to the government.
2. Service Tax
Individuals or entities that render services such as legal, consulting, etc. levy service tax to the recipients of said services. The tax is then remitted to the Central Government. Service tax was levied at 14% since 1 June 2016, but the addition of Krishi Kalyan Cess and Swacch Bharat Cess, both at 0.5%, has brought it up to 15%. It is important to note that small service providers whose annual income is under Rs.10 lakh are exempt from paying service tax.
3. Excise Duty
Excise duty is charged on all products that are manufactured within the country. It is an indirect tax that must be paid by manufacturers to the government, and manufacturers pass it on the consumers. The Central Government levies excise duty, and the tax is governed by the provisions of the Central Excise Act, 1944.
4. Value Added Tax
The sale of movable products within the country attracts Value Added Tax. VAT, as it is commonly called, is charged at every stage of the production as well as distribution channel. Every instance of value addition also attracts VAT. The State Governments levy VAT under Entry 54 of the State List.
5. Securities Transaction Tax
Securities Transaction Tax is levied at the time of selling or buying stocks through an Indian stock exchange. The tax was implemented in 2004. It applies to mutual funds, shares, as well as future and options transactions. Securities Transaction Tax was introduced in an effort to lower the short-term capital gains tax in addition to do away with long-term capital gains tax.
6. Customs Duty
Customs duty is among the indirect taxes imposed on bringing imported products into India. Exported goods can also be subject to customs duty. The regulations regarding the levy as well as collection of customs duty are governed by the Customs Act, 1962. The Act also deals with all the regulations regarding the import and export procedures, prohibitions, penalties and offence.
7. Entertainment Tax
Entertainment and everything related to it attracts entertainment tax. The tax is levied by state governments. For instance, movie tickets, stage shows, music concerts, exhibitions, video game arcades, sports-related activities and amusement parks all charge entertainment tax.
Features of Indirect Taxes
Here are the key features of indirect taxes:
- Tax liability: The service provider or seller pays indirect taxes to the government, and the liability is transferred to the consumer.
- Payment of tax: The seller pays indirect taxes to the government and the same is transferred to the consumer.
- Nature: Indirect taxes were initially regressive in nature, but thanks to the implementation of the Goods and Services Tax, they are now pretty progressive.
- Saving and investment: Indirect taxes are generally growth-oriented considering the fact that they encourage consumers to save and invest.
- Evasion: It is difficult to evade indirect taxes because they are now implemented directly through products and services.
Advantages of Indirect Taxes
Here are the main advantages of indirect taxes:
- Convenience: Indirect taxes do not burden the taxpayer and are convenient as they are paid only at the time of making a purchase. Moreover, state authorities find it convenient to levy indirect taxes because they are collected directly at the stores/factories which helps in saving a lot of time and effort.
- Ease of collection: Indirect taxes are easy to collect in comparison with direct taxes. Since indirect taxes are only collected at the time of making purchases, the authorities need not worry about their collection.
- Collection from the poor: Those who earn less than Rs.2.5 lakh p.a. are exempt from income tax, which means that they do not contribute to the government. Since indirect taxes are charged at the point of sale, all individuals, regardless of the income tax slab under which they fall, contribute towards the growth of the economy.
- Equitable contributions: Indirect taxes are directly related to the costs of products and services. What this essentially means that the basic necessities attract lower rates of tax while luxury items are charged at higher tax rates, thereby ensuring that contributions are equitable.
Goods & Services Tax and Indirect Taxes
The Goods and Services Tax, or GST as it is commonly known, was implemented on 1 July 2017 in order to subsume the various indirect taxes in the country. The taxes that were once compulsory are now done away with due to the introduction of the new tax regime. One of the main benefits of GST is that it has eliminated the cascading effect of tax, thereby ensuring that they do not end up paying for every value addition.
The taxes subsumed under GST on the state level include service tax, state excise duty, countervailing duty, additional excise duty, and special additional custom duties. The taxes subsumed under GST at the central level include sales tax, central sales tax, purchase tax, entertainment tax, luxury tax, octroi and entry tax, and taxes on betting and lottery gambling.