Indirect Tax in India Last Updated : 26 Feb 2020

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.

News About Indirect Tax

  • Indirect Tax Collections Registers Strong Growth

    The growth in indirect tax collections declined 13.9% in November 2016 from the growth registered in October.

    However, experts believe that this deceleration is not due to the demonetization drive by the government. As the announcement of withdrawal of 86% of the total currency in circulation came on November 8, production could not stop the next day as the required raw materials would already be in stock by then, opined M.S. Mani, Senior Director Deloitte India. He added that in all probability, the impact of demonetization would be felt by coming January.

    The Reserve Bank, however, has reduced its growth forecast for the current financial year from 7.6% to 7.1% by 50 basis points.

    2 January 2017

  • Indirect tax-mop up risen, for the first fiscal half

    Revenue collection driven by the Government within the period of April to October witnessed mop-up of indirect tax at a whopping 26.7% while direct taxes were in at 10.6%. The sum of both the direct and indirect taxes came up to an impressive Rs.8.62 lakh crore. This number is higher than the target of Rs.16.26 lakh crore which is the number this year. The government is already expecting 12.64% rise in direct tax at Rs.8.47 lakh crore for the current financial year and 10.8% indirect tax at Rs.7.79 lakh crore.

    15 November 2016

  • Indirect tax collection rises 28%, direct tax increases 15%

    The government reported a healthy growth in tax collections in the first five months of financial year 2016-17, with direct tax mop up increasing by 15% and indirect tax collection rising by 27.5%. The gross PIT collected was 24% higher, while CIT collections rose by 11.5%.

    The finance ministry indicated that refunds worth Rs. 77,080 crore were furnished during the 5 month interval between April and August, this year, and it is 22.2% higher than the refunds issued during the same interval last year. The mop up of Rs. 1.89 lakh crore from direct taxes constituted 22% of the budget estimates for this fiscal.

    However, the indirect tax collections that are inclusive of central excise, service tax and customs was more striking, with a collection of Rs. 3.36 lakh crore, constituting 43% of the budget estimate. Net service tax collections increased by 23% to stand at Rs. 92,696 crore and customs duty is 5.7% higher at Rs. 90,448 crore.

    The increase in net tax collections was attributed to healthy domestic manufacturing figures that shadowed the declining industrial production numbers.

    13 September 2016

  • CBEC issues circular to officials on indirect tax recovery

    The CBEC (Central Board of Excise & Customs) has issued a circular to its officials with regard to recovery of a confirmed demand if there is a stay application pending. It has asked the field officials not to go ahead with recovery in such cases.

    This circular has brought in that much needed relief to the industry where cases have been pending. It must be noted that the government had amended the rules in August 2014 offering a fixed payment of 7.5% or 10% of the tax demand. It is now clear that the officials cannot go ahead with the recovery after assessee has made an appeal to the tribunal after making the required payment. This process change has been implemented to provide sufficient time to the assessee to file an appeal.

    4 August 2016

  • Indirect Tax Collections Rise By 41%

    Indirect Tax collections shot up by 41 per cent during April 2016 on the back of a major rise in excise collections. Collections to the tune of Rs 64,394 crore were recorded in the same month, showing an increase by 17 per cent after the exclusion of collections via additional resource mobilisation measures. Central excise collections also showed a sharp upturn, rising by 70 per cent to Rs 28,252 crore in comparison to Rs 16,546 crore in April last year. A tweet by Revenue Secretary Hasmukh Adhia stated that provisional revenue figures for indirect tax showed a 41% growth in April 2016 as compared to revenue figures during the same time last year. Customs collections for April 2016 also saw a 22 per cent rise from Rs 14,286 crore last year to Rs 17,495 crore, while service tax collections witnessed an increase of 27 per cent, shooting up from Rs 14,585 crore last year to Rs 18,647 crore this April. However, no details on direct tax collections were forthcoming.

    7 June 2016

  • Raised monetary limits for appeals in Indirect Tax cases

    Central Board of Excise and Customs has raised limits for appeals made in case of indirect taxes. In appellate tribunals the limit is now Rs.10 lakhs and it is Rs. 15 lakhs for high courts. The earlier limits were Rs.5 lakhs and Rs.10 lakhs. Detailed information about the issuance of Show Cause Notice have been rolled out by the department.

    CBED is also organizing workshops and various sessions to strengthen the quality of SCNs issued. This is also in order to minimize dispute as well as litigation.

    27 April 2015

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