In this blog, we will explore the top 7 types of indirect taxes in India, and highlight their meaning and impact on both businesses and consumers. Imputed taxes are an essential component of India’s taxation scheme, which is levied on goods and services rather than directly on income. These taxes are collected from intermediaries, such as businesses, which pass on the burden to the final customer. With the introduction of the Goods and Services Tax (GST) in 2017, the tax structure in India became more streamlined, but other imputed taxes still play an essential role.
What is the Indirect Tax?
An indirect tax is a type of tax that is levied by an intermediary (such as a seller or service provider) to the final consumer of goods or services. Unlike direct taxes, which are paid directly from individuals or entities to the government (e.g., income taxes), indirect taxes are built into the price of goods and services. These taxes are ultimately paid by the consumer but remitted to the government by the consumer.
1. The tax burden is shifted: The obligation to pay the tax falls on the consumer, but it is collected and deposited by the seller or provider.
2. Included in the price: Tax amount is included in the cost of goods and services.
3. No direct payment: Consumers pay taxes indirectly instead of paying directly to the government while purchasing goods or services.
4. Multiple Tax Points: Indirect taxes are levied at various stages, such as manufacturing, distribution, and sales.
What are the Top 7 Types of Indirect Tax in India?
1. Service Tax
2. Value Added Tax
3. Excise Duty
4. Custom Duty
5. Entertainment Tax
6. Stamp Duty
7. Goods and Service Tax
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1. Service Tax
Service tax was an indirect tax levied on services provided in India. It was introduced under the Finance Act, of 1994 and was applicable to a wide range of services, making it an important component of India’s taxation structure. However, with the introduction of the Goods and Services Tax (GST) on July 1, 2017, service tax was subsumed under GST, effectively streamlining reported taxation in the country.
1. Tax on Services: Applicable on services provided by the service provider to the consumer.
2. Indirect Nature: The burden of the tax was passed on to the final consumer, but it was collected by the service provider and paid to the government.
3. Central Government Tax: Service tax is levied by the Central Government and is governed by the Finance Act, of 1994.
4. Standard Rate: Before its abolition, the rate of service tax was 15% (including cess and surcharge).
2. Value Added Tax
Value Added Tax (VAT) is a consumption-based indirect tax levied on the sale of goods and services at each stage of the production and distribution chain. This tax is levied on the “value added” to the product at each stage, ensuring that the final consumer bears the burden of tax.
1. Multi-point taxation: levied at multiple stages of production and distribution.
2. Input Tax Credit (ITC): Sellers can claim credit for tax paid on inputs, thereby reducing the tax burden.
3. State-level taxes: Administered and regulated by individual states, which leads to varying rates.
4. Transparent Taxation: It reduces taxes as only value addition at each stage is taxed.
3. Excise Duty
Excise duty is an indirect tax imposed on the manufacture or production of goods within a country. In India, this tax was traditionally imposed on manufacturers who made goods for home consumption. Although the introduction of the Goods and Services Tax (GST) in 2017 subsumed most of the excise duties, it is still applicable to some goods meant for human consumption such as petroleum products, tobacco, and liquor.
1. Duty on Manufacture: Excise duty is levied on the production or manufacture of goods and not on their sale.
2. Payment by the manufacturer: Responsibility for payment lies with the manufacturer, but the tax is ultimately passed on to consumers.
3. Central Excise: Excise was earlier governed by the Central Excise Act, of 1944.
4. Subsumed under GST: Most excise duties have been replaced by GST except for select items like fuel, tobacco, and alcohol.
4. Custom Duty
Customs duty is a type of indirect tax levied on goods imported into or exported from a country. In India, it serves as an important source of government revenue while regulating the flow of goods across borders. This tax is governed by the Customs Act, of 1962, and its rates are determined by the Customs Tariff Act, 1975.
1. Revenue Generation: Customs duty is an important source of income for the government.
2. Trade Regulation: It ensures trade balance by controlling imports and exports.
3. Domestic Industry Protection: By imposing high duties on imports, it protects domestic industries from foreign competition.
4. Prevention of dumping: Discourages the foreign manufacturer from selling goods at unjustly low prices.
5. Enforcement of Laws: Ensures compliance with various laws related to prohibited or restricted items.
5. Entertainment Tax
Entertainment tax is a type of indirect tax levied by the government on activities, services, and goods related to entertainment. It is collected from individuals who purchase tickets or pay fees for entertainment events and services. Although much of the entertainment tax has been subsumed under the Goods and Services Tax (GST) since its introduction in 2017, it is still applicable in some states and for some categories outside the scope of GST.
1. Nature: Indirect tax which is borne by the consumers but collected and remitted by the providers of entertainment services.
2. State Jurisdiction: Entertainment tax is primarily a state-level tax, and its rates vary in different states.
3. Pre-GST era: Before GST, the entertainment tax was an important source of revenue for state governments and was collected separately from other indirect taxes.
6. Stamp Duty
Stamp duty is a type of indirect tax that the government levies on legal documents to make them valid and enforceable. It is mainly levied on property transactions, agreements, and financial instruments. This fee acts as proof of transaction and helps prevent legal disputes.
1. Modes of Payment: E-stamping, non-judicial stamp paper or franking.
2. Documents involved: Sale deed, lease agreement, gift deed, loan agreement and share certificates.
3. Penalty for non-payment: The documents will be invalid in court, and a fine may apply.
7. Goods and Service Tax
Overview: The Goods and Services Tax (GST) is a single, comprehensive tax regime implemented in India on July 1, 2017. It replaced several reporting taxes that were previously levied by the central and state governments, such as value-added tax (VAT), service tax, excise duty, and more. The objective of GST is to simplify the taxation process, ensure a single tax system, reduce tax cascading, and create a harmonized market across India.
1. Dual GST Structure:
CGST (Central GST) and SGST (State GST) for inter-state transactions.
IGST for inter-state transactions
2. Input Tax Credit: It allows businesses to offset taxes paid on inputs against taxes collected on sales.
3. Integrated Market: Uninterrupted trade will be promoted by removing inter-state tax barriers.
4. Tax Slabs: GST is divided into 4 slabs: 5%, 12%, 18% and 28%, with some items exempted.
Conclusion
The types of Indirect taxe play an important role in India’s taxation system as they contribute significantly to government revenue. With the introduction of GST, India has moved towards a coordinated tax structure that simplifies collection development and reduces the perception impact of taxes. However, several other types of indirect taxes such as customs duty, stamp duty and entertainment tax continue to operate alongside GST, each of which serves specific purposes in regulating work, legal transactions, and entertainment activities.
FAQs
Q1. What is indirect tax and what examples?
Indirect taxes are the same for everyone and do not consider the consumer’s ability to pay. Examples include excise duty, VAT, and service tax. In contrast, direct taxes such as income tax, wealth tax, and corporate tax are based on the financial capacity of an individual or business.
Q2. Is gift tax an indirect tax?
Gift tax is a direct tax levied under the Income Tax Act.
Q3. Is TDS an indirect tax?
Tax deduction at source (TDS) is a method of collecting tax by the Government of India under the Income Tax Act, of 1961. Managed by the Central Board of Direct Taxes (CBDT) under the Indian Revenue Service (IRS), TDS ensures that tax is deducted at the source of income.
Q4. What is an example of indirect tax?
Excise duties on fuel, alcohol, and cigarettes are examples of indirect taxes, as these are paid by consumers through intermediaries. In contrast, income tax is a direct tax, paid directly by the income earner. Entry fees to a national park are also an example of direct taxation.
Q5. Why is stamp duty an indirect tax?
Stamp duty is an indirect tax levied by the state and central government on specific legal and financial transactions. It is required for a document to be legally valid and admissible in court.
Q6. Why do we need indirect tax?
Ultimately it is the consumer who pays taxes on goods and services. State governments prefer indirect taxes because they are collected directly from businesses, saving time and effort in administration.
Q7. What are the objectives of indirect taxes?
The main purpose of indirect taxes is to generate government revenue and regulate consumption.
Q8. What are the characteristics of indirect tax?
Indirect taxes are transferable and are passed from one party to another until they reach the consumer. These taxes are based on consumption, affecting the price of goods and services rather than income.
Q9. What are the functions of indirect taxes?
Indirect taxes are collected by an entity involved in the supply chain, such as a manufacturer or retailer, and paid to the government. This tax is ultimately passed on to the consumer as part of the price of a good or service.
Q10. What is the history of indirect tax?
Indirect taxes were introduced in India in 1944 to protect India from British manufactured goods. After independence, the government introduced many new indirect taxes. However, many of these taxes have now been abolished after the introduction of GST.
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