In India, business owners are responsible for paying business-related taxes. Whether it is about tax related to sales, services, or custom duty, you need to pay them to the Government. With the rising influence of GST return filing processes, many of you might not know about the implications of indirect taxes that are now converged into one tax. 2021-22 marks the highest tax-GDP ratio with the indirect tax to GDP ratio at 5.6% (Source).
Ever wondered what indirect tax means and why it now forms a part of GST? You’ve come to the right place. In this complete guide, we will cover indirect taxes from every angle to help you understand the related niceties.
What is Indirect Tax?
An indirect tax is a type of tax that is levied on the consumption of services or goods, and not on the income of a person. Rather, a consumer has to pay this tax along with the price of goods/services bought by a seller. In other words, the incidence and impact do not fall in the same category. Here, the person paying the tax to the government (seller) and the person who is liable to pay the tax are two different people.
Consider the following example to better understand the indirect tax implication on sellers:
Mr. Sharma is a goods manufacturer while Mr. Sahai is a retailer who buys goods from Mr. Sharma. Assuming the rate at which indirect tax is to be levied is 10%, Mr. Sharma priced a product at Rs. 2000. Here’s how the indirect tax will be calculated:
|Particulars||Mr. Sharma’s Side||Mr. Sahai’s side|
|Selling price of a product||Rs. 2000||Rs. 2200|
|Indirect tax @10%||Rs. 200||Rs. 220|
|Selling price with tax||Rs. 2200||Rs. 2420|
|Tax paid on purchase||0||Rs. 200|
|Total tax to be paid to the government||Rs. 200||Rs. 220|
As in the table given above, Mr. Sharma collects a tax of Rs. 200 on the selling price of Rs. 2000 from Mr. Sahai. Since Mr. Sharma has not paid any taxes earlier, he will pay the Rs. 200 to the government.
Mr. Sahai sells the same product to a customer at the rate of Rs. 2200 plus 10% taxes, taking the total selling price to Rs. 2420. Since Mr. Sahai has already paid Rs. 200 to Mr. Sharma, he will need to pay the remaining balance of Rs. 220 to the government.
Here, the government will receive a total tax of Rs. 420. Also, here the customer will bear the total indirect tax liability on the product bought.
Types of indirect taxes
The following table covers different types of indirect taxes:
|Type of indirect tax||Description|
|Service Tax||This tax is levied by entities for the services they provide. It is to be deposited with the Government of India.|
|Excise Duty||This type of indirect tax is paid for the manufacturing of goods by a company in India. Here, the manufacturer pays this tax and then recovers it from their customers.|
|Custom Duty||This tax is levied on the goods imported to India. Sometimes, it is also levied on products exported outside Indian boundaries.|
|Stamp Duty||This tax is levied on the transfer or sale of any immovable property in every state in India. This tax is also applicable to all types of legal documents.|
|Value Added Tax||This tax is paid on the value addition in movable product price during their sale directly to the customer. Besides this, the VAT tax rate is determined by the nature of the product and the respective state of sale.|
|Entertainment Tax||This tax is levied on every transaction or product related to entertainment. It is charged by the state government and is applicable to the purchase of video games, sports activities, movie shows, etc.|
|Securities Transaction Tax||This is levied while trading securities through the Indian stock exchange.|
Note: After the implementation of GST, all these types of indirect taxes are now bundled into a singular tax for Indian citizens.
Features of indirect tax
Given below are the key features of indirect taxes in India:
Streamlined tax liability
The sellers or service providers are responsible to pay indirect taxes to the government, and then the liability is transferred to the end customer.
Indirect taxes were previously regressive in nature. However, their nature has now changed to being progressive with the implementation of the GST regime.
Reduced tax evasion
Indirect taxes are difficult to evade owing to the direct implementation over goods and services.
Advantages of indirect tax
Convenience of payment
Indirect taxes are not meant to burden the taxpayer and are only payable at the time of buying a product or availing services. Moreover, it is convenient for the state authorities to levy these taxes directly on the stores, factories, or service providers.
Ease of tax collection
In comparison to direct taxes, indirect taxes are easy to collect at the time of purchase.
Contribution by the financially-weak segments of society
Those who earn less annual income are outside the purview of direct taxes. However, indirect taxes are levied at the point of sale, regardless of the income of the consumer buying the products or services. This is how every section of society contributes to the overall economic growth.
Equitable collection as per product/service cost
Indirect taxes are levied as per the cost of the services or products. In other words, the basic necessities attract a lower tax rate while there is a high tax rate applicable to luxury items.
Disadvantages of indirect taxes
Some of the most common disadvantages of indirect tax are:
- They can be cumulative in nature sometimes. For example, if the middlemen involved start to charge their own service tax, the overall product price will further increase in the hands of consumers.
- Indirect tax often turns out to be regressive in nature. For example, the tax on salt is the same for all individuals, irrespective of their income. However, if the rich default on the tax payment, they will be charged with higher penalties.
- Since the indirect tax is also levied on raw materials and goods, it increases the overall production cost which often restricts the expansion of business.
Is GST an indirect tax? – The truth behind
The Goods and Services Tax, also known as GST, when implemented in July 2017, subsumed various indirect taxes that were there in the country. Besides this, different types of taxes that were once deemed compulsory are now done away with under the GST regime. Another benefit of GST implementation is the elimination of the cascading effect of tax, hence ensuring that the buyers do not end up paying tax for every value addition.
Furthermore, the following table covers different types of taxes that were subsumed under GST on both central and state levels:
|On Central Level||On State Level|
|Sales tax||Service tax|
|Central sales tax||State excise duty|
|Entertainment tax||Additional excise duty|
|Purchase tax||Countervailing duty|
|Luxury tax||Additional custom duties|
|Taxes on betting and lottery gambling|
Recent news about indirect tax in India
- The central government in India has collected Rs. 10.71 lakh crore including GST and non-GST for the financial year 2020-21 as indirect tax. The total tax collection increased by 12% in comparison to the numbers for the previous fiscal year.
- The net GST collection in the financial year 2021 was Rs. 5.48 lakh crore. This includes central GST, integrated GST, and compensation cess and was 8% lower than the tax collected in FY2020.
Is the indirect tax rate subject to change?
Indirect tax rates are subject to change based on economical conditions and many other factors. The Government of India decides to cut or increase the rate at which the taxes are to be levied.
Do I need to pay indirect tax when buying a movie ticket?
In this case, you will be charged Entertainment tax on buying a ticket for a movie. However, it will be a part of the GST collected.
Why is GST an indirect tax?
GST is considered a single tax on the supply of services or goods, from the consumer to the manufacturer.