Consumption Tax

5paisa Research Team Date: 15 Feb, 2024 11:54 AM IST


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In India, there are numerous tax types. Many different goods are subject to these taxes, which the customer typically pays for at the conclusion of the sales cycle. 

The consumption tax is arguably the most prevalent kind of tax. However, what is the consumption tax, and how many different kinds of tax are imposed on us? We'll look at the consumption tax meaning more closely as you read on.

What is a consumption tax?

Well, the answer to what is consumption tax is is that anyone who purchases a product or uses a service is subject to a consumption tax. 

A national consumption tax does not exist in India. However, the comprehensive indirect tax known as the Goods and Services Tax (GST) has replaced several other taxes. In an effort to establish a single tax system, GST is applied to the provision of goods and services. Rates are different, and it affects people and companies all over the country.

Value-added taxes, excise taxes, use taxes, taxes on gross corporate revenues, retail sales taxes, and import tariffs are a few examples of consumption taxes. Those who purchase the commodity or service at a higher price point will be liable to pay these taxes. 

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How does consumption tax work?

India's main consumption tax is called the Goods and Services Tax (GST). It follows the destination principle by imposing the tax at the location of final consumption. GST is a value-added tax with multiple stages that applies to the whole supply chain. It took the place of a number of secondary taxes and affected the sale of goods and services. The tax is collected at every step of the production and delivery chain, and businesses can get credits for the tax they pay. To promote economic efficiency and minimising cascading effects, the GST seeks to establish a single, transparent tax system.

Types of Consumption Taxes

The Goods and Services Tax is the main form of consumption tax in India (GST). A comprehensive indirect tax, the GST combined several federal and state taxes to form a cohesive tax system. It has multiple tax slabs, including 5%, 12%, 18%, and 28%, to suit different commodities and services. Besides GST, the following are other types of consumption taxes.

Excise Tax

In India, an excise tax is a type of consumption tax levied on the manufacturing or production of specific items. When comparing excise duty to customs duty, which is a tax on foreign goods, excise duty is the tax on goods made in the country. 

Due to the GST's absorption of numerous indirect taxes, including the excise duty, taxpayers need to be aware of this. This means that India has no excise duty on anything other than a few goods, like petrol and liquor. 

The excise charge is not paid to the government directly by the customer. Rather, it gets passed on to the customer in the form of higher pricing after being included in the cost of the items by the producer or retailer. 

Value-Added Tax

Value-added tax, or VAT, is an Indian consumption tax that is applied to the value added at every point in the supply chain. Value-added tax, or VAT, is a typical type of indirect tax that is applied to products and services. At every point in the supply chain, the producers pay it to the government. 

The tax system is multistage with provisions for collecting tax payments on purchases at each point of sale. It eliminates the tax-on-tax effect as a result.

Retail Sales Tax

The Retail Sales Tax, also known as the State Sales Tax, was a consumption tax levied by individual Indian states prior to the introduction of the Goods and Services Tax (GST). Retail sales tax is the name given to the tax imposed on the sale of retail items that is paid directly by the final customer. 

The consumer is subject to this tax if they purchase products and services that are not subject to sales tax. When products are purchased from suppliers outside of the tax jurisdiction, this is typically the case. If you have figured out the consumption tax definition, then you will realise that the total amount paid by the buyer already includes this tax.

Import Duties

India imposes import duties, a type of consumption tax, on items that are imported into the nation. Consumer prices are affected by these tariffs because they increase the total cost of the imported items. 

One type of consumption tax that is imposed on items imported into India is customs duty, which includes basic customs duty, extra customs charge, and integrated goods and services tax (IGST). In addition to protecting home industries and bringing in money for the government, import tariffs also serve to control imports.

Are there exemptions from consumption taxes?

Yes, consumption tax, like Goods and Services Tax (GST), offers exemptions and lower rates for specific commodities and services. Periodically, the GST Council changes and examines the list of exempt things. Furthermore, there may be lower tax rates or exemptions for some necessities like food, medical care, and education. It's important to look at the most recent GST notices and talk to tax experts to fully understand the exemptions and rates that apply to various goods and services in India.

Advantages of Consumption Tax

A consumption tax implemented in India, the Goods and Services Tax (GST), has the following benefits: it simplifies the tax system, lessens cascading effects, creates a single market, improves compliance, and stimulates economic growth. Both businesses and consumers gain from the simplification, transparency, and efficiency of the GST tax system.

Disadvantages of Consumption Tax

One possible drawback of consumption taxes like India's Goods and Services Tax (GST) is that they might have regressive effects. Meaning that people with lower incomes pay a disproportionate share of the tax. There may also be problems with implementation and difficulty in following the rules. Thus, policymakers are continuously thinking about how to balance tax rates and deal with these problems.


Consumption taxes, most notably the Goods and Services Tax (GST), have been essential to tax reform in India since they promote efficiency, openness, and a single market. Fewer cascading effects, easier tax processes, and economic growth boost are some of the pros. Even though there are problems, consumption taxes will remain an important part of India's changing financial environment.

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Frequently Asked Questions

The Goods and Services Tax (GST) is a single consumption tax that took the place of many state and local taxes. At every step of the supply line, this tax is applied based on where the goods are going. Participating in the GST system, states and local governments do not impose their consumption taxes. The Goods and Services Tax (GST) system comprises central and state components, with income divided between the state and central governments. This creates a uniform and unified consumption tax framework throughout the nation.

Yes, in India, there is a consumption tax, namely the Goods and Services Tax (GST). Indirectly, it is a tax that is put on all things and services at every step of the way they are made and sold. GST is levied at the moment of final consumption since it is a destination-based tax. 

Since Goods and Services Tax (GST) in India is collected at the moment of consumption instead of production, it is referred to as a consumption-based tax. GST is different from older tax systems that were often origin-based, meaning that taxes were put on things or services where they were made. It is a consumption tax since it is related to the ultimate consumption of goods and services and is imposed at every point in the supply chain, where the end-user pays it.