What is Indirect Tax?

5paisa Research Team Date: 25 Nov, 2022 03:06 PM IST


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Taxes are either direct or indirect. Direct taxes are applicable on income including salary, profits, or interest from a fixed deposit. But, what is the indirect tax meaning? An indirect tax applies to consumption. It is the tax on the price of goods or services the seller buys. Indirect taxes affect manufacturers or suppliers and are further paid by the final consumers. 

For example, you go out for dinner and pay INR 3,150. This means the bill was INR 3,000, and you have paid a GST of 5%. All bills are subject to revealing the GST percentage and charges. This article focuses on the indirect tax definition and what is indirect tax with examples.

Different types of indirect taxes in India

In India, various types of indirect taxes apply based on their respective categories. Here are a few indirect taxes: 

1. Goods and Service Tax (GST)

It is a consumption tax on the supply of goods and services. The GST is a comprehensive, multistage, destination-based tax considering it has subsumed almost all the indirect taxes since July 2017. 

It is imposed at every step in the production process. Furthermore, the tax applies only to the final consumer, so the producer, seller, and manufacturer can apply for a refund. It is a destination-based tax collected from the point of consumption and not a point of origin like the previous taxes it replaced. 

2. Excise Duty

It is a tax on goods for production, licensing, and sale. However, GST has subsumed many types of excise duty. Today, excise duty applies only to petroleum and liquor. As per a statutory provision, alcohol does not come under the purview of GST. Therefore, States levy taxes on alcohol according to the same practice as was prevalent before the advent of GST.

3. Custom Duty

It is the tax on goods transported across international borders. Custom duty exerts on the import and export of goods. The government usually uses this duty to safeguard domestic industries and regulate the movement of goods. 

4. Entertainment Tax 

It applies to all financial transactions related to entertainment, such as movie shows, amusement parks, video games, arcades, and sports activities. The respective state governments charge this tax.

5. Stamp Duty

It is a tax on the transfer of immovable property within the state. It is also applicable to all legal documents.

6. Securities Transaction Tax 

It applies at the time of trade of securities on the Indian stock exchanges. STT is payable on the value of securities (excluding commodities and currency) transacted through a recognized exchange. It is 0.1% for delivery-based equity trading.

Features of Indirect Tax

Indirect tax has some defining characteristics, which include:

    Charged on commodities: They are charged on commodities such as goods and services. These are not levied on the income earned.

●    Shifts the tax burden: Sellers of the goods are required to pay indirect taxes to the government. However, they transfer the liability to their consumers.

●    Tax evasion: Indirect taxes are already included in the price of commodities. Thus, when you buy a good or a service, you automatically pay your share of the tax. Hence, this can help lower the menace of tax evasion. 

●    Paid by the consumer: The indirect tax liability is passed on by the sellers to the consumers. Hence, it is charged at the point of sale and is paid for by the customer.

●    Source of government revenue: It is a major revenue source for the union and state governments. Moreover, over the years, the share of indirect tax in the total collection has steadily increased.

The Benefits of Indirect Tax

The indirect tax provides many benefits which are not available in the case of direct taxes.

●    Helps in maintaining equity

These taxes are equitable. Indirect tax is proportionate to the cost of the goods. Thus, the people who can purchase high-ticket items end up paying higher taxes.

    Easy to pay/collect

The indirect tax applies to the consumption of goods and services. For example, the GST applies during the purchase. This eradicates the cumbersome process of form filling and filing. Furthermore, evasion of indirect taxes isn't possible owing to the multistage feature.  

●    Reduce unhealthy consumption

Products harmful to your health, like alcohol and tobacco, are subject to the highest taxes. This makes them significantly more expensive, which might help limit their consumption.

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Frequently Asked Questions

Yes, it can change from time to time, depending upon the regulatory authorities. 

Yes, you may have to pay entertainment tax for the same.

No, customs duty applies to importers of goods manufactured abroad for commercial sale.