Tax is a mandatory liability for every citizen of the country. There are two types of tax in India i.e. direct and indirect. Taxation in India is rooted from the period of Manu Smriti and Arthasastra.Present Indian tax system is based on this ancient tax system which was based on the theory of maximum social welfare.
Indirect tax is a type of tax collected by the government from an intermediary such as manufacturer or retailer. The eventual burden of the tax falls on to consumers who buy goods and services from the intermediary, as the intermediary applies indirect taxes on the product in the form of Value Added Tax (VAT), service tax, sales tax etc.
Indirect taxes are called so because they are collected indirectly from consumers by the government through intermediaries, who are the first payers of the tax to the government. These taxes are different from direct taxes such as income tax which is collected directly from taxpayers. Indirect taxes include taxes such as Sales Tax, service, tax, VAT etc. whereas income tax, wealth tax, corporation tax etc. fall under the ambit of direct taxes.
Unlike direct taxes, indirect taxes are levied on goods and services rather than individuals. Individuals pay the taxes indirectly in the form of higher prices on their purchases. A retailer selling a product to you has already levied indirect taxes on the product, which is then passed on to the relevant tax-collection authorities.
Indirect Tax in India
There are a number of indirect taxes applied by the government. Taxes are levied on import, manufacture, sale and even purchases of goods and services. These laws aren’t also well-defined in terms of Acts from the government; rather orders, circulars and notifications are given out by relevant government bodies to this end. As such, it can be cumbersome trying to understand every feature of indirect taxes in India.
Advantages of Indirect Tax
Indirect Tax comes with a number of advantages. Some of these are –
Indirect taxes are so called because they are paid for directly by the taxpayer to the government but through the goods and services that they consume. Due to the nature of this tax, consumers do not feel as deep a pinch in their pocket as they would if they paid this amount all at once to the government. Indirect taxes are paid in small amounts and only when purchasing certain goods and services. Also this tax is a part of the price of the product and is not separate, hence will have to be paid when the product is being purchased.
Indirect taxes are also convenient from the point of view of the government as well as they can collect the said tax at the factory or port directly from the traders or manufacturers.
Hard to evade
Most individuals try to evade paying taxes and usually through illegal methods. However, through the concept of indirect taxes, evasion becomes very hard. This is because indirect tax is paid by the customer not to the government to the seller of the product or service that they are purchasing and these costs are a part of the actual price of the product. Hence, they have no way of evading this tax.
Coverage and Elasticity
Unlike direct taxes, a large number of services and products come with indirect taxes hence individuals do not have a choice but to pay this tax. If not, they will have to forgo the product or service they wanted.
Whenever the government believes that its revenue needs to increase, taxes can be increased wherein indirect taxes provide a lot of revenue to the government.
Universality and Influence
Indirect taxes are paid by everyone regardless of their class or economic status depending on the type of product and service procured.
The government can allocate resources better and understand the spending habits of individuals by imposing taxes on specific sectors or commodities such as luxury goods and other niche services.
The money collected through indirect taxes can be used for positive purpose such as social welfare and infrastructure. Indirect taxes are also flexible.
Difference between Direct Tax and Indirect Tax
Direct tax is referred to the type of tax that is levied on an individual’s wealth and income and is paid to the government directly. Indirect tax is levied on an individual who consumes products and services and is paid indirectly to the government as the price of the particular product or service comprises of the tax amount as well.
- Direct Tax is progressive in nature whereas Indirect tax is regressive
- Examples of Direct Tax include Wealth Tax, Property Tax, Income Tax, Import and Export Duties and Corporate Tax.
- Example of Indirect Tax includes VAT or Value Added Tax, Service Tax, Central Sales tax, Custom Duty, Excise Duty, Security Transaction Tax and so on.
- Tax evasion is possible with Direct Tax but is not the case with Indirect Tax.
- Direct Tax helps to reduce inflation whereas Indirect tax promotes inflation.
- Direct Tax is collected from and imposed on assessees such as Individuals, Hindu Undivided Family, Firm, Company and so on.
- Indirect Tax is collected from those consumers of products and services but is deposited and paid by the assessee.
- Burden of Direct Tax cannot be shifted but can be shifted in case of Indirect tax.
Payment of Indirect Tax
Indirect tax is paid by the customer indirectly to the government, as the name suggests when they pay for a particular product or service. The amount that is paid for the particular goods/product or service is inclusive of the tax amount and is therefore a more convenient method of paying this particular tax.
Indirect taxes are streamlined following the introduction of the uniform Goods and Services Tax (GST) on first July 2017.
Features of Indirect Taxes:
- Levied on goods and services sold by an intermediary to final consumers. Consumers than pay the tax in the form of higher price of items.
- Broadly divided into categories such as sale of goods, imported/exported goods, offering of services and manufacture of goods.
- Indirect taxes are levied on clearance of goods and services from the origin, instead of actual sale of the products to the customers. What this means is that the intermediary will pay excise duties irrespective of whether they could sell the good or service to consumers.
- Indirect taxes fall under both the central and state governments according to specific type of indirect tax. For instance, VAT is levied by the state governments whereas CST is levied by the central government.
Types of Indirect Taxes:
Indirect taxes are a broad category under which different kinds of indirect taxes fall. There are 4 basic sub-categories with further sub-divisions according to goods and services.
Examples of Indirect Taxes:
- Service tax
- Excise duties
Tax on Services
This type of indirect tax is levied by the service tax provider and paid by the recipient of the services. However, in some cases the liability for the tax is divided between the recipient as well as the provider of service.
There is also a provision for abatement of service tax if the final price is a mixture of services as well as material, such as restaurant bills. In general, restaurants levy service tax on 40% of the bill amount as 60% of the amount is considered to be cost of materials. Service taxes fall under the ambit of the central government.
Service Tax has been subsumed in GST with effect from 1st July 2017.
Tax on Manufactured Goods
The central government collects excise duties on manufacture of goods subject to clearance of the products from warehouse or factory. As such, this tax can be said to apply on clearance of goods from storage rather than being applied on the sale of the manufactured goods. Excise duties are further divided into 4 categories, of which basic excise duty is levied for the most part while the others are levied only in special cases.
1.Basic excise duty: This is the most common type of excise duty which is levied on goods manufacturing and falls under the Central Excise Act, 1944. This tax is exempted in special cases such as manufacture of salt or export of manufactured goods of less than Rs.1.5 crores overall value per year, among others. The excise duty rates vary from product to product.
2.Special excise duty: Levied on a small list of items and falls under Central Excise Tariff Act, 1985.
3.Textile duties: As the name suggests, only applicable on specific textile goods and falls under the Additional Duties of Excise Act, 1978.
4.Goods of special importance: This is levied as per the Additional Duties of Excise Act, 1957 on specific goods mentioned under the article.
5.National calamity contingent duty (NCCD): This is levied on goods like cigarettes, chewing tobacco, pan masala, mobile phones and crude oil, and is applicable U/S 135 of the Finance Act, 2001.
All these taxes have now been subsumed in GST.
Tax on Imported Goods
Imported goods are charged taxes as per excise duties. This is further divides in specific duties and ad-valorem duties.
1.Specific duties: These are applicable on all individual components of a good imported into the country, for instance a cloth imported from abroad will be charged excise per meter of the material, or laptops imported will be charged excise on each unit of the order.
2.Ad-valorem duties: These are levied on the overall value of goods exported or imported. For instance, 10% of the overall bill of imported clothes or 10% of the overall order value for laptops.
3.Anti-dumping duties: These are levied so as to shield the domestic market against foreign goods dumped at very low or below cost prices. For instance, plastic products imported from China, which can be cheaper than the domestic market rates.
4.Countervailing Duty of Customs: This is another type of excise duty used to help Indian produced goods sell on a level playing field. This is additional to the ad-valorem or specific duties already applied on goods.
Tax on Goods Sold
Finally, goods sold directly to consumers are levied Value Added Taxes (( VAT)Which is collected by the respective state government on intra-state sales, as well as Central Sales Tax, which is collected by the central government on inter-state sales. Every state levies its own VAT figure, which usually lies between 5% and 12.5%. There may be some exceptions to this tax as per state laws.
Apart from all the types of indirect taxes discussed above, Octroi or Local Body Taxes (LBT) are also applicable as per local rules and regulations.
These taxes are now subsumed in GST with effect from 1st July 2017.