Facts about Indirect Taxes

Apart from income tax which is a direct tax, the government also levies indirect taxes on expenditures and consumption of various goods and services. This category of tax is known as an indirect tax. 

Here are some key facts you should know:

Indirect taxes are levied on the consumption of goods and services. Payment of such taxes does not have any connection with the income or the paying ability of the taxpayer. The person discharging their tax liability to the government is the seller or manufacturer, whereas the person who pays the tax is the end consumer. 

 Both individuals and body corporates are liable to pay indirect taxes. Like direct taxes, indirect taxes also serve as a source of revenue for the government. 

The government collects indirect taxes for fiscal revenue. Since such taxes are not pegged to income, everyone is liable to pay them, whether they are rich or poor.

Before the introduction of the Goods and Services Tax, there were different types of indirect taxes levied. These included:

  • Service tax:  The tax charged on the services availed by a customer. For instance, service tax is payable when a person books a room in a hotel.
  • Excise duty: Manufacturing of various goods attracts excise duty. A car manufacturer has to pay excise duty on various parts required for building the car.
  • Value Added Tax (VAT): Tax payable on any value addition in the price when the goods are sold. 
  • Custom duty: Any goods imported to India attract customs duty.
  • Stamp duty: Tax paid on certain legal documents and transactions is known as stamp duty.  
  • Entertainment tax: Any transaction related to entertainment attracts entertainment tax. Examples include stage shows, movie tickets, exhibitions, and sports-related activities.

In 2017, the government introduced Goods and Services Tax which brought under its purview 17 indirect taxes, including sales tax, entertainment tax, octroi tax, value added tax, purchase tax, and luxury tax. A key advantage of the introduction of GST has been the elimination of cascading effect. Under the earlier regime of different tax heads, buyers had to pay taxes for every value addition.  This led them to pay tax on tax, a feature that GST eliminates.

The key features of indirect taxes include:

  • The tax liability is transferable. At first, the liability is on retailers and service providers, and then it is passed on to the customers from whom they collect it.  Therefore, the end consumer is the ultimate taxpayer.
  • Indirect taxes encourage savings on part of the taxpayer since the tax payment is not linked to annual income but expenditure patterns.
  • It is difficult to evade the payment of such taxes as the payment happens automatically at the time of purchase.
  • The manufacturer and seller collect the tax payment from the end consumer.
  • The rate of Indirect taxes is determined based on the country’s economic condition. The government can determine the prevailing rate and the goods and services on which such tax shall be levied. 

The key advantages of indirect taxes are:

  • The collection of indirect taxes is far more convenient and time-saving when compared to direct taxes. The tax liability is transferable from one person to another, and the end user is the ultimate taxpayer. 
  • The payment feels less of a burden to the taxpayers since nothing has to be paid from their salaries. The tax is recovered through the price of goods or services at the point of purchase.
  • Indirect taxes on luxurious goods and services are higher compared to basic and essential commodities. Certain items are also exempt from the levy of indirect taxes.
  • The tax is included as part of the purchase price. Whenever you purchase a good or service, you pay a tax.