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What Are Indirect Taxes In India?

What Are Indirect Taxes In India?

Indirect Taxes in India
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The taxes collected by the Indian Government can be categorized into Direct and Indirect Taxes. Direct Taxes are broadly the taxes which are levied on the Income, revenue or profits earned by an individual or firm, for instance, Income tax, Surcharge, and Gift Tax. These are implemented and governed by the Central Board of Direct Taxes (CBDT).

Indirect tax is the tax imposed by the government on a taxpayer for goods and services bought. Indirect tax is not levied on the income of the taxpayer and can be passed on from one individual to another. Examples of indirect taxes include sales tax, entertainment tax, excise duty, etc. These are levied on the sellers of goods or the providers of service, where it is passed on to the end consumer in the form of service tax, excise duty, entertainment tax, custom duty etc.

What is Indirect Tax?

Meaning of indirect tax reflects a type of taxation that applies to the sale of goods and services. Thus, these differ from the direct taxes which are charged on the income you earn.

In indirect taxes, the person on which the burden falls and the person who pays the tax are different. The sellers are required to pay these taxes to the government (e.g., manufacturers, retailers,). But since they sell goods to the consumers, they pass the burden of paying the tax to you.

Thus, when you purchase goods, you pay the amount inclusive of tax to the seller. The seller then pays the tax to the government.

For Example:

Suppose you go out for dinner. In the bill, you may see your total amount plus the GST (Indirect tax). Let’s say the bill was Rs 2000 and the GST rate is 5%. Then you will have to pay 2000+100=2100. This Rs 100 is the indirect tax that is passed on to you by the service provider.

What are Different Types of Indirect Taxes?

Unlike direct taxes, indirect taxes are levied on materialistic goods. Indirect taxes are basically passed on to another individual or entity. Indirect tax is generally imposed on suppliers or manufacturers who pass it on to the consumers using their goods or services. Listed below are some popular examples of indirect taxes, explained in brief:

1. Service Tax

Applicable on the services provided by a company and paid by the recipient of their services, collected by and deposited with the central government.

2. Value Added Tax

Popularly known as VAT, it is levied on the sale of movable goods or goods sold directly to the customers. It is exacted by the respective state governments on intra-state sales.

3. Excise Duty

It is levied on the goods produced or manufactured in India, paid by the manufacturers of different goods. It is often recovered from the customers.

4. Custom Duty

It is applicable on the goods which are imported into India from other countries. In some cases, it is also levied on the goods being transported out of India.

5. Entertainment Tax

Levied on all financial transactions related to entertainment such as movie shows, amusement parks, video games, arcades, and sports activities, charged by the respective state governments.

6. Stamp Duty

Levied on the transfer of immovable property located within the state, charged by the State Government and may vary in rates. It is also applicable on all legal documents.

7. Securities Transaction Tax

This tax is levied at the time of trade of securities through Indian Stock Exchange.

Features of Indirect Tax

In India, there are many different Indirect Taxes which are applicable on different kinds of goods, imports, manufacturing and services. Indirect Tax has some defining characteristics. These are as follows:

1. Charged on Commodities

Indirect taxes are charged on material things such as goods and services. These are not levied on the income you earn.

2. Shifts the Burden of Tax

Sellers of the goods are required to pay the indirect taxes to the government. But they transfer the liability to their consumers.

3. Tax Evasion

Indirect taxes are already included in the price of the commodities. Thus, when you buy goods or a service, you automatically pay your share of the tax. This can thus help to reduce tax evasion.

4. Paid by the Consumer

The liability of indirect tax is passed on by the sellers to the consumers. This tax is thus charged at the point of sales and is paid by the customers.

5. Revenue for Government

Since this type of tax cannot be easily evaded and is applicable on most of the commodities, it serves as a major revenue source for the govt. Its contribution is higher than the direct tax.

6. Consumer is not Directly Affected

The main cause of direct tax evasion is that it is charged on the income directly. Indirect taxes face no such problem as they are not directly affected.

Five Benefits of Indirect Tax

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

1. Helps Maintain Equity

Indirect taxes are very equitable. The tax depends on the cost of the goods. The higher the price of the goods the more can be the indirect taxes involved. Thus, the people who can purchase high-priced goods pay higher indirect taxes.

2. Easy to Pay/Collect

Indirect taxes are easy to pay for both taxpayers and the authorities. For the tax-payers: While making payment of direct taxes, you need to file an income tax return statement, though it can be done by yourself, it generally requires a Chartered Accountant. But in case of Indirect Taxes, there is no such need as it is paid when you purchase a good.

For Authorities: It is easier to collect for the authorities. This is because the taxes are collected in the shop, factories themselves.

3. Convenient

While calculating the income, there are 5 heads to go through. It should include all the earnings you have made; this is the reason why people evade income tax. But indirect taxes provide you convenience as these are collected on point of sales, i.e., when you purchase.

4. Limit Harmful Consumption

Commodities that are harmful to our health such as tobacco, wine, etc include the highest indirect tax. This makes them highly expensive. The high cost of goods helps limit their consumption.

5. Has a Broader Scope

Indirect taxes are levied on a range of products and services. It is not the case that some brands incur taxes and some don’t. Also, unlike direct taxes, where it is a one-time payment that is high, indirect taxes are paid as and when you purchase and are much smaller in amount.

Four Disadvantages of Indirect Tax

Despite having many advantages, Indirect taxes have some limitations also. It has the following disadvantages of Indirect Taxes.

1. Can be Regressive

Regression is a state which pushes a country backward. Indirect taxes are regressive as they are the same for the commodities. Thus, it doesn’t matter you are rich or poor, you pay the same tax. Thus, if you have a lower income, a larger proportion will go towards indirect tax, making your income even lesser.

2. Can be Inflationary

If the indirect taxes are increased by the government, the sellers will add higher charges to their products, this will increase the prices of goods. Thus, it can lead to inflation.

3. Discourage Industries

Indirect taxes when are levied on the raw materials, will make them costly, this can discourage the industry owners to make the product. This can also affect the competitiveness of the market.

4. Unpredictable Revenue

The indirect tax collection is not fixed. It depends on the purchase of goods and services. Thus the government cannot be certain of how much revenue will come through the indirect tax.

Who is Eligible to Pay Indirect Tax?

The inception of Goods & Services Tax (GST) has consumed almost all the indirect taxes prevailing in India before this. Let us take a look at the parties who are eligible to pay GST.

1. Goods & Services Tax (GST)

It stands for Goods and Services Tax. It came into action on 1st July 2017 and has been used since. In India, there is a slab system under which several rates of GST are there. Each commodity can be put in a specific slab. GST is levied on the supply of the goods.

If you buy a product, then you have to pay GST based on the slab rate the product falls in. If you run a business and your turnover exceeds Rs 20 lakhs per year, then also you are eligible to pay GST.

Though GST has replaced all the previous taxes, there are still some taxes prevailing. There are some taxes that are still active. Each of these taxes is required to be paid by different parties.

2. Customs Duty Tax

If you are involved in international trading then you are eligible to pay customs duty. This is a tax that is charged on the goods that need to be transported outside of your country.

3. Excise Duty

Though GST has replaced this tax, but there are still some commodities that are charged with excise duty. These commodities are Liquor, petroleum, fuel, etc. Excise is levied at the time when the goods are removed from the warehouse.

How GST is an Indirect Tax?

As there are many different types of indirect taxes levied on the expense incurred by a buyer, the government has made an effort to simplify the taxing process and merged all these indirect taxes into a common indirect tax called the Goods and Service Tax (GST).

Merging of all these taxes has reduced the hassles of compliances associated with all these indirect taxes, improving tax governance in the country. Introduced in 2017, the GST has eliminated the cascading effect of multiple taxes.

GST and the Insurance Industry

Goods and Services Tax (GST) apply to almost every sector and services including Life Insurance Policies unless otherwise exempted by the GST Law. As per the latest rates, 18% GST applies to the life insurance premiums. While the rate may seem high enough to disrupt the returns on investment policies, its overall effect is nominal.

GST in insurance policies applies only on the protection premium or a part of it. Summary of GST impact on different type of insurance plan premium are as follows:

Insurance Plan GST on Part of Premium
Term Insurance Plans 100%
Health Insurance Plans 100%
Guaranteed Savings Plans 1st year 25% & the rest 12.5%
Single-Premium Pension Plans 10%
Unit Linked Insurance Plans (ULIPs) Total Premium – Investment part

So, in wealth generation plans like ULIPs and guaranteed saving schemes, GST impact is quite low. If we look at the GST’s impact on wealth generation and savings plan it doesn’t create a lot of impact on returns. Additionally, you can claim the GST paid as a tax deduction in the year of investment.

FAQs Related to Indirect Taxes

1. Is Indirect tax subject to change?

Indirect tax is a tax that is charged on goods and services. In India, Indirect tax is not fixed. The rates of Indirect taxes that are to be charged depend on some factors. These can be changed by the government according to the change in factors. These can be economic conditions, political conditions, etc.

2. If I purchase a ticket for a cricket match, will I have to pay any indirect tax?

Yes, you will be charged GST if you purchase a ticket for a cricket match. Watching a cricket match in a stadium comes under entertainment and thus will be charged to GST. Earlier there was an Entertainment tax.

3. I am traveling to India and have some food items for personal use. Will I be charged customs duty?

Customs duty is charged on goods and services that are either

A. Imported to India from abroad
B. Exported from India to any other country

Since the food items are for personal use, these will not be subject to customs duty.

4. Does a manufacturer of goods require to obtain a license from the Central Excise department for payment of Central Excise duty?

No, a license is not required for payment of Central Excise duty. But you must be registered with the Excise department. Excise duty is a tax applicable on the goods manufactured in India.

5. What is the duty-free allowance for someone of Indian Origin (British passport holder flying to India form the UK) returning to India for a short holiday?

The duty-free allowance is up to Rs 12,000 in case of Indian Origin (British passport holder flying to India form the UK) returning to India.

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