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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 Taxes, on the other hand, are the taxes on the expenses incurred by an individual. Unlike direct taxes, indirect tax is not levied on the income of the taxpayer and can be passed on to other individuals or entity. 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 are the 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 good 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: 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: 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. Also applicable on all legal documents.

7. Securities Transaction Tax: Levied at the time of trade of securities through Indian Stock Exchange.

In India, there are many different Indirect Taxes which are applicable on different kinds of goods, imports, manufacturing and services.

GST: Merging of various indirect taxes

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 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.

The 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%
Add-on Benefits or Riders 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.

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