What is indirect tax?

Indirect taxes are charges levied on manufacturers and producers by the government of a country but are ultimately collected from the consumers for the purchase of their goods or services. Indirect taxation is levied on the expenses incurred by the taxpayer, not on their income.

How are indirect taxes collected?

Taxes are borne by the consumer at the time of purchase of the goods or service. The manufacturer or service provider collects the indirect tax on behalf of the consumer and transmits it to the government with the tax return.

Types of Indirect taxes

In India, indirect taxes are collected in a variety of ways. Take a look at the indirect taxes listed below.

Service Tax
Services taxes are levied by the central government on the service provider for the services delivered by them. Despite the fact that the tax is paid by service providers, It can be reimbursed from the customers who purchased or used the taxable services. Individual service providers are billed on a cash basis, whereas businesses are billed on an accrual basis.

Excise Duty
Excise duty refers to the taxes levied on the manufacture of goods for their production, licensing, and sale within the domestic country levied at the time of removal of goods. It is mandatory to pay duty on all goods manufactured unless exempted. Excise duty is also known as the Central Value Added Tax (CENVAT)

Customs Duty
Customs duty is levied on goods transported across boundaries of India, it is levied on both import and export of goods. The tax levied on the import of goods is called an import duty and the tax levied on the export of goods is called an export duty. The government imposes customs duty to regulate the movement of goods, restrict transaction of prohibited goods, to protect the country's economy, environment, and other resources from being exploited.

Sales Tax
Sales tax is a consumption tax, imposed on the sale of goods within India. A percentage of the value of the merchandise is generally charged at the time of purchase or exchange for certain taxable products. Sales taxes are collected in various forms such as retail sales tax, use tax, wholesale tax, manufacturers’ sales tax, and value-added tax.

Entertainment Tax
The government imposes entertainment tax on entertainment activities, such as movies, exhibits, trade fairs, arcades, celebrity stage performances, Teatro or stage play, video games, events relating to sports, amusement parks, and other large-scale commercial displays. In India, the authorities in charge of collecting entertainment tax from clients are the state governments. Certain aspects of the entertainment tax provisions vary by state because it is administered by the state governments.

Securities Transaction Tax
Securities transaction tax commonly known as (STT) refers to taxes levied on the acquisition or sale of shares, bonds, debentures, equity-oriented mutual funds (MFs), and other exchangeable securities listed on the National stock exchange of India. It is collected by the transaction's intermediary, such as the broker. As it is imposed on the broker rather than the investor/trader directly. The broker, in turn, collects it from its clients and deposits it with the government.

Contemporarily, Since the implementation of GST in India, indirect taxes have evolved into the single goods and services tax, reducing the time and hassle associated with compliance.

Goods and Services Tax (GST)

In 2017, the Indian government enacted the Goods and Services Tax (GST) Act. To consolidate numerous indirect taxes schemes into a single taxation system. GST is levied on the delivery of products and services from the producer to the customer, effectively replacing various indirect taxes such as service tax, entertainment tax, excise duty, and customs duty.

GST is furthermore categorized based on states and union territories,

  • State goods and services tax (SGST)
  • Central goods and services tax (CGST)
  • Integrated goods and services tax (IGST)
  • Union territory goods and services tax (UTGST)

Effects of GST on Indian economy

  • GST has simplified the taxation system of the country by unifying multiple indirect tax methodologies into one globally acceptable tax collection system, reducing compliance of tax and cost to a great extent.
  • GST has empowered many small businesses by reducing tax burdens and simplifying them. For firms with a turnover of more than Rs. 20 lakhs in case of supplier of services and Rs. 40 lakhs in case of supplier of goods, required to register under GST. Small businesses can register for a composition scheme, if they have businesses with an annual turnover of not exceeding Rs. 1.5 crores. Prior to now, Indian logistics companies had several warehouses throughout different states in order to avoid CST and state entry taxes. Due to the increase in buffer stock requirements and storage costs, they incurred significant expenditures. However, with the implementation of GST, the restrictions on interstate travel have been considerably removed and paved way for a better flow of goods across PAN India.
  • There will be more transparency in the system because customers will be able to determine exactly what taxes they are being charged.
  • Goods and services taxation provides tax credits for tax payments made by producers. Producers will be more likely to pick up raw materials from different sellers and more vendors will come under taxation jurisdiction by this measure.
  • Customs tariffs on exports have been abolished as a result of GST. Because of decreased transaction costs, the country's competitiveness in global markets will improve.

Disadvantages of GST implementation

  • The registration, maintenance of papers, invoicing, and filing of returns is a time-consuming procedure. As a result, several businesses outsource the GST filing procedure, incurring additional compliance costs.
  • In contrast, the late filing penalty is Rs. 50 (Rs. 20/day in case of NIL Return) for every day the failure continues, up to a maximum of 0.25% of the firm's annual turnover. The penalty imposable on non-GST compliance firms might affect small businesses drastically.
  • The government has made the GST registration and filing of returns online. While some urban and rural companies are progressively speeding their digital solutions, small businesses are unfamiliar with changing and advanced technology and solutions. Many firms may find it difficult to implement the GST system and such technological advancement will incur unnecessary operational costs.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.