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Indirect taxes are imposed on goods and services at the point of sale. While the seller is legally responsible for collecting and remitting the tax to the government, the economic burden ultimately falls on the consumer who pays a higher price for the product or service.
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. I.e., the person responsible for paying the tax to the government and the one who ultimately bears the tax liability is two different people.
For example, when you buy a product, the price you pay includes the indirect tax. The retailer collects this tax and later pays it to the government. This way, the tax burden is ultimately borne by the consumer, even though it is collected by the intermediary entity.
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 from the consumer and on behalf of the consumer transmits it to the government with the tax return.
In India, indirect taxes are collected in a variety of ways. Take a look at the indirect taxes listed below.
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 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 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 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.
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 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.
In 2017, the Indian government legislated 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,
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.
Indirect taxes are imposed on goods and services rather than on an individual’s income or profits. These taxes are embedded in the cost of goods or services, and the consumer indirectly bears the burden. Conversely, direct taxes are paid directly to the government by the individual or entity liable for them, such as income tax.
Common examples of indirect taxes include:
Indirect taxes are collected by entities within the supply chain, such as manufacturers or retailers. These entities include the tax in the price of goods or services, which is then paid by the consumer at the point of purchase. The collected tax is subsequently remitted to the government by the entity that collected it.
Indirect taxes exacerbate income inequality by placing a heavier tax burden on those who can least afford it. This regressive nature undermines the principle of fair taxation and can perpetuate economic disparities.
Indirect taxes raise the price of goods and services, as the tax is incorporated into the final price the consumer pays. This can result in higher costs for consumers and may lead to a decrease in demand for certain products.
