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Indirect Tax - Definition & Advantages of Indirect Tax | What is Indirect Tax?

Indirect tax refers to the taxes imposed by the government on goods and services. Unlike direct taxes, which are deducted from income, indirect taxes are levied at the time of purchase. Examples of indirect taxes are service tax, customs duty, Goods and Services Tax (GST), and entertainment tax. It is important to note that the ultimate liability to pay the tax lies with the consumer.


What is Indirect Tax?

Indirect tax is added to the value of goods and services by the supplier. The supplier collects tax and pays it to the government. The tax is ultimately passed on to the end consumer. Consumers bear this tax on their purchases. For instance, GST, and excise duty on fuel and alcohol, are examples of indirect tax.

For example, let's consider a scenario where you go for lunch at a hotel. When you receive the bill, you notice the inclusion of GST (an indirect tax). Suppose the bill amounts to Rs. 3000, and the GST rate is 5%. Therefore, you would need to pay Rs. 3150 (3000 + 150), with Rs. 150 being the indirect tax passed on to you by the seller.


Types of Indirect Taxes

With the implementation of the Goods and Services Tax (GST) on July 1, 2017, many taxes were subsumed under this unified tax structure. Here are some types of indirect taxes:

  1. Service Tax: Levied on services provided by service providers, with the tax charged from the recipients of those services.

  2. Excise Duty: Imposed on goods produced or manufactured by companies in India, with the companies paying the tax and subsequently passing it on to their customers.

  3. Value Added Tax (VAT): Levied on movable products directly sold to consumers, including Central Sales Tax. The revenue from VAT goes to the account of the respective State Government.

  4. Customs Duty: Tax charged on goods imported to India.

  5. Stamp Duty: Applicable during the transfer of immovable property within the states of India. The rate is set by the state government where the property is located. It is also levied on legal documents.

  6. Entertainment Tax: Imposed by state governments on entertainment-related services or products.

  7. Securities Transaction Tax: Levied on trading securities on the Indian Stock Exchange.


Advantages of Indirect Tax

Indirect tax offers several advantages:

  1. Convenience: Indirect tax is conveniently levied at the time of purchase, reducing the burden on the taxpayer. Additionally, it requires less time and effort to collect compared to direct taxes.

  2. Ease of Collection: Indirect taxes are relatively easier to collect than direct taxes, as they are integrated into the price of goods and services.

  3. Equitable Contributions: Indirect tax ensures equitable contributions, with luxury goods subject to higher taxes and necessities, such as food items, attracting lower taxes.



Indirect tax plays a crucial role in the growth of the economy. While it is subject to occasional changes by the government, it provides a convenient and equitable means of revenue collection for government. By understanding the implications and advantages of indirect tax, individuals can better comprehend its impact on their day-to-day purchases and the overall economy.