Indirect tax plays a significant role in the fiscal policies of governments worldwide, including India. It is a form of taxation imposed by the government on goods and services rendered, rather than directly on the taxpayer’s income, revenue, or profit. Indirect taxes are levied at various stages of production, distribution, and consumption, and they can be passed on from one individual or entity to another. In India, indirect taxes are a vital source of revenue for the government and play a crucial role in financing public expenditure, promoting economic growth, and achieving socio-economic objectives.
Different Types Of Indirect Taxes In India
In India, the taxation system encompasses various types of indirect taxes that are categorised based on their nature and application. These indirect taxes play a crucial role in generating revenue for the government and shaping the country’s economic landscape. Here are some of the key indirect taxes in India:
GST (Goods and Services Tax):
GST is a comprehensive consumption tax imposed on the supply of goods and services. It replaced multiple indirect taxes and was implemented in July 2017. GST is a multi-stage, destination-based tax, which means it is levied at each stage of the production and distribution process. It applies to the final consumer, and businesses can claim input tax credits for the GST paid on their inputs. The tax is collected at the point of consumption, making it a significant reform in India’s indirect tax system.
It is a tax levied on the production, licensing, and sale of goods. However, with the introduction of GST, many types of excise duty have been subsumed. Currently, excise duty is primarily applicable to petroleum and liquor products. Alcohol, being exempted from GST, is still subject to excise duty imposed by the respective states.
It is a tax imposed on goods transported across international borders. It applies to both imports and exports and is regulated by the government to safeguard domestic industries and regulate the movement of goods. Customs duty rates vary depending on the nature of the goods and their country of origin or destination.
It is levied by state governments on various financial transactions related to entertainment activities. This tax applies to movie shows, amusement parks, video games, arcades, and sports activities. The rates and regulations may vary from state to state.
It is a tax imposed on the transfer of immovable property within a state. It is also applicable to various legal documents, such as agreements, leases, and share transfers. The rate of stamp duty varies across states and is usually a percentage of the transaction value or the property’s market value.
STT (Securities Transaction Tax):
Securities Transaction Tax (STT) is a tax applied to securities transactions on Indian stock exchanges. It is levied on the value of securities traded, excluding commodities and currencies. STT is intended to collect revenue and discourage speculative and short-term trading. The rate of STT varies depending on the type of transaction, with delivery-based equity trading attracting a 0.1% tax.
These are some of the major indirect taxes in India, each serving a specific purpose in the overall tax structure of the country. The introduction of GST has been a significant milestone in simplifying and harmonising the indirect tax system, streamlining taxation processes, and fostering economic growth.
Features of Indirect Tax
The indirect tax system encompasses several features. Here are some notable ones:
Indirect taxes in India are primarily consumption-based taxes. They are levied on the supply of goods and services at each stage of production and distribution, ultimately impacting the final consumer. This approach ensures that taxes are collected when goods or services are consumed, aligning the tax burden with the level of consumption.
Indirect taxes contribute significantly to the government’s revenue collection in India. They form a crucial source of funds for financing public expenditure, infrastructure development, welfare programs, and other government initiatives. The revenue generated through indirect taxes supports the functioning of the government and helps meet the fiscal requirements of the country.
Indirect taxes in India are subject to the risk of tax evasion. Since these taxes are typically levied at various stages of production, distribution, and consumption, businesses or individuals can evade or underreport their tax liabilities. Tax evasion can occur through activities such as under-declaration of sales, manipulation of invoices, or misrepresentation of goods and services. To tackle tax evasion, the government implements measures like tax audits, inspections, and technological solutions to ensure compliance and revenue collection.
Shifting of tax liability:
Another characteristic of indirect taxes in India is their ability to be shifted from the initial taxpayer to the final consumer. Businesses that bear the burden of indirect taxes on their inputs can pass on these costs to the consumers by including the tax amount in the prices of goods and services. This shifting of the tax burden can occur through price adjustments, where businesses increase their selling prices to compensate for the taxes paid. As a result, the ultimate burden of the tax falls on the end consumer, who pays a higher price for the goods or services.
Advantages Of Indirect Tax
Indirect taxes in India offer several advantages and these benefits play a crucial role in maintaining equity, ease of payment and collection, and promoting responsible consumption. Here are some key benefits of indirect tax:
Equity and progressive taxation:
Indirect taxes contribute to maintaining equity in the tax system. They are proportionate to the cost of goods and services, which means individuals who can afford higher-priced items end up paying higher taxes. This progressive nature of indirect taxes helps to distribute the tax burden more fairly among different income groups.
Ease of payment and collection:
Indirect taxes are relatively easier to pay and collect compared to direct taxes. They are applied at the point of consumption or purchase, such as the Goods and Services Tax (GST) during the transaction. This eliminates the need for complex form-filling and filing processes for taxpayers. The simplicity and convenience of indirect tax contribute to efficient tax collection, reducing administrative burdens for both taxpayers and the government.
Reduced tax evasion:
Indirect taxes, especially those with a multistage feature like GST, are designed to minimise tax evasion. The involvement of multiple stages in the supply chain and the requirement for tax invoices and input tax credits help in tracking transactions and reducing opportunities for tax evasion. This strengthens the overall tax compliance framework and ensures a more robust revenue collection system.
Promotion of responsible consumption:
Indirect taxes play a crucial role in discouraging the consumption of harmful products such as alcohol and tobacco. These products are subject to higher tax rates, making them more expensive. The increased prices act as a deterrent and can potentially reduce their consumption. By taxing products that are detrimental to health or have negative social impacts, indirect taxes contribute to public health objectives and societal well-being.
Revenue generation and fiscal stability:
Indirect taxes are an essential source of revenue for the government. They contribute significantly to the overall tax revenue, allowing the government to finance public expenditure, infrastructure development, and social welfare programs. The broad-based nature of indirect taxes ensures a stable revenue stream, reducing the reliance on a limited number of taxpayers and minimising revenue fluctuations.
What is the Goods and Services Tax (GST) in India?
The Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. It was implemented in July 2017 and replaced various indirect taxes such as excise duty, service tax, VAT, and others. GST is a destination-based tax that is applied at each stage of the production and distribution chain, with input tax credits available to businesses for the taxes paid on their inputs.
How is customs duty calculated in India?
Customs duty in India is calculated based on the customs value of imported goods. The customs value includes the cost of the goods, transportation, insurance, and any applicable landing charges.
What is the purpose of levying an entertainment tax?
Entertainment tax is levied by state governments in India on various entertainment activities, such as movie shows, amusement parks, video games, and sports activities. The purpose of levying an entertainment tax is to generate revenue for the state government and regulate these activities.
What is the Securities Transaction Tax (STT)?
The Securities Transaction Tax (STT) is a tax imposed on the trading of securities on recognised Indian stock exchanges. It applies to transactions involving equity shares, equity derivatives, units of equity-oriented mutual funds, and options and futures contracts in the stock market.