Indirect taxes are not collected based on an individual's income but based on the expense incurred by the individual. The government collects indirect tax from an intermediary such as a retailer, later passing it on to the consumer. Indirect taxes can be shifted from one person to the other.
Indirect tax increases the end product's price and is equal for everyone irrespective of their tax slab. In other words, the person who makes the sale is subject to indirect tax, which he can recoup from the buyer. In some cases, the indirect tax is specified on the invoice, and in other cases, it might not be specified on the invoice but is included in it.
Merging different types of taxes into GST
Earlier in India, there were many different types of taxes like service tax, value-added tax, and so on, which were levied on manufacturing, and custom-duty levied on import. As there are many different types of taxes, on 1st July 2017, the government merged all the indirect taxes into one, i.e., Goods And Service Tax (GST).
Types of indirect taxes
There are many different types of indirect taxes. However, all the indirect taxes were bundled into a special tax, i.e., Goods And Service Tax (GST).
- Service tax- The government levies a tax on service providers on specific service transactions, while the customers bear the cost. The Finance Act of 1994 established it as an indirect tax. In this case, the service provider pays the government tax he recovers from his customers. Also, this tax is not applicable in Jammu and Kashmir.
- Health care
- Maintenance services
- Tour Operator
- Excise duty- This type of tax is charged on purchasing goods and products within the country.
- Value-added tax (VAT) - A value-added tax (VAT) is a consumption tax imposed on a product at each point of sale where value is added. The tax is imposed when a raw materials producer sells a product to a manufacturer, the factory sells the finished product to a wholesaler, the wholesaler sells it to a retailer, and the retailer sells it to the end-user.
- Custom duty refers to the type of tax imposed on importing foreign goods. In laymen's terms, it is the tax imposed on importing and exporting a product.
- Entertainment tax- This is also referred to as "amusement tax" and is levied on any form of commercial entertainment, including movie tickets, public events, etc.
- Securities transaction tax- The securities transaction tax is a tax imposed on the value of the securities traded on a recognized stock exchange in India.
Features of Indirect Tax
The critical feature of indirect tax are:
- Payment and tax load- The tax payments are made by the manufacturers or the retailers, and this is transferred to the final consumer.
- Liability of tax- In indirect tax, the seller pays the tax to the government, not the consumer.
- Ease of collection- Indirect taxes are automatically collected during the purchase of a product; hence it's very convenient.
- Tax evasion - Indirect taxes are hard to evade since they are automatically collected during product purchases.
Advantages of Indirect Tax
- Indirect tax is the best way for the poor to contribute to the tax. This goes along the same line that every citizen of the country should support the country's growth.
- Indirect taxes are automatically collected when a transaction is done.
Indirect tax is considered one of the best ways to collect taxes as it is independent of the individual's income. Indirect tax is easy to collect since it originates from the organized sector. There are many indirect tax types, such as service tax, excise duty, value-added tax, etc. Due to the complex structure of the indirect tax system, on 1st July 2017, the government decided to combine it all into one, i.e., Goods and service tax.