What is indirect tax?
Indirect taxes are those which are payable by the person who is the ultimate consumer of the goods or services. Indirect taxes are levied on the basis of consumption or use, rather than being paid in cash. They are levied by the central government. Additionally, the rules related to indirect taxes are created either directly by the central government or by a constitutional body created by the government. For instance, GST is the main indirect tax and the GST council creates all rules pertaining to it from the conditions for GST late fee waiver to the rules for GST registration, etc.
The concept of indirect taxes is to make the tax system transparent and fair for everyone. The idea is to apply a single tax rate on every product or service in the country. This is done through an indirect tax system. An indirect tax is one that does not directly affect the final consumer of goods or services but affects suppliers, transporters, and other intermediaries who sell products and services to final consumers (or consumers’ agents). An indirect tax is a tax that is imposed on the value added in production and not on the finished product. Many countries have implemented indirect taxes as a means of reducing inequality and promoting efficiency. The goal is to increase the cost of production and reduce the ability of businesses to avoid them. Indirect taxes are sometimes called “regressive” because they tend to fall more harshly on those who can afford it least: individuals with low incomes, small businesses with high labor costs, or large corporations with few sales.
Types of indirect taxes
1. Service tax
Service tax is an indirect tax on services, which includes all types of services with the exception of banking and insurance services. It is charged on all services except those provided by the government, central or state banks, and insurance companies. Service tax is a type of indirect tax where service providers are taxed on the basis of their net service income.
2. Excise duty
This tax is imposed on goods sold in India and is collected by the Central Excise department of the finance ministry to fund its activities. The rate of excise duty varies from one state to another and depends on the type of goods being sold and how they are manufactured or produced. It is levied on goods at different rates depending upon their classification and value in terms of rupees or dollars or any other currency unit. There are three types of excise duty – Central Excise Duty, State Excise Duty, and Import Duty.
3. Value Added Tax (VAT)
VAT is a tax on the supply of goods and services, levied by a centralised tax authority on sellers of goods and services in the country. The rate at which the tax is levied is decided by the government and it varies from state to state depending upon their needs and requirements. The value-added tax or VAT is a consumption tax levied after all costs have been added to the price paid by the consumer. VAT is applied to goods and services at each stage of production, distribution, or sale. The revenues collected from VAT are commonly used to reduce income taxes levied on businesses and consumers.
4. Custom duty
Custom duty is an indirect tax levied on imported goods. It is imposed to recover cost of production, storage, insurance and other costs incurred in bringing the goods into the country. These are generally intended to protect local industry from foreign competition in order for the economy to develop further and for domestic capital to enter into these industries.
The GST is a form of indirect tax that is levied on the supply of goods and services. Goods and services are taxed at differing rates depending on their nature, thus different types of goods and services are taxed at different rates. Goods that are exempt from the GST include alcohol, petrol, electricity, etc. The introduction of GST is considered as one of the biggest tax reforms in India. One of the main GST advantages is that it led to the unification of many different taxes and simplified the process for businesses.