What Are the Advantages and Disadvantages of Indirect Taxes?

An indirect tax is a tax that is not levied directly on the income of an individual. Instead, the individual has to pay this tax in addition to the actual price of the goods or services purchased from the seller or service provider. In short, indirect taxes are imposed on the expenses incurred by the taxpayer on the purchase of goods and services.

It is a tax that gets passed on; generally, it is levied on the sellers, but they pass it to the final consumers in the form of additional prices.

Service Tax: It is an indirect tax charged by a service provider from the consumers in return for the services provided by them. They collect the service tax from customers and then pay it to the Government.

Custom Duty: This indirect tax is levied on goods imported to India. In some cases, customs duty can be charged on exported goods, too.

Excise Duty: Excise duty is charged on the goods or products manufactured in India. Manufacturers pay it to the government and later on, they recover it from the customers.

Value Added Tax: Value-added tax or VAT is an indirect tax charged on the sales of movable goods or goods directly sold to customers. It is levied on all production and distribution stages of the goods where there is value addition.

Stamp Duty: It is a tax levied on the transfer of any immovable property within the state limits. Thus, it is collected by the state government in which the property is transferred. Stamp duty is also payable on all legal documents.

Securities Transaction Tax: This indirect tax is levied on the trading of securities through the Indian Stock Exchange.

Entertainment Tax: It is a tax charged by the state government on any transactions related to entertainment, for example, booking movie tickets, amusement parks, sports activities, etc.

After understanding the concept of indirect taxes and its types, let us learn about the advantages and disadvantages of indirect tax.

Merits of Indirect Taxes

Contribution From All: Indirect tax's most significant advantage is that it is collected from everyone who buys or avails products or services regardless of their income bracket. Whether a resident individual or a tourist visiting India, everyone has to pay indirect taxes for the goods and services consumed by them.

Convenient to Collect: The collection of indirect taxes is quite convenient for the government. The seller or the service provider can easily collect it directly at their store, making it time-saving and convenient. Secondly, they are nominal charges that are primarily included in the sales price of the goods or services; thus, customers pay it immediately without feeling the pinch of it.

Default Payment of Tax: Indirect taxes are often included in most of the products and services consumed by people, so they are unavoidable, and customers have to pay them.

Changes According to Government: The rates of indirect taxes on products and services are decided by the government. It means by tweaking the rates of indirect taxes the government can influence consumer behaviour towards the consumption of particular goods or services.

Digital Collection: With the rise of e-payment methods to buy products and services, the collection of indirect taxes has become easier. As of now, all the tax details are auto-filled by e-payment platforms, and customers just have to make the final decision.

Demerits of Indirect Taxes

Can Be Regressive: A significant issue with indirect taxes is that they can be regressive towards the less fortunate people of society. As indirect tax is collected the same from everyone, while the rich can pay it without hassle, the poor may find it difficult.

Uncertainty: While, on the one hand, policies regarding direct taxes are made with precision and provide clarity to individuals, indirect taxes are different. Targeting specific commodities and levying indirect taxes on them might have a negative impact on certain industries.

Lack of Awareness: As mentioned earlier, the percentage of indirect taxes on goods and services is so minimal that it becomes unnoticeable by the consumers and they pay indirect tax without even knowing. There needs to be more awareness among the public regarding this issue.

Can Cause Inflation: Indirect taxes levied on necessities and generally used commodities can lead to a rise in inflation. Not all sellers may calculate the exact tax amount while setting a selling price. Many may even charge more in order to adhere to the regulation or earn more profits.

Now that you know the merits and demerits of indirect taxes, let us have a glance at how indirect taxes are different from direct taxes.

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ndirect taxes are one of the essential sources of income for the government. As the buyers of goods and services, you must be aware of this tax and how the merits and demerits of indirect tax affect you.