Indirect Tax in India

  • Author :
  • TATA AIG Team
  • Published on :
  • 11/12/2023

Taxes play a pivotal role in a country’s economic landscape. There are two major types of taxes that are charged to citizens - direct and indirect tax in India. Direct tax is charged on our annual income whereas indirect tax is generally paid when an assessee undergoes a transaction.

Unlike the Income tax, you do not pay these taxes directly to the government. In one or the other way, it is levied on the consumer.

Out of two significant types of taxes in India, one of them is popularly called indirect taxes. We may not be aware of it many times when it is levied on us. But being charged, we all must have a good knowledge of it.

Here in this blog, let us delve into it and learn everything about Indirect tax in India.

What is Indirect Tax?

The word Indirect tax meaning is similar to its name. These are taxes that are not directly levied on an individual. That means it is collected on goods and services we consume. It is added to its price and thus increases its cost.

According to Statista, in India around 48.5% of total tax contributions are constituted of Indirect taxes. Normally it is imposed on the manufacturer or provider of the services and then passed onto the end consumer. Now let us know its various forms.

Types of Indirect Tax of India

Here’s the list of Indirect taxes in India:

Goods and Service Tax (GST)

It is one of the most heard and popular indirect taxes introduced on 1st July 2017. This tax is levied on supply of the goods and services. Before this in common goods and services production, there were multiple taxes and the filing for it was a little complicated. With GST, all of those are subsumed under one which also removes the cascading effect of taxes.

Mainly GST has 3 major components IGST (Interstate), CGST, and SGST (Intrastate). Specific tax rates are provided for different types of goods and services under the GST Act. This is added to the cost of the product and thus increases the purchase price for the final consumer. Goods and services providers and distributors are required to file GST returns as required under the act.

Custom Duty

This tax is only levied on the import of goods into India. And sometimes on the export of goods. It is governed by the Customs Act, of 1962. Tax rates, rules and regulations, and other provisions are provided thereunder.

Stamp Duty

Stamp duty is the indirect tax levied on property transactions between two or more parties. Stamp duty taxes are paid under provisions of the Stamp Act, of 1899.

**Securities Transaction Tax **

Securities transaction tax is levied upon the buying and selling of securities in companies in India. Every time a trade happens, this tax is automatically added to the transaction value, so one does not need to pay these taxes separately.

**Value Added Tax (VAT)

Value Added Tax is a multi-stage consumption tax that is applied to the value added at each stage of production and distribution of goods and services. In India, VAT has been replaced by the Goods and Services Tax (GST) since July 2017. However, before GST, VAT was a state-level tax on the sale of goods.

Features of Indirect Tax

Here are some characteristics of indirect tax:

It is levied on goods and services you purchase for consumption.

The tax burden is shifted to customers while the seller pays the indirect tax to the government.

It is impossible to evade indirect taxation in India as tax comes attached to the products and services.

The tax rates are equal to all. Unlike income tax where higher tax rates apply to higher income groups, here for everyone the tax liability remains the same. For this reason, it is also considered under regressive tax.

Mechanism of Indirect Tax

Let us understand the mechanism with an example. Consider buying a biscuit pack for ₹50. This price includes GST, i.e. cost of manufacturing, distribution of the biscuit, and other taxes is ₹42 and GST is around ₹8.

Now this ₹8 is collected by the seller and paid to the manufacturer. The manufacturer will later file a GST return and pay taxes. In this indirect tax structure in India, a registered seller can claim the Input tax credit if he files the GST return. In the end, ₹8 is paid to the government.

Now let us know the pros and cons of Indirect Taxes.

Advantages of Indirect Tax

Universal Contribution

Indirect taxes help in democratising tax contributions. Indirect taxes are levied upon goods and services. This makes everyone purchasing these commodities pay indirect taxes unlike incase of direct taxes.

Non-Evadable Nature

Evasion of indirect taxes is not possible because this tax is already included in the purchase price. Regardless of the buyer's awareness or intentions, buying goods and services inevitably makes them pay these taxes.

Distributed Impact

These taxes are spread over an array of goods and services. This spread facilitates in reducing the financial burden on consumers as opposed to heavy taxation concentrated on a specific class of commodities.

Convenience

These taxes are not only convenient but also ease the collection of them. Generally, they are a small component of the total cost of a commodity which makes them less burdensome for consumers.

Disadvantages of Indirect Tax

Following are some demerits of Indirect tax:

Inflationary Effect

Indirect taxes can lead to higher prices of goods and services. Retailers might overcharge from the consumer in case they are uncertain about the precise amount of tax. This overestimation can happen at multiple levels and on various goods and services.

Lack of Tax Awareness

Since indirect taxes are concealed in the prices of goods and services, many consumers might be unaware of the contribution they make. This can act as a lack of awareness or transparency which can further lead to diminished sense of civic responsibility and public finances.

Regressive Impact

One of the main concerns attached to indirect taxes is their regressive nature. These taxes are applied uniformly to all, irrespective of the income group they belong to, the effect of these taxes can disproportionately impact the people of lower income groups.

To Sum Up

Indirect taxes are a way of paying taxes to the government while you purchase any goods or services from a seller. One or the other way it is indirectly levied. For strategic tax saving, it is important for one to have a detailed understanding of its provision and process.

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Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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