This article is written by Monesh Mehndiratta, a law student at Graphic Era Hill University, Dehradun. There are two kinds of taxes that are imposed by the government on their citizens. These are direct and indirect taxes. The article deals with indirect tax, its features, and different types of taxes under the heading of indirect tax.
It has been published by Rachit Garg.
Table of Contents
Introduction
Do you pay taxes? If so, how much? When do you pay tax? Are there any deductions? Are you a tax defaulter?
These are some common questions that are faced by adult people earning money through various means. But have you ever wondered what tax is? Why do we have to pay taxes to our government when it is working for our benefit only? What kind of tax is imposed by the government? The answer to these questions lies in the article itself.
A tax is a sum or amount imposed by the government on its citizens and various companies or institutions. Generally, every government imposes two types of taxes, i.e., direct tax and indirect tax. Direct tax is the tax where the burden of paying the tax lies on the person on whom it has been imposed, whereas indirect tax is the tax where the tax is imposed on a person but paid partly or wholly by another person. The article mainly deals with indirect taxes that are paid by citizens to their government. It further discusses the position of indirect taxes after the introduction of GST in the country, which is the only indirect tax applicable to citizens now.
What is a tax
A formal tax system was first introduced during the Mauryan Empire when the highest classes of people gave a fraction of their incomes and wealth as tax. The tax was paid either in cash or through goods and materials. This system in history was also termed feudalism. But with the passage of time and the development of modern systems, the old practice of the feudal system changed and there came a formal tax system in India. The first formal tax system was introduced in the first union budget by Sir James Wilson in the year 1860. This was done to recover the losses faced by the government because of the mutiny of 1857.
With the advancement of knowledge and technology, the tax system has evolved throughout the decades. Article 265 of the Indian Constitution states that legislation imposing any kind of tax on citizens must be valid and not in contravention of the provisions of the Constitution. Further, the Union List under the Seventh Schedule of the Constitution gives the right to the parliament to impose taxes on citizens, and no one other than the government has the authority to do so.
Professor Seligman defines the term ‘tax’ as “a compulsory contribution by a person to the government to provide revenue and money for the expenses that are borne by the government in the common interest and benefit of the citizens.” The tax collected by the government is their main source of revenue and is used to pay for the facilities used by people in their daily lives, like education, healthcare, housing, etc. The state has now changed itself into a welfare state, and so is the aim. The objective of the welfare state is to protect the interests of citizens and work for their betterment. In order to fulfil its aim, it collects taxes from people, which are used for different functions like:
- War expenditure,
- Maintenance of law and order and peace and harmony,
- Protection of the property of the citizens,
- Better infrastructure,
- Other public works,
- Strengthen education facilities,
- Development of health care facilities and institutions,
- Create equal working opportunities for men and women,
- Prevention of the accumulation of wealth in the hands of a few,
- Transportation for the public, creation of energy and electricity, management of waste systems, and
- Development and enhancement of the economy of any nation.
Characteristics of a tax
The following are the various characteristics of tax:
Compulsory
A tax is a compulsory contribution levied by the government on its citizens. It is the duty of every citizen to pay tax on time if the income is above the exemption limit and falls under the category which is suitable to pay tax. As mentioned above, the tax collected is used only for the welfare of people, so no one can deny paying tax on the ground that they do not get any benefits from government services and facilities.
Public benefit
With the change in the nature of a state from a welfare state, the purpose of government has changed to the betterment and welfare of its citizens. Article 37 and Article 38 of the Directive Principles of State Policy in the Constitution impose a duty on the government to work on minimising the inequalities of income and preventing the accumulation of income in the hands of a few respectively. One way of doing this is to impose a tax on everybody according to the income earned and wealth collected.
Imposed by the government
Article 265 makes it mandatory that a tax must be imposed only by the authority of law and not by anyone else. Thus, Parliament has the right to impose corporate as well as wealth taxes on its citizens according to Entry 85 and Entry 86 of List 1 given in the Seventh Schedule of the Constitution. This also means that only the government can force a person to pay if his income is such that he is eligible to do so and impose a penalty if he does not adhere to the duty to pay tax.
Paid out of the income of a person
The person on whom the tax has been imposed has to pay it out of the income earned. Earlier in the Act of 1860, the income was classified as income from:
- Land property,
- Securities,
- Profession and trade, and
- Salaries and pensions.
Section 2 of the Income Tax Act, 1961, defines the term ‘income’ in Sub-Clause 24. The person who pays the tax is called an assessee. It is further defined under Clause 7 of Section 2 of the Act. The word “assessee” includes:
- A person who is under an obligation to pay tax or any other sum under the Act; or
- A person for whom any proceedings are going on in the Act:
- For the income which is assessable; or
- Income of any other person for which he is assessable; or
- Loss sustained by him or another person; or
- Any refund that has to be given to him under the Act; or
- A person who is considered as a deemed assessee under the Act; or
- A person who is an assessee in default under the Act.
Types of taxes
There are two types of taxes that are levied by the government on its citizens and companies, as well as other enterprises and institutions. These are:
- Direct tax
- Indirect tax
Direct tax
This type of tax is imposed on a person who has to pay it and cannot shift the burden of paying the tax or its impact on anyone else. This type of tax helps in preventing the accumulation or concentration of wealth in the hands of a few rich and influential people in society and finally reduces income inequality. Some examples of direct taxes are house tax, income tax, wealth tax, etc.
Indirect tax
This type of tax is imposed on one person but paid by any other person, either partly or wholly. The burden and impact of paying tax can be shifted to some other person, and that is the reason these taxes are called indirect taxes because they are not paid by the person who is earning the money. This type of tax is levied on goods, products, and services provided by a person to another person. Some of its examples are excise duty, custom tax, GST, VAT, etc.
Difference between direct and indirect tax
| Basis of comparison | Direct tax | Indirect tax |
| Incidence and impact | These are on the same person on whom the tax has been imposed. | The impact of tax lies with the person on whom the tax is imposed, but the incidence lies with another person who pays the tax. |
| Burden to pay tax | The burden of paying tax is on the person who earned the income and cannot be shifted to anyone else. | The burden of paying the tax is on the person who uses the commodities or facilities given by a person on whom tax is imposed, so it can be shifted. |
| Viability | The burden of direct tax is less as it is imposed on income earned and wealth generated. | The MRP of a product includes taxes, and so the income or wealth of a person has no role to play but is only used to pay. |
| Penalty in case of default | In the case of any default, the penalty lies with the assessee. | Here, the penalty lies with the supplier of goods and services and not with the person who is paying the tax. |
| Paid to | It is directly paid to the government. | It is paid to the suppliers of goods and services, and then they further pay it to the government. Thus, it is indirectly paid to the government. |
| Examples | House tax, wealth tax, income tax, etc. | VAT (value-added tax), excise duty, custom tax, tax on agricultural products, entertainment tax, etc. |
Indirect tax
Meaning of indirect tax
Tax is an important source of revenue for any nation’s government. It will be surprising for many to know that we pay tax on everything that we buy or use in our day-to-day lives. The government imposes a tax on anything, be it biscuits, furniture, electrical appliances, or other products. This tax is further used to provide services of public utility like education, health care, the building of roads and bridges etc. The kind of tax paid on any commodity or service is known as an indirect tax.
Unlike a direct tax, an indirect tax is not paid on the income of a person but indirectly on the consumption of goods and other services. In this type of tax, a consumer pays the tax to the supplier or service provider who acts as an intermediary between the consumer and the government, and then they further pay it to the government. The burden and incidence can be shifted to another person. Some examples of indirect taxes are VAT (value-added tax), excise duty, custom tax, GST, entertainment tax, service tax, etc.
Article 265 of the Indian Constitution provides that the power to impose a tax is given only to the government and no other authority in the country can do so. The Construction further provides subject matters that are to be dealt with by union and state governments separately in the lists mentioned in the Seventh Schedule. The Constitution also provides the framework and safeguards related to taxation in India. For example, Article 286(1) prohibits the state from imposing any kind of tax on the export of goods outside the state and on the import and export of goods outside India. This means that where the Constitution has given the power to the government to impose and collect taxes, it has also restricted it by providing certain safeguards.
Features of indirect tax
The indirect tax has the following features:
Liability to pay tax
The liability to pay the tax is partly or wholly on the consumer of goods and services. The suppliers and service providers act as intermediaries and further pay the tax to the government. This type of tax is not paid by the person who is earning profit but by the person purchasing the product. The intermediaries like shopkeepers, service providers etc sell the products to the customers and in return, they pay for the product or service. This cost includes all kinds of indirect taxes within itself.
Levied or paid on the purchase of goods and services
Unlike direct taxes, which are levied or paid on the income earned or wealth accumulated by an individual, indirect taxes are levied or paid on the goods and services purchased by him. Direct taxes were imposed on the income or wealth accumulated by an individual or profits gained by him by way of house property, salary, capital gains etc. He had to pay a fixed percentage of tax that was imposed on his income after all the necessary deductions. This tax varies from person to person depending on the income earned and deductions but in the case of indirect tax, he is not aware of the amount he is paying as tax. Moreover, it is the same for everyone irrespective of their earnings.
Regressive in nature
The indirect tax is the same for everybody. For example, if a person buys a packet of milk, the indirect tax paid by him on this product will be the same as that paid by someone else buying the same product. This also means that the nature of this type of tax is regressive as it is not dependent on the income earned by a person.
Multiple taxes
In the case of multiple taxes in indirect taxes, the rates are high, which results in a high cost for the product. A person with a moderate income has to think twice before purchasing the item and might end up saving their money rather than buying the costly product. For example, if you buy furniture, you might have to pay service tax, excise or customs duty whichever is applicable, sales tax etc. In such a situation, there is a high probability that the cost of the furniture will be higher than what is expected because it will include all kinds of indirect taxes that are applicable to the product.
Difficult to evade
This type of tax cannot be easily evaded by a person, unlike a direct tax, as it is included in the cost of the product and a person is required to purchase the product at the same cost as mentioned.
GST in other countries
Over 160 countries in the world have implemented GST and its model in their financial and indirect tax regime. Now, we will briefly understand the provisions of GST in some major countries around the world.
France
France was the first country to introduce GST in its system of taxes in the form of VAT in 1954. It has 4 different tax slabs under GST, ranging from 2.1% to 20%. The tax slab of 20% is considered to be a standard tax slab and is imposed on the maximum products and services. The other tax slabs include 5.5% and 10%. Intra-community and international transport, except roads and inland waterways, are excluded from GST. The tax slab of 2.1% is applicable on pharmaceutical products, newspapers, livestock, etc., while 5.5% is applicable on canteen food, non-alcoholic beverages, books, renovation, services for the repair of private dwellings, etc. Firewood, cafes, and nightclubs are covered under the tax slab of 10%. All the VAT principles are included in Code General des taxes i.e., France Tax Code.
Canada
The Canadian model of GST consists of three different schemes. These are the federal GST, joint federal GST, and separate federal GST. The federal tax is the standard tax system, while the joint federal is applied on the basis of the economy and condition of the states. The separate federal GST is applicable only in the province of Quebec because it is deemed to be a partially independent province in Canada. The tax slab under GST ranges from 5% to the harmonised sales tax (HST), which is 15%. The basis of accrual is the date of invoice or date of payment receipt. However, education, health, charities, real estate, etc. are excluded from the purview of GST. The GST/HST are governed under the Excise Tax Act, 1985 of Canada.
United Kingdom
GST is implemented in the country in the form of VAT, or value-added tax. The tax slabs range from 5% to 20%, and most of the goods and services are covered under a slab of 20% as given under The New Tax system in the Goods and Services Act, 1999. The returns and payments related to tax are done quarterly, while small-scale businesses have the option of making such payments and returns annually. There is a provision for a reverse charge mechanism as well, and medical, education, insurance, postal services, etc. are excluded from tax.
United States of America
There is no GST or sales tax system at a federal or national level in the United States of America. All the indirect taxes like GST, excise, sales tax, etc., are imposed by states based on their choices and preferences. The tax slabs also differ from state to state. The states have been given this right in the Constitution to impose indirect taxes on their own, subject to limitations in the Constitution. There is no standard tax slab, but sales tax may vary from 2.9% to 7.5% in different states. The local governments in each state also have the right to impose an additional sales tax that ranges from 1% to 5%.
Current position of indirect tax in India
Earlier, there were different kinds of indirect taxes that were levied and imposed by the government on its citizens. The taxes vary from product to product depending on the type of product and service used. Goods were subject to tax by both the central and state government. At times, the tax imposed by the state government was different from the tax imposed by the central government, and variations could be easily seen in the cost of similar products. For example, the central government used to collect excise duty on all products except alcohol, narcotic drugs, etc., on which the tax was imposed by the state government. On the other hand, service tax is exclusively imposed and collected by the central government.
However, the situation changed after the implementation of GST, i.e., Goods and Services Tax. This tax was introduced in 2017 throughout the country and removed all other different kinds of indirect taxes. All the indirect taxes are now covered under the ambit of GST and are common for all states and regions. With the help of GST, people are now required to pay only one kind of indirect tax rather than the different kinds imposed on one product. The tax levied is also the same for the states but may vary depending on goods and services.
Types of indirect taxes that existed before the implementation of GST
Before the implementation of GST throughout India, there existed different kinds of indirect taxes. These are:
Taxes imposed by the state government
The following taxes were imposed by the state governments under the head of indirect tax on different goods and services:
- State excise duty and additional excise duty,
- Service tax,
- Luxury tax,
- Entry tax,
- State cesses and surcharges, etc.
Taxes imposed by the central government
These are:
- Central excise duty,
- Additional excise duty on goods of self-importance and textile products,
- Custom tax,
- Service tax,
- Entertainment tax,
- Sales tax etc.
Sales tax
This kind of tax was imposed by the central government on the sale of a product in different states, i.e., interstate sales of products. This tax was further divided into 3 kinds of taxes:
- Interstate tax,
- Intrastate tax, and
- Sale on the import and export of goods.
Service tax
This kind of indirect tax was imposed on paid services like health care, banking services, maintenance services, etc.
Value Added Tax (VAT)
The government collected central excise on the gross value till 1987, which had a cascading effect. In order to reduce this effect, the MODVAT scheme was introduced, which was further replaced by the CENVAT Credit scheme. Further advancement led to the imposition of VAT on local sales of essential goods and services.
Excise duty and customs duty
An excise duty is imposed on the sale of products that are manufactured in India, but a customs duty is imposed on the sale of products that are imported to the country and manufactured outside India. The excise duty is now called the Central Value Added Tax (CENVAT).
For example, tea is produced in India, so the government has the right to impose an excise duty on its export, while the cost of branded clothes that are manufactured outside India and imported into the country includes a custom duty. This is the reason why some branded clothes are more expensive.
Entertainment tax
This kind of tax is levied on entertainment services like movie theatres, cinema halls, gaming zones, amusement parks etc. This can be easily understood with the example of a movie theatre or a PVR. Whenever you go to a PVR to watch a movie, the price that you pay for the movie ticket includes the entertainment tax. So from now on, you’ll remember to check that the authorities are not imposing this tax arbitrarily.
Need for a revised or new indirect tax scheme
The various economic factors that resulted in the reforms in the taxation scheme in India. The previous indirect tax regime had various issues and challenges that it failed to address. These are:
Numerous taxes
Prior to the implementation of GST in the country, there were numerous taxes imposed by different levels of government. These were:
- Taxes imposed by the central government,
- For example, customs duties, central excise duties, service tax, etc.
- Taxes imposed by the state government, and
- For example, VAT, CST, entertainment tax, luxury tax, etc.
- Taxes imposed by the local authorities.
- For example, property tax, local body tax, etc.
All the above-mentioned taxes imposed by different levels of government created confusion and chaos, which resulted in chaos among the tax authorities as well.
Double taxation
This was one of the major issues of the indirect tax regime of that time. Multiple taxes were imposed by different authorities on a single product or service. For example, if a person stays in a hotel room in Mumbai, he has to pay the luxury tax, service tax, and entertainment tax if the hotel is equipped with entertainment facilities like a gaming zone, a theatre, etc. Another issue was that some taxes were imposed by both central and state governments. For example, service tax. A person had to pay tax twice on a single transaction.
Multiple procedures
The suppliers and service providers who act as intermediaries had to comply with various procedures for different kinds of taxes paid by them. Every tax has its own authorities, assessment procedure, dates to pay tax, etc. This made the whole system of indirect taxation more complex and costly.
Cascading effect
The old indirect tax regime had some cascading effects. There was a lack of cross-utilization facility between goods and services and non-availability of set-off arrangements against state or central government. A tax paid in one state was not allowed to be set off against a similar tax paid in another state. Similarly, taxes imposed by the central government could be set off against taxes imposed by the state government. For example, excise duty or service tax could not be used to pay VAT on the same products or services.
All these issues and challenges were not addressed by the old indirect tax regime and had to be addressed at the earliest. In order to reduce such loopholes and issues, the government decided to reform the regime and introduce a whole new tax regime which further introduced a single indirect tax known as GST, which subsumed all kinds of indirect taxes under its ambit, making the procedure easy to understand and comply with.
GST
GST, or goods and services tax, was implemented for the first time in France in 1954 and is followed in almost 160 countries in the world. The models of GST differ from country to country. The different models are:
- Australian model– the tax in this model is collected by the central government and distributed among the various units or states.
- Canadian model– In this model, there are 3 types or variants of taxes which differ from each other.
- Kelkar-Shah model– In this model, there are two different kinds of tax rates that are imposed by the central and state governments.
- Bagchi-Poddar model– this model is a combination of service tax, VAT, and other taxes, forming a basis for the GST.
India, being a quasi-federal country, adopted a dual model, which means that the tax is imposed concurrently by the Centre and state governments, and implemented GST in 2017. This means that both the Centre and states have the power to levy taxes in the form of central goods and services tax (CGST), state goods and services tax (SGST) and integrated goods and services tax (IGST). Apart from India, Brazil also follows this model of GST. It is applicable to all transactions, goods and services and has subsumed all the previously existing different kinds of indirect taxes. However, certain taxes, like the tax on alcohol, petroleum products, electricity, etc., are exempted from GST.
GST is one of the biggest achievements and reformations in the taxation system in India implemented with the aim of integrating all other existing indirect taxes. The objective is to consolidate multiple indirect taxes by subsuming them under its ambit. It has also helped in reducing the cascading effect by introducing single authorities and procedures to pay tax.
History of GST
The history of GST and its implementation in the country is marked by struggles faced by the government. The Goods and Services Tax is implemented in almost 160 countries in the world. France was the first country to introduce the concept of GST in its financial framework in 1954. In India, the journey has been long and tedious. It is a result of a lot of trade, industries, and foreign establishments having an interest in the Indian market.
The old indirect tax regime had various problems, including its regressive nature, cascading effect, the issue of double taxation, etc. In order to deal with such problems, the Vajpayee government in the year 2000 proposed a comprehensive taxation framework on goods and services available to people in India. The task of formulating the framework of the GST model and dealing with its intricacies was given to a committee headed by the then Financial Minister of West Bengal.
The finance ministers of various states like West Bengal, Karnataka, Madhya Pradesh, Maharashtra, Punjab etc stated the objectives of the Empowered Committee formed for the purpose of implementing GST in the country. These are:
- Monitor the implementation of uniform sales tax by states and union territories,
- Monitor phasing out of the incentive schemes based on sales tax,
- Decide methods by which states can switch over to VAT, and
- Monitor reforms in the existing Central sales tax system.
The government in 2004 decided to reconstitute the committee which worked on creating the model and framework of GST that would be implemented in our country. After years of hard work and strategies, the bill on GST was successfully introduced in Parliament in 2014 and gained the assent of the President in 2017, making the dream of GST a reality.
The history of GST and important years in its journey can be easily understood with the help of the following table:
| Years | Importance |
| 2003 | The suggestion of a comprehensive goods and services tax by the Kelkar Task Force. |
| 2007 | Announcement to introduce GST by the then Union Finance Minister in the Central Budget. |
| 2009 | The Empowered Committee set up a working group to give recommendations on GST. |
| 2011 | A bill to create a GST council and a services tax dispute settlement authority was introduced but lapsed. |
| 2013 | Submissions of recommendations of the empowered committee. |
| 2014 | The government introduced a bill on GST which was approved by the standing committee. |
| 2016 | The Ministry of Finance released the model of GST for suggestions and objections in the public domain and then for final assent by the President. |
| 2017 | GST was implemented in the form of four legislations in the country. |
Framework of GST
The four pieces of legislation and laws related to taxes (GST) are:
| S.no. | Legislations | Objectives |
| The Central Goods and Services Tax Act, 2017 | Imposition and collection of tax on intra-state sales and supplies of goods and services. | |
| The States Goods and Services Tax Act, 2017 | Imposition and collection of tax on intra-state sales and supplies of goods. | |
| The Integrated Goods and Services Tax Act, 2017 | Imposition and collection of taxes on inter-state supplies of goods. | |
| The Union Territory Goods and Services Tax Act, 2017 | Imposition and collection of tax on intra-union territory supplies of goods. | |
| GST (compensation to states) TAX Act, 2017 | Provide compensation for loss of revenue caused due to the introduction and implementation of GST. |
The hierarchy of the administrative mechanism of goods and services tax at the central level is as follows:
- The Ministry of Finance
- Revenue Department
- The Central Board of Indirect Taxes and Customs (CBIC)
- Chief commissioners in regions and zones
- Commissionerates
- Divisional officers and deputy commissioners
However, the GST Council is given the responsibility to recommend issues related to the formulation of policies, principles and their implementation under the GST regime.
GST Council
It is a constitutional body given under Article 279 of the Constitution, also termed as the apex body, to make any kind of recommendations on the policy formulation and implementation of the GST regime in the country. It consists of the following members:
- The Union Finance Minister will serve as the chairman of the council.
- The Union minister of state is in charge of revenue of finance.
- Other ministers who are in charge of finance and taxation are nominated by the state government. Every state has to nominate one minister to be a member of the council.
Half of these members would constitute the quorum for the meetings of the council.
The council makes recommendations to the central and state governments on the following matters:
- Taxes, cesses, and surcharges to be subsumed in the tax,
- Goods and services that are to be excluded or exempted,
- Models to be adopted and principles to be formulated,
- Threshold limit of turnover below which no tax shall be imposed,
- Tax rates,
- Other matters related to the goods and services tax.
Products excluded from GST
The cost of petrol and diesel has increased enormously in the last few months. Have you ever wondered why this is so? Liquor and fuels like natural gas, petrol, diesel, etc., are excluded from the ambit of GST in India. These are subject to other indirect taxes. Tax has always been a major source of revenue for the government. Products like fuel and liquor are consumed by people daily and contribute majorly to the revenue of the government. When GST was introduced in our country, people expected that the prices of fuel and liquor would decrease as they would be included in the GST. But this is not the case. The present situation reveals that such products and services are outside the ambit of GST.
A recent report from 2021 shows that the Kerala High Court directed the GST council to recommend to the central government to include petrol and diesel within GST. On this matter, the central government stated that it is not the right time to do so. They fear that this might hamper the revenue of the country as these products are consumed mostly. The highest tax slab in GST is 28% but fuels like petrol and diesel and liquor are currently taxed more than 100% as revealed by another report. If these products will be included in GST then, it might heavily hamper the revenue which is further used for the welfare of people. This is the reason that has been stated by the government over the issue of excluding these items from within the ambit of GST.
Advantages of indirect tax
The advantages of indirect tax are:
Convenient and easy
This tax can be easily paid by middle-class people and poor people who are not paying the direct tax due to their income and thus contribute to society. Consumers do not have to worry about the procedure and date to pay such a tax as it is already paid by them by way of the cost of a product or service. Every person, irrespective of their income and whether that income falls within the tax slab, can pay indirect tax. It is convenient and easy for both the taxpayer and the government to collect tax as it is included in the cost of a product or service.
Single tax after implementation of GST
With the implementation of GST, numerous different kinds of taxes are not levied on a single product, making it easy for consumers as they have to pay only one tax with lower tax rates. There is a different tax slab for different products and services. The implementation of GST has tried to bring uniformity in the indirect taxes applicable throughout the country. This is because it is governed by uniform legislation and the GST council.
Economical and easy to modify
This kind of tax is economical as it is the same for similar products and services and results in an equal collection from everyone, whether rich or poor. No one can escape the liability of paying indirect tax. Moreover, the cost of collection and administration of these taxes is low as compared to direct taxes.
Yields higher revenue
These taxes are imposed on goods and services, which means an estimated amount will be collected. These taxes cover a large number of essential commodities and services that are consumed by every person irrespective of income, which further yields higher revenue. It has also helped in regulating the unorganised sector through the imposition of GST. This sector was earlier not included in the tax regime and a large part was not paying any such taxes. But now, the situation is different, and there is an increase in revenue with the help of the implementation of GST throughout the country.
Cannot be evaded
Unlike direct taxes, where there is a high possibility of evasion and avoidance of tax, indirect taxes cannot be avoided or evaded easily. People paying direct tax try their means to evade and avoid the taxes but cannot do so in these kinds of taxes. The reason is simple: these taxes are included in the cost or price of a good or service. Thus, consumers are bound to pay the tax.
Disadvantages of indirect tax
The disadvantages of indirect tax are:
Regressive nature
It is regressive in nature, which means that the tax rate on indirect tax is the same for all. A commodity that is cheaper for the rich might be costly for the poor, and with the implementation of such a tax, it will become costlier for them. There is no distinction between the rich and poor in terms of direct tax.
Cumulativeness
Before the implementation of GST in India, the taxes under the category of indirect tax were cumulative. The suppliers and manufacturers would charge high taxes on every stage of production and sale. But now, the tax rates are fixed by the government in GST, and so the suppliers cannot demand a higher tax than what has been mentioned.
The problem of multiple taxes and double tax
Due to multiple taxes in the old indirect tax regime, manufacturers and industrialists had to comply with different procedures, making it difficult for them to remember every tax imposed on their products. This problem of multiple taxes and double taxation has also been faced by consumers who have to pay high amounts for a particular product due to the inclusion of multiple taxes on a single product.
High cost of compliance
With the implementation of GST throughout the country, the compliance cost has increased and has made it compulsory for every business to get registered under GST in order to continue their business. Small businesses have been facing several problems due to the GST. They have to hire accounting professionals to comply with the requirements of GST and change their software, making it a costly affair for them.
Increases inflation
Indirect taxes discourage savings, which further leads to an increase in inflation. These taxes are not levied on the income or wealth of an individual, but on the goods and services purchased by him. This makes it difficult for the authorities to keep track of indirect tax and estimate the total amount. This kind of tax increases the cost of input and output due to higher production costs as the indirect tax is applicable on every step of production.
Conclusion
An indirect tax is a type of tax that is paid indirectly to the government through intermediaries like suppliers, service providers, manufacturers, etc. These taxes are levied on goods and services as well as essential commodities used by people in their daily lives. The old indirect tax regime had numerous taxes like service tax, luxury tax, entertainment tax, etc., which created a lot of problems and confusion. All this ended with the introduction of the GST, which subsumed all the existing indirect taxes.
But some challenges are still to be addressed. An increase in the cost of raw materials and finally the finished product due to the imposition of tax on every transaction and stage of manufacturing is one of the biggest challenges. The different tax rates under the GST have further made some goods costlier than others, making it difficult for the poor to purchase them. This has further inculcated a fear of higher taxes in them. All these issues have to be addressed. Also, with the expansion of online businesses and e-commerce, the provisions of GST have to be modified accordingly. However, GST is one of the major contributions in the area of indirect tax.
Frequently Asked Questions (FAQs) on indirect tax
Can a person transfer indirect tax?
A person, unlike direct tax, can easily transfer the indirect tax from one person to another. The burden and incidence of tax can be shifted to another person.
What are the different rate structures under GST?
The different rate structures are divided into 4 categories, i.e., 5%, 12%, 18%, and 28%. These rates are applied differently to different goods and services. For example, 18% is imposed on telecom services, furniture, IT services, etc., while 28% is imposed on hotel stays, automobiles, machines, etc.
Name some old indirect taxes that have been subsumed under GST.
The following taxes have been included and they are subsumed under the ambit of GST:
- Central excise duty,
- Excise duty on medicines, textiles, etc.
- Purchase tax,
- Luxury tax,
- Entry tax,
- Entertainment tax,
- Service tax,
- Custom duty,
- Additional duties of customs.
- Taxes on advertisements,
- State VAT,
- Cesses and surcharges imposed by the state, and
- Sales tax etc.
References
- https://www.squareyards.com/blog/indirect-tax-in-india-taxart
- https://blog.ipleaders.in/indirect-taxes-introduction-gst/
- https://gstcouncil.gov.in/gst-council
- https://blog.ipleaders.in/analysis-indirect-taxes-corporate-taxpayers-india/
- https://cleartax.in/g/terms/indirect-tax
- https://www.godigit.com/income-tax/difference-between-direct-tax-and-indirect-tax
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