It has been published by Rachit Garg.
Table of Contents
In India, whether you are earning or making a purchase of any goods or services, you, as an individual or any corporate entity, are obliged to pay taxes. Tax is a kind of mandatory recurring fee that is paid to the Central and state governments. It is also regarded as the main source of revenue for the government, which helps them build the economy of a country. These tax revenues are used for various important public services such as healthcare, infrastructure development, education and the welfare of the country. Taxes in India are categorised into several types, including income tax, goods and services tax, excise tax, and customs duties.
What is a direct tax
A direct tax is a tax that the taxpayer pays directly to the authority imposing the tax. Here, the taxpayer has to bear the tax and will not be able to transfer this liability to another entity. In India, the Central Board of Direct Taxes (CBDT) is responsible for the collection and administration of direct taxes. CBDT is governed by the Department of Revenue, which provides input to the government related to the implementation of direct taxes.
Income Tax, Capital Gain Tax, and Securities Transaction Tax
What is an indirect tax
Direct taxes are levied on taxpayer’s income and profits; however, indirect taxes are charged on goods and services. The taxpayers pay the indirect tax to the government via intermediaries, and thus they are indirectly paid by the government. The Central Board of Indirect Taxes and Customs (CBIC) is responsible for the collection and administration of indirect taxes, which are governed by the Department of Revenue, just like CBDT.
Excise Duty, Entertainment tax, Custom duty, Value Added Tax (VAT), Service tax, GST, etc.
History of indirect tax in India
In India, in 1944, indirect taxes were introduced to protect against British made goods. Some new indirect taxes were introduced by the Indian government after India’s independence. But now the GST has replaced many indirect taxes.
Types of indirect taxes
- Service tax
- Excise Duty
- Custom Duty
- Stamp Duty
- Entertainment Tax
- Securities Transaction Tax
Service tax: When we are going to buy any service from any organisation, we will pay service tax. When a service provider is going to provide any service, the Indian government imposes a service tax.
Excise duty: Manufacturing units pay excise duty on items made in India to the Indian government. The producers charge excise duty from their customers. The excise tax was the first indirect tax in India.
Customs duty: The Government of India imposes customs duty on all imports within and all exports from the country. This tax is typically assessed as a percentage of the declared value of the goods, although it can also be a specific amount per unit of the goods. The primary purposes of customs duties are to generate revenue for the government, protect domestic industries, and regulate the flow of goods into and out of a country.
Value Added Tax (VAT): A Value Added Tax is a consumption tax imposed on the value added to goods and services at each stage of production. It is applied as a percentage of the price of the product or service and it is collected by businesses on behalf of the government.
Stamp duty: Stamp duty in India is a type of tax levied on various types of legal documents and transactions, including property transactions, financial transactions, and commercial and legal agreements. It is governed by state governments, which means that the rates and rules for stamp duty can vary from one state to another.
Entertainment tax: An entertainment tax imposed on commercial entertainment events by the state government. For example, you have to pay an entertainment tax (28% under GST) when booking movie tickets, sporting events and theme parks.
Securities transaction tax: Securities transaction tax is a tax that is similar to tax collected at source. A securities transaction tax is imposed on every purchase and sale of securities that are listed on the recognised stock exchange in India. This includes equity, derivatives, and equity oriented mutual funds.
Introduction of GST
GST is a combined tax system that replaces multiple indirect taxes levied by both the Central and state governments. The GST was introduced on July 1, 2017 by the President of India and the Government of India. There are four GST slabs 5%, 12%, 18%, and 28%. The GST system follows the dual structure Central GST and state GST levied by the central and state governments. Integrated GST is levied on interstate supplies and imports, which are collected by the central government but apportioned to the destination state. The Goods and Services Tax (GST) in India has been established under the “Central Goods and Services Tax Act, 2017” and “State Goods and Services Tax Act, 2017.”
Current status of indirect taxes and how they work in India
In India, the following indirect taxes have been merged into the Goods and Services Tax (GST):
- Purchase Tax
- Central Excise Duty
- Central Sales Tax
- Additional Excise Duty
- Entertainment Tax
- Service Tax
- Additional Custom Duty
- Value Added Tax (VAT)
- Octroi and Entry Tax
- Luxury Tax
What are the current rates of indirect tax
Customs duty and goods and services tax are the two principal indirect taxes in India.
The customs duty effective rate is approximately 30.98% – considering the standard GST rate of 18%. While the general rate of basic customs duty is 10%, the exact rate depends on the nature/classification of imported goods and their HSN classification.
All goods and services tax is divided into four categories, 5%, 12%, 18% and 28%. Further, there is a special rate of 0.25% on rough precious and semi-precious stones and 3% on precious metals such as gold, silver and articles.
Petroleum products and alcoholic drinks are taxed separately by the individual state governments. Additionally, Compensation is also applicable on a few items, such as aerated drinks, cars, tobacco products, etc.
Principal indirect tax
The principal indirect tax applicable is as follows:
Union levy by the Central Government
- Central GST: Central GST applies to the intra-state supply of goods and services and it’s levied by the central government.
- Integrated GST: Integrated GST means tax levied under Integrated Goods and Service Tax Act on the supply of any goods and services in the course of inter-state trade.
- Customs duty: Customs duty is levied on goods imported and exported outside of the country.
- Anti-dumping duty: It is levied on the goods that are being sold in the domestic market at a price lower than their fair market value.
- Safeguard duty: It is a temporary tax imposed by the government on imports of particular products to protect domestic industries from sudden and significant increases in foreign goods.
State Levy by the state government
State GST /Union Territory GST: It is levied on the intra-state supply of goods and services.
Other key indirect taxes:
Professional tax: It is a state level tax that individuals earning an income from their profession are required to pay.
Property tax: It is a tax levied by municipal authorities and local government bodies within their jurisdiction on real estate properties.
Features of indirect taxes
Indirect taxes and annual income- Indirect taxes are a type of taxation system where the tax burden is imposed not directly on your annual income or profits but on the goods and services you purchase or consume. These taxes are collected by intermediaries, such as businesses or retailers, at the point of sale and paid to the government. Indirect taxes generate revenue for the government and provide funds for public services, infrastructure and social welfare
Burden of indirect taxes- The burden of indirect taxes is a key element of how these taxes operate in the economy. While the sellers are responsible for collecting and submitting the indirect tax to the government, the consumer bears the actual burden of the indirect tax at the end. The seller passes on the taxes to the consumer by charging a higher price for the goods and services they offer; at this point, taxes are charged to the customer.
Repressiveness and GST- Indirect taxes tend to be regressive as the burden of taxation is a flat rate. The tax burden takes up a large portion of the income of lower income people compared to higher-income individuals. This system generates income inequity and puts a higher burden on people with lower incomes and those who can’t afford it. The introduction of GST in India represents an important change in the country’s taxation system that aims to reduce some of the regressive aspects linked to direct taxes.
Evasion of indirect taxes- Evasion of taxes is not possible because taxes are included in the price of goods and services. However, it’s important to note that there are still loopholes where individuals and businesses can attempt to evade or avoid paying these taxes. Even though indirect taxes are typically collected at the point of sale and passed on to the government by intermediaries such as businesses, instances of evasion can still occur.
Impact of indirect taxes- The impact of indirect taxes on consumer behaviour and economic decisions is essential; higher taxes result in higher prices of goods and services. A higher price of commodities affects the choice of customers and the overall economy. When prices are higher due to taxes, consumers change their buying patterns.
Analysis of the indirect tax regime in India
Before the introduction of the goods and services tax in India, our tax system was very complicated. But after the GST, things became simpler. GST combines many indirect taxes into one, which helps prevent the problem of taxes piling up on top of other taxes. In the Indian tax system, we have a three- tier tax system created by the central government, state government and local municipal bodies. Taxes can only be collected according to the constitution.
The tax system in India was very complicated, but post GST implementation, the process has become very easy. It includes all the indirect tax, which helps remove the cascading effect of indirect tax. Tax structure in India is a three-tier federal feature that is made by the Central government, state government and local municipal bodies. The Constitution states that “no tax shall be levied or collected except by the authority of law. Tax was first introduced in India in 1860 by James Wilson to cope with the losses incurred by the government on account of the Military Mutiny of 1857. In 1918, a replacement tax was passed and again, it was replaced by another new act passed in 1922. This Act remained in force up to the assessment year 1961-62 with numerous amendments. In consultation with the Ministry of Law, the Tax Act of 1961 was passed. The Income Tax Act of 1961 was brought into force on April 1, 1962. Since then, several amendments have been made to the Income Tax Act.
GST structure in India
GST is a destination-based indirect tax levy on goods as well as services at the national level. The main objective of GST was to combine multiple indirect taxes into a single tax. GST, a well-designed value-added tax on all goods and services, is the simplest method to eliminate twisting and tax consumption.
How did it all go?
- November 2009: The Empowered Committee releases its first discussion paper on GST.
- November 2012: A committee on GST design is constituted.
- December 19, 2014: The Constitution Bill 2014 is introduced in LokSabha by Mr. ArunJaitley.
- May 6, 2015: The Constitution Bill is passed in LokSabha. The Bill is also referred to a 21-member Select Committee of Rajya Sabha.
- August 3, 2016: The Constitution Bill is passed in Rajya Sabha with certain amendments.
- September 2016: The Bill is adopted by a majority of state legislatures, requiring approval from at least 50% of state assemblies.
- September 8, 2016: The Bill receives the assent of the President and becomes the Constitution Act, 2016.
- April 12, 2017: The CGST Bill 2017, IGST Bill 2017, UTGST Bill 2017, and GST Bill 2017 receive the assent of the President.
- GST Council: Formed as the main decision-making body to finalise the planning of GST.
- Constitution Act, 2016: Provides that the GST Council, in its discharge of various functions, shall be guided by the need for a harmonised structure of GST and the development of a harmonised national marketplace for goods and services.
Every registered person other than ISD, NRTP and a person paying tax under the provisions of Section 10 has to file various returns. The relevant legal provisions can be found in the Central Goods and Services Tax Act, 2017. There are many returns that are applicable to different people. We have two different schemes, regular and composite, and have different time periods, rules and returns for both of them. few are as follows:-
Outward supplies: We need to report outward supplies in GSTR 1 on or before the 10th of next month.
Inward supplies: Inward supply is auto-populated in GSTR 2 after the 10th of next month, i.e., on the basis of the outward supply reported by different taxpayers in GSTR 1.
Monthly return: We need to pay taxes along with the monthly return in GSTR 3B on or before the 20th of next month.
The GST late filing penalty has been specified as follows:
If a taxpayer fails to furnish the return on the due date, he is liable for a penalty that depends upon the number of days of delay- The penalty is Rs 100 per day, subject to a maximum of Rs 5000.
If a taxpayer fails to furnish the annual return on the due date, he is liable for a penalty that depends upon the number of days of delay- The penalty is Rs 100 per day, subject to a maximum of a quarter of the person’s registration.
Merits of indirect tax
Indirect taxes are less burdensome and inconvenient to the taxpayer than direct taxes. One of the major reasons is that indirect taxes are incorporated into the price of goods and services, which are more expensive and less sensed. Because these taxes add to the overall cost, taxpayers may not recognise or feel the burden of paying taxes early, as the tax-paying process is added to daily routine consumption activities.
It is also convenient because these taxes are not paid in lump-sum amounts, unlike direct taxes. An indirect tax can be avoided by not buying taxed commodities. But once a taxpayer crosses the threshold limit, he or she will have to pay direct taxes. For all these reasons, indirect taxes are both convenient and burden-free.
Indirect taxes are broad-based impacting more or less all the people in the community. Direct tax, on the other hand, has a limited base. In the case of direct tax, a person with a lower income is not required to pay any type of income tax. Still, indirect taxes do not have such exemptions based on income levels, which means that even individuals with lower incomes are subject to these taxes once they engage in the purchase of commodities or services that are subject to such taxes.
Elastic and productive
Elasticity and productivity are the other merits of indirect taxes. It is flexible or elastic in the sense that it can be revised to meet the requirements of the government. The term elasticity, when applied to indirect taxes, means natural flexibility. Indirect taxes can be adjusted or revised in response to changing economic conditions and the requirements of government expenditure. Direct tax, which involves complex legislative processes to alter. The government can alter indirect taxes to increase or decrease according to revenue collection.
Difficulty in evading taxes
The essential structure of indirect taxes presents some notable challenges for tax evasion. Under indirect taxes, the taxes are included in the price of goods and services, so it’s more intricate to evade taxes. The inclusion of indirect taxes within the price of a commodity occurs at the point of sale, with businesses being responsible for collecting and remitting these taxes to the government. The transparency of this process reduces the scope for individuals or businesses to manipulate their transactions to avoid paying the tax.
The concept of using indirect taxes as a means to achieve social objectives. Indirect taxes apply to harmful and luxury goods, allowing revenue generators to become powerful tools for promoting public health, reducing inequality, and enhancing the overall quality of life for citizens.
Harmful goods, such as tobacco, alcohol, sugary beverages, and certain unhealthy foods, have a bad effect on health. Governments aim to control their consumption and minimise the linked health risks by imposing higher tax rates on these items. This not only directly improves public health but also lessens the burden on healthcare systems and the economy.
Important anti-Inflationary measures
Indirect taxes are often seen as ways to prevent prices from increasing too much. They can make people change how they spend money, which can help keep the economy stable. But it’s important to know that while these taxes can help stop prices from rising too fast, they can also sometimes make prices go up. On one hand, indirect taxes can stop prices from rising too much. When the government makes certain things more expensive by adding more taxes, people may decide not to buy those things. This means some people are buying, which can slow down the economy and stop prices from going up too fast. So, indirect taxes can help control how much things cost and how people spend money, which can help keep the economy stable.
Demerits of indirect tax
Regressive in character
Indirect taxes are called regressive because they don’t follow the rule of treating everyone fairly when it comes to taxes. This is about sharing the tax burden in a way that makes sense. The problem with the indirect tax is that things become harder for people who don’t have much money. If everyone has to pay a certain tax when they buy things, like food or clothes, it does not matter if someone is rich or poor; they have to pay the same tax. But this hurts people with less money. They spend more of their money on daily things like food, so they pay less tax than their income.
The indirect taxes might not be very useful if you think about whether the money spent to collect them is worth what they bring in for the country. Indirect taxes are already included in the price of the goods you buy. So, when we pay for these things, we’re also paying these taxes. These taxes are meant to help the government by paying them for public welfare, like building schools and roads. When we collect indirect taxes, there are costs like paying people to watch over transactions, making sure everyone follows the tax rules, and dealing with problems like people not paying the right amount or cheating on taxes. Businesses also need to spend money to keep track of their transactions, follow the tax rules and pay taxes.
Civic consciousness is not created
It means that people understand their role in society and how the government works. Sometimes, indirect taxes don’t do a great job of making people feel this way. Unlike direct taxes that come from what people earn, indirect taxes are added to the prices of things they buy, like stuff from stores. This makes it difficult for people to notice these taxes because they’re not clearly shown. Because of this, people might not realise how much they’re contributing to the government’s money. In direct taxes, people know they are paying taxes to the government, like ones from salaries. But with indirect taxes, it’s not as clear. This can make people less aware of how the government is using their money.
Possibility of evasion
Indirect taxes are also evaded by taxpayers. The development of an unholy alliance between buyers and sellers may result in tax evasion. Usually, buyers evade taxes by not accepting ‘receipts of sale’ from the sellers. Sellers also evade these taxes by not maintaining a legal accounting book.
Finally, instead of being an anti-inflationary device, increased rates of indirect taxes have the potential to fuel cost-push inflationary pressures in the economy. Higher prices consequent upon a high rate of tax result in higher costs, higher wages, and again, higher prices. A wage-price spiral is thus initiated.
Uncertain revenue earning
When taxes are added to products, their prices go up, and people tend to buy less of those things. This can make it hard to guess how much money the government will collect from the taxes. This uncertainty goes against the idea that taxes should be clear and easy to predict, which a famous economist named Adam Smith believed in. When the price of goods goes up, people buy less, so it’s not easy to know how much will be submitted to the government, which goes against what Adam Smith thought about having clear and predictable taxes.
The future of indirect taxes in India
The government aims to streamline and simplify the tax structure in India. For this, the GST has come into existence so that many taxes are merged into one tax, and it will apply equally to goods and services. The tax base should be the same. Also, the government will use technology to simplify compliance for businesses. Currently, there are multiple tax rates applicable to different products and services. In the future, the government will also simplify this for ease of business. Also, customs duties and compliances are simplified on import-export transactions to promote cross-border transactions. The Government introduced many concepts, like E-bill, Restriction on claiming ITC, etc. Due to this, there is a reduction in tax evasion.
In conclusion, indirect taxation in India presents many advantages and disadvantages. Indirect taxes, such as excise duty, value added tax, service tax, and goods and services tax, play a crucial role in generating government revenue and helping with public services, infrastructure, and social welfare programmes. These taxes are included in the prices of goods and services, making them less noticeable to consumers. The broad-based nature of indirect taxes ensures that they impact a wide range of individuals in the community, thereby contributing to revenue collection. However, their regressive structure can disproportionately burden lower-income individuals, posing challenges to income equity. The introduction of GST aimed to address some of these regressive aspects, streamlining the taxation system. Indirect taxes offer elasticity, allowing for adjustments to align with changing economic conditions and government expenditure requirements. Indirect taxes can serve social objectives by discouraging the consumption of harmful and luxury goods. They are also perceived as tools to manage inflation, though their potential to fuel cost-push inflationary pressures should be considered. Moreover, the unpredictability of revenue earnings due to changes in consumer behaviour following price increases poses a challenge in designing a clear and predictable tax system, as advocated by economists like Adam Smith.
In essence, while indirect taxes contribute significantly to government revenue and have several advantages, they also come with limitations. Achieving a balance between revenue generation, economic stability, and fairness in tax distribution remains a continuous challenge for policymakers. A well-structured and balanced approach to indirect taxation, considering the pros and cons discussed, is essential for fostering sustainable economic growth and ensuring that the tax burden is distributed equitably across society.
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