Types of Indirect Tax
An indirect tax is one that is levied on the consumption of goods and services. It is not applied immediately to a person’s earnings. Instead, the seller must pay the tax in addition to the price of the goods or services they bought. An indirect tax is collected and paid to the government by an individual in the supply chain, such as a manufacturer or retailer.
However, when a customer buys a good or service, the producer or retailer incorporates the tax in the price. The buyer ultimately pays the tax by increasing the product’s price.
The indirect tax structure in India can be better understood by looking at the following list of indirect taxes:
Goods and Services Tax (GST)
One of the most significant reforms in India’s tax structure, GST, or Goods and Services Tax, has replaced many older levies that once fell under different types of indirect taxes. Introduced on July 1, 2017, GST consolidated multiple state and central taxes into a single tax applied to the supply of goods and services across the country.
GST is structured to promote transparency and remove the cascading effect of tax-on-tax. It is applicable at every stage of the supply chain, right from the manufacturer to the end consumer. The tax you pay is divided among different authorities based on the nature of the transaction:
- Central Goods and Services Tax (CGST): Collected by the central government on intra-state sales (within the same state).
- State Goods and Services Tax (SGST): Collected by the state government on intra-state sales.
- Integrated Goods and Services Tax (IGST): Collected by the central government on inter-state transactions (between different states).
- Union Territory Goods and Services Tax (UTGST): Applied in Union Territories where SGST does not apply.
Different slabs of GST rates—0%, 5%, 12%, 18%, and 28%—are distinguished based on the goods or services being offered. The majority of consumer products and services are between 5% and 28%, apart from certain requirements.
GST has made it easier for businesses to comply with the tax system and guaranteed that you, as a consumer, pay a more efficient and transparent tax.
Customs Duty
According to the Customs Act of 1962, customs duty is a tax levied on the import and export of commodities. Basic customs duty, countervailing duty, and anti-dumping duty are some of its constituent parts. In addition of generating money, customs taxes also aid in controlling international trade and safeguarding local businesses.
Excise duty
Previously a significant indirect tax on Indian manufacturing, excise duty is now only applied to specific goods including alcohol, tobacco, and petroleum products. Other products are now subject to the GST system. The central government and state governments in these exempted categories still rely heavily on excise duty as a source of funding.
Value Added Tax (VAT) and Sales Tax
Value Added Tax (VAT) and Sales Tax were the two main state-level taxes on the sale of products prior to the introduction of the Goods and Services Tax (GST). VAT still applies to petroleum items and alcoholic drinks, which are exempt from the GST structure because of constitutional requirements, even though the GST has replaced them for the majority of goods.
Stamp Duty
State governments impose stamp duty, a tax, on a variety of legal documents, including agreements, sale transactions, and property transfers. Stamp duty is a separate fee on transactions involving immovable property and is not included in the GST. It is governed by the Indian Stamp Act, 1899, and the legislation of the respective states.
Entertainment Tax
Now mostly incorporated into GST, the entertainment tax was previously imposed by state governments on services including cable TV, amusement parks, and movie tickets. It may still be applied to certain entertainment services that are not included by the GST system, however, by certain states and local governments.