What is Indirect Tax? Explained with Types and Examples

Examples of an Indirect Tax

Excise Duty, Customs Duty, Entertainment Tax, Service Tax, Sales Tax, Gross Receipts Tax  and Value-Added Tax (VAT) are examples of Indirect taxes.

An example of GST (Indirect tax): Explanation

Let's say you eat at a restaurant. You could see your entire payment plus the GST on the bill (Indirect tax). The GST rate is 5%, so let's say the total was Rs.2500. Then, you will be required to pay Rs.2625(2500+125). The service provider passes on the indirect tax to you in the amount of Rs.125.

Overview of Indirect Tax in India

There are many indirect taxes applied by the government of India. Taxes are levied on manufacture, sale, import and even purchases of goods and services. These laws aren't also well-defined Acts from the government, rather orders, circulars and notifications are given out by relevant government bodies to this end. As such, it can be cumbersome trying to understand every feature of indirect taxes in India.

Indirect taxes are touted to be streamlined following the introduction of the uniform Goods and Services Tax (GST). The points below will help you understand more about the types of indirect taxes and where they are applicable from a consumer's perspective.

Different Types of Indirect Taxes

There are different types of indirect tax in India. However, after the implementation of GST, all these indirect taxes were bundled into one singular tax for the citizens of India. We will have a look at the different types of indirect tax in India:

• Service tax: This tax is levied by an entity in return for the service provided by them. The service tax is collected by the Government of India and deposited with them.
• Excise duty: When any product or good is manufactured by a company in India, then the tax levied on those goods is called the Excise Duty. The manufacturing company pays the tax on the goods and in turn recover the amount from their customers.
• Value Added Tax: Also known as VAT, this type of tax is levied on any product sold directly to customer and are movable. VAT consists of Central Sales Tax which is paid to the Government of India State Central Sales Tax which is paid to the respective State Government.
• Custom Duty: This a tax levied on the goods imported to India. Sometimes, Custome Duty is also levied on products which are exported out of India.
• Stamp Duty: This is a tax levied on the transfer of any immovable property in a state of India. The state government in whose state the property is located charges this type of tax. Stamp tax is also applicable on all legal documents too.
• Entertainment Tax: This tax is charged by the state government and is applicable on any products or transactions related to entertainment. Purchasing of any video games, movie shows, sports activities, arcades, amusement parks, etc. are some of the products on which Entertainment Tax is charged.
• Securities Transaction Tax: This tax is levied during the trading of securities through Indian Stock Exchange.

Features of Indirect Tax

Here are the key features of indirect taxes:

1. Tax liability: The service provider or seller pays indirect taxes to the government, and the liability is transferred to the consumer.
2. Payment of tax: The seller pays indirect taxes to the government and the same is transferred to the consumer.
3. Nature: Indirect taxes were initially regressive in nature, but thanks to the implementation of the Goods and Services Tax, they are now pretty progressive.
4. Saving and investment: Indirect taxes are generally growth-oriented considering the fact that they encourage consumers to save and invest.
5. Evasion: It is difficult to evade indirect taxes because they are now implemented directly through products and services.

Advantages of Indirect Tax

Here are the main advantages of indirect taxes

1. Convenience: Indirect taxes do not burden the taxpayer and are convenient as they are paid only at the time of making a purchase. Moreover, state authorities find it convenient to levy indirect taxes because they are collected directly at the stores/factories which helps in saving a lot of time and effort.
2. Ease of collection: Indirect taxes are easy to collect in comparison with direct taxes. Since indirect taxes are only collected at the time of making purchases, the authorities need not worry about their collection.
3. Collection from the poor: Those who earn less than Rs.2.5 lakh p.a. are exempt from income tax, which means that they do not contribute to the government. Since indirect taxes are charged at the point of sale, all individuals, regardless of the income tax slab under which they fall, contribute towards the growth of the economy.
4. Equitable contributions: Indirect taxes are directly related to the costs of products and services. What this essentially means that the basic necessities attract lower rates of tax while luxury items are charged at higher tax rates, thereby ensuring that contributions are equitable.
5. Reduce Negative Consumption: The highest indirect taxes are placed on goods that are bad for our health, like alcohol, tobacco and other similar products. Thus, they are more expensive which helps curb the spending and consumption of such harmful commodities. 

Disadvantages of Indirect Tax

Some of the disadvantages of Indirect Tax are given below:

1. Indirect Tax charged sometimes are cumulative. This means that in a point-based transaction system, middlemen involved are likely to charge their own service tax which may result in the overall price of the product increasing.
2. Indirect Tax can be regressive in nature. For example, salt tax remains the same for both poor and rich, However, if a rich person defaults the payment, then the penalties imposed will be higher as well.
3. Indirect Tax are not industry friendly. Taxes are levied on raw materials and goods which in turn increases the cost of production, thus not allowing industries to expand as their competitive capacity is restricted.
4. Indirect Tax is unpredictable: The amount of indirect taxes collected fluctuates. It is based on the buying of goods and services. As a result, it is impossible for the government to predict how much money will be raised through indirect taxes. 

Why GST is Indirect Tax?

The Goods and Services Tax, or GST as it is commonly known, was implemented on July 1st, 2017 to subsume the various indirect taxes in the country. The taxes that were once compulsory are now done away with due to the introduction of the new tax regime. One of the main benefits of GST is that it has eliminated the cascading effect of tax, thereby ensuring that they do not end up paying for every value addition.

The taxes subsumed under GST on the state level include service tax, state excise duty, countervailing duty, additional excise duty, and special additional custom duties. The taxes subsumed under GST at the central level include sales tax, central sales tax, purchase tax, entertainment tax, luxury tax, octroi and entry tax, and taxes on betting and lottery gambling. In July 2017, the GST law went into effect, bringing 17 indirect taxes under its purview. The GST now includes all significant services and service tax.

GST on Insurance Policies

Unless specifically exempted by the GST Law, almost all sectors and services, including life insurance policies, are subject to the Goods and Services Tax (GST). The life insurance premiums are subject to an 18% GST based on the most recent rates. Although the rate may appear to be high enough to interfere with investment return policies, its overall impact is minimal.

GST in insurance policies only applies to the full or partial protection premium. The following is a summary of how GST affects various types of insurance plan premiums: