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Indirect Taxes

Indirect Tax

In addition to government revenue raised through direct taxation, India’s system of Indirect Taxation can also affect an individual’s or company’s consumption pattern and their ability to engage in certain types of marketplace activities, while influencing the purchasing decision for every single individual each day. The taxes charged on an individual’s or company’s purchase or use of goods and/or services, are identified as indirect taxes, in contrast to Direct Taxation, which are imposed upon income earned by that individual or company. When buying a product or service, every time you make a payment, a portion of that payment is attributable to an Indirect Tax; therefore, this type of tax is easier for State and Local Governments to administer and provides a uniform tax base throughout India, without the need for each entity to establish their own separate tax systems.

Indirect Taxes Used in India

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Although Goods and Services Tax (GST) has superseded many indirect taxes, there are still several indirect taxes that were previously implemented prior to the introduction of GST.

Goods & Services Tax (GST)

Goods and Services Tax (GST) – Announced on July 1st, 2017, GST will be the only indirect tax in India and will replace the multitude of indirect taxes such as excise duties, value-added taxes and service taxes that have existed over time.

GST Structure – India’s GST will be structured as a dual GST. There will be:

  • Central Goods and Services Tax (CGST)
  • State Goods and Services Tax (SGST)
  • Integrated Goods and Service Tax (IGST)
  • Union Territory Goods and Service Tax (UTGST)

GST Rates

  • 0%, 5%, 12%, 18%, and 28%
  • Sin goods taxed under Compensation Cess (such as cigarettes)
  • Electricity is not taxed under GST

Items not included in GST

  • Petroleum Crude
  • Petrol and Diesel
  • Aviation Turbine Fuel
  • Natural Gas
  • Alcohol for Human Consumption

Customs Duty

Customs Duty – It is a Tax on goods entering or leaving India.

  • Basic Customs Duty – the standard Import Taxes
  • Anti-Dumping Duty – this Tax prevents foreign businesses from selling below cost
  • Countervailing Duty / Safeguard Duty – this protects domestic industries

Excise Duty

Excise Duty – It is a Tax on goods manufactured in India. Excise Duties remain intact since these items were not covered under GST. Excise Duty is only charged for:

  • Petroleum Products
  • Alcohol for Industrial Use
  • Tobacco and Related Products

Stamp Duty

Stamp Duty – It has rates that vary according to each state; therefore, Stamp Duty has a large impact on state Revenue. Stamp Duty is applied to the:

  • Transfer of Real Estate
  • Registration of Agreements
  • Loan Documents
  • Commercial Contracts

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) – It is deductible from traders' accounts as the stock market operates. Securities Transactions Taxes are assessed on:

  • Purchase and sales of Shares
  • Units in Mutual Funds
  • Equity Derivatives
  • Other Financial Market Instruments

Characteristics of Indirect Taxes

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Indirect taxes have certain defining features that differentiate them from direct taxes and determine how they are collected and borne by individuals and businesses.

  • Payable at Time of Purchase – Tax is usually part of the overall price of goods or services.
  • Universal Coverage – All individuals will contribute regardless of earnings.
  • Transparency – The GST invoice clearly indicates how much tax is charged.
  • Reduced Tax Evasion – The tax is embedded in any transaction, making it difficult to evade.
  • Encourages Savings & Investment – Taxes on luxury goods discourage excess consumption.
  • Streamlined Liability – Businesses collect and remit tax to the government, reducing administrative burden.

Why Indirect Taxes Matter

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Indirect taxes are a critical source of government revenue and play an important role in economic planning, social regulation and public service delivery.

  • Indirect taxes are one of the largest sources of funding for public services such as healthcare, infrastructure, defence and education.
  • They create a stable and predictable source of income for governments.
  • Taxes on tobacco, alcohol and luxury goods discourage harmful or excessive consumption.
  • Even individuals who do not pay income tax contribute to government revenue through GST.
  • Changing indirect tax rates allows the government to quickly respond to economic changes.

Disadvantages of Indirect Taxes

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While indirect taxes offer many benefits, they also have certain limitations that impact consumers and the economy.

  • Impact on Low-Income Groups – The tax burden is heavier for lower-income individuals since everyone pays the same tax on goods.
  • Higher Cost of Goods and Services – Taxes increase prices and can add inflationary pressure.
  • Dependence on Consumption – If consumer spending slows down, government tax revenue declines rapidly.

Who Must Pay Indirect Taxes

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Indirect taxes are legally required to be paid by consumers and collected by businesses involved in the supply, manufacture and import of goods and services.

  • Consumers – Pay indirect tax when purchasing goods or availing services.
  • Businesses above the turnover threshold – Businesses exceeding ?20,00,000 (?40,00,000 for goods only) must register and collect GST.
  • Import and Export Companies – Must pay customs duties on goods imported into or exported from India.
  • Manufacturers of specific products – Producers of alcohol, petroleum and similar products must continue paying excise duty.
 
     
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