What is Indirect Tax?

An Indirect Tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). In simpler words, it can be defined as the charge that is paid by one individual at the beginning, but the burden of which will be passed over to some other individual, who eventually holds the burden.

Let us understand it by an example. Suppose you go to Pizza Hut. You had pizza. When the bill is made there are different types of taxes imposed over the total price of the food you had. One such tax is VAT (Value Added Tax). Now, Pizza Hut takes this tax from you and gives it to the government of India. So Pizza Hut is acting as intermediary between you and government to levy tax. This type of tax is known as Indirect tax.

The some important indirect taxes imposed in India are as under:

·        Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.

·         Excise Tax: It is an indirect tax levied on the sale of a specific good. It is a vital source of revenue for the Government of India.

·         Service Tax: The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax.

·         Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country.

·         VAT: The practice of VAT executed by State Governments is applied on each stage of Sale. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and 12.5% on other items.

·         Securities Transaction Tax (STT): STT is a tax being levied on all transactions done on the stock exchanges. 

·         Stamp duty: This is an additional charge levied on documents, like promissory notes, bills of exchange, insurance policies and debentures

·         Expenditure tax: The hotels in India collect expenditure tax from their customers and eventually deposit to the Central Government

Advantages and Disadvantages of Indirect Taxes:

·         Advantages:

1.    They are convenient,

2.    Difficult to invade and have a wide coverage

·         Disadvantages:

1.    High cost of collection,

2.    Increasing income inequalities (both rich and poor pay the same amount of tax)

3.    Affecting consumption of certain products

The scope of raising revenue through direct taxes is limited, so indirect taxes are important parts and parcels of the financial system.