Indirect Taxes

Indirect tax is the tax levied on the consumption of goods and services. It is not directly levied on the income of a person. Instead, he/she has to pay the tax along with the price of goods or services bought by the seller. The person paying the tax to the government and the person bearing the liability to pay the tax are thus, two different people. Let’s look at an example to understand how indirect tax works. The indirect tax rate here has been assumed to be 10%. As seen in the above table, Mr. X will collect taxes of ` 100/- on the selling price of ₹ 1,000/-, from Mr. Y. Mr. X has not paid any taxes earlier. So he will pay the entire ` 100/- collected to the government. Mr. Y will then sell the goods to the customer at ₹ 1,100/- plus 10% taxes i.e. total selling price is ₹ 1210/- for Mr. Y. Since Mr. Y has already paid taxes of ₹ 100/- to Mr. X, he will only pay the balance ₹ 10/- (₹ 110/- – ₹ 100/-) to the government. Hence, the government has received a total tax of ₹ 110/- (₹ 100/- from Mr. X and ₹ 10/- from Mr. Y). The customer has paid ₹ 1210/- to Mr. Y which is bifurcated as ₹ 1100/- selling price and ₹ 110/- of taxes. It is thus ultimately the customer who is bearing the entire tax liability on the goods purchased. Earlier, different types of indirect taxes were imposed as follows: Service Tax: This is charged on the services availed by the customer. For example, if the person books a hotel accommodation, service tax is charged on the hotel booking amount. Excise Duty: This is paid for the manufacturing of goods. For example, if a person manufactures cars, he is liable to pay excise duty on manufactured cars. Value Added Tax (VAT): This is paid on the value addition in price during the sale of goods. For example, when the wholesaler sells goods to a retailer. Custom Duty: This is paid on the goods imported from outside India. Stamp Duty: This is paid on the sale of immovable property. Also, stamp duty is mandatory on all types of legal documents. Entertainment Tax: This is levied on every transaction related to entertainment. For example, movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.