What is Indirect Tax in India and its Types?

Taxes are a crucial component of a nation's economy, providing revenue for government functions and public welfare. In India, taxation is classified into Direct Taxes and Indirect Taxes. While direct taxes are levied on income and profits (e.g., Income Tax), indirect taxes are imposed on goods and services, making them applicable to consumers at the point of purchase.

An indirect tax is a tax imposed on the use of goods and services rather than directly on an individual's income. Instead of being paid directly by the consumer to the government, it is collected by an intermediary, such as a manufacturer or retailer, who then remits it to the government.

The seller adds the tax to the cost of the goods or services, and the final consumer ultimately bears the tax burden in the form of increased prices.

Types of Indirect Taxes Before GST

Before the introduction of Goods and Services Tax (GST) in July 2017, multiple indirect taxes were levied in India. These were later merged into GST to simplify the taxation system. Here are some of the major taxes that were replaced:

1. Service Tax – This tax was imposed on entities providing taxable services. Any company offering taxable services had to pay this tax on the revenue generated from those services.
2. Excise Duty – A tax levied on the production, sale, or licensing of certain goods. With the introduction of GST, excise duty was largely abolished except for specific products like petroleum and tobacco.
3. Value-Added Tax (VAT) – Applied to the sale of movable goods within a state. VAT was collected by state governments on intra-state transactions. Currently, specific goods like petrol and diesel still attract VAT.
4. Customs Duty – Levied on goods imported into India from foreign countries. The duty charged varies based on the type and value of imported goods.
5. Stamp Duty – Imposed on the transfer of immovable property and legal documents. This tax is still applicable and is charged by state governments.
6. Entertainment Tax – Applied to entertainment-related transactions, such as movie tickets, amusement parks, video games, and sports events. The state governments used to levy this tax before it was absorbed into GST.

Present Indirect Tax System in India – GST Era

Key Features of GST

1. One Nation, One Tax – A unified tax system eliminating multiple indirect taxes.
2. Multi-stage Tax – Levied at each stage of the supply chain, with tax credits available for the previous stage.
3. Destination-based Tax – The tax is collected by the state where goods or services are consumed rather than where they are produced.

Types of GST

1. CGST (Central Goods and Services Tax) – Collected by the Central Government on intra-state sales.
2. SGST (State Goods and Services Tax) – Collected by State Governments on intra-state sales.
3. IGST (Integrated Goods and Services Tax) – Collected by the Central Government on inter-state sales, later distributed to states.
4. UTGST (Union Territory Goods and Services Tax) – Applicable in Union Territories.

The features of GST are:

1. GST Rates: The States and Centers have mutually decided upon the GST rates levied on goods or services through CGST, SGST, and IGST under the aegis of the GST Council. The four tax slabs under GST are 5% (for consumer durables), 12% (general rate), 18% (general rate), and 28% (luxurious goods). However, the rate of GST for exports and supplies to the Special Economic Zones (SEZs) is 0%.

2. Applicability of GST: The Goods and Services Tax applies to the whole country (India).

3. Consumption-Based Tax: Earlier, the taxes were based on the principle of origin-based taxation. However, the Goods and Services Tax is a destination-based consumption tax, which means that the taxes will be received by the states.

4.Applicable on Supply of Goods and Services: The Goods and Services Tax is based on the supply of goods and services, as opposed to the previous system that based taxes on the production, sale, or provision of goods or services.

5. GST on Imports: Goods and services imported are subject to IGST and are regarded as interstate supplies. In addition to the relevant customs charges, IGST is levied on the import of goods and services.

6. GST Payment: There are several ways for taxpayers to pay GST, including Internet banking, debit/credit cards, and NEFT (National Electronic Funds Transfer)/RTGS (Real Time Gross Settlement).

Other Existing Indirect Taxes

Although GST has subsumed most indirect taxes, a few continue to exist, such as:

• Customs Duty- Levied on imports and exports.
• Excise Duty on Certain Products- Applicable to specific goods like petroleum, tobacco, and alcohol.
• Stamp Duty- Charged on the transfer of property and legal documents.

Advantages of Indirect Tax

1. Ease of Collection – Indirect taxes are easier to collect compared to direct taxes. The government does not have to pursue individuals for payments, as these taxes are collected at the point of sale.
2. Convenience – Since indirect taxes are paid only when a purchase is made, they are more convenient for taxpayers. Additionally, state authorities find it efficient to collect these taxes at stores or manufacturing units, saving time and effort.
3. Equitable Contribution – The tax burden is proportionate to consumption. Essential goods and services are taxed at lower rates, while luxury items attract higher taxes, ensuring fairness in taxation.
4. Discourages Harmful Consumption – High indirect taxes on products like alcohol, tobacco, and cigarettes help reduce their consumption, promoting better public health.
   
   Conclusion

An essential component of a country's tax structure, indirect taxes have a significant impact on economic activity and revenue generation. Although they have a lot to offer in terms of fiscal stability, they also have drawbacks in terms of political viability, economic distortion, and compliance. In order to meet the changing needs of society and the economy, the indirect tax system must be managed effectively and undergo ongoing modifications.