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Exploring the Meaning, Features, and Types of Indirect Taxation

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Indirect taxes are essential to the Indian economy because they give the government money and control how much people spend on products and services. However, most indirect taxes were dissolved after GST implementation, but some indirect taxes are still charged on some goods and services.

In India, indirect taxes are levied on manufacturing, selling, and consuming goods and services. Intermediaries, such as manufacturers, wholesalers, and retailers, collect these taxes and pass them to the end consumer.

Customs charges are imposed on items brought into the nation. Products made or created domestically are subject to central excise duty. On some services offered domestically, a service tax is charged. The value added to products as they move through the supply chain, from manufacturing to final sale, is taxed with VAT.

Did You Know? The significant indirect taxes in India include the Goods and Services Tax (GST), Customs Duty, Central Excise Duty, Service Tax, and Value Added Tax (VAT).

All About Indirect Taxes 

In India, an indirect tax is assessed on purchases of goods and services instead of on income or property. These taxes are typically passed on to the final customer by intermediaries like manufacturers, wholesalers, or retailers.

Types of Indirect Taxes

Some of the main indirect taxes in India are:

1. GST

Several taxes and levies, including Central Excise Duty, Service Tax, and Value Added Tax, were replaced by the Goods and Services Tax (GST), a comprehensive indirect tax, in 2017. GST has been a significant tax reform in India and is expected to positively impact the economy in the long run.

2. Customs Duty

A tax on products brought into the nation through customs. Custom duty rates depend upon the type of goods, value, and country of origin. The customs tariff act of the respective country determines it. 

3. Central Excise Duty

A tax is imposed on domestic products. Central Excise Duty has been playing a significant role in generating revenue for the government and regulating the manufacturing sector in India.

4. Service Tax

A tax imposed on domestic activities. A shift to GST has simplified the tax system and eliminated the cascading effect of taxes, which has promoted the ease of doing business in the country.

5. Value-added Tax

A value-added tax (VAT) is a tax imposed on the value added to goods as they pass through the supply chain, from production to ultimate sale, known as a value-added tax (VAT).

Also Read: Challan 280: The Process of Using a Challan to File Income Tax

GST Meaning in Simple Terms

An indirect tax known as the Goods and Services Tax (GST) was implemented in India in 2017. At every point in the supply chain, from the manufacturer to the consumer, it is assessed on the value attributed to goods and services. GST supersedes several indirect taxes, including Central Excise Duty, Service Tax, and Value Added Tax. This ensures the state where the products or services are consumed collects tax funds.

GST has simplified India’s revenue system and is more consistent across states. Eliminating the cascading effect of various taxes previously imposed on products and services has also reduced the consumer tax burden.

Types of GST

In India, there are four kinds of GST.

1. CGST

Central Goods and Services Tax, or CGST, is part of the GST that the federal government collects on state transactions.

2. SGST

State Goods and Services Tax, or SGST, is part of GST that the state government collects from transactions occurring within the state.

3. IGST

Integrated Goods and Services Tax, or IGST, is part of the GST the federal government collects from state transactions. Products or services transported from one state to another are subject to IGST.

4. UTGST

Union Territory Goods and Services Tax is UTGST. It is a type of Goods and Services Tax (GST) charged on trade between union territories.

Features of Indirect Taxes

Some of the main features of the indirect tax system are listed below.

1. Wide-ranging

India’s extensive indirect taxation scheme covers most goods and services.

2. Multi-level

The structure has multiple levels, and taxes are imposed along the supply chain.

3. Location-based

GST, India’s central indirect tax, is based on a person’s final location. This implies that rather than the state where the products or services are produced, the state where they are consumed collects the tax revenue.

4. Unified Tax System

GST has replaced several indirect taxes, including the Central Excise Duty, the Service Tax, and the Value Added Tax. (VAT). As a result, the country’s revenue system is now more uniform.

5. Technologically Driven

The GST system is technologically driven, and taxpayers must submit reports online. As a result, efficiency has increased, compliance expenses have decreased, and transparency has improved.

6. Input Tax Credit

GST’s input tax credit system is one of its main components. This enables companies to claim credit for GST spent on materials used to create their products. This makes it easier to prevent cascading taxes.

7. Threshold Exemptions

Small companies are exempt from GST registration requirements if their annual revenue is below a specific threshold.

Overall, the Indian indirect tax system aims to provide a simplified and transparent tax structure that is easy to understand and comply with for taxpayers.

Also Read: Everything About Income Tax Slabs for FY 2021-22 (AY 2022-23)

Advantages of Indirect Tax 

Here are some advantages of India’s indirect tax scheme:

1. Tax Structure Simplified

GST, which replaces several indirect taxes, results from the Indian indirect tax system’s tax structure simplification. As a result, citizens are now under less pressure to comply, and doing business is more manageable.

2. Tax Regime Uniformity 

By eliminating previously present variations in tax rates and processes, GST has created a uniform tax regime throughout the nation.

3. Tax Cascading Lessened

The previous tax system’s input tax credit mechanism eliminated multiple taxes’ cascading impact. The overall tax burden on companies and consumers has decreased as a result.

4. Transparency

The GST system is online, increasing efficiency and transparency. Due to this, tax evasion has decreased, and tax compliance has increased.

5. Increase in Exports

Exports are now more competitive thanks to GST, which offers input tax credits on export manufacturing products and services. Exports have increased, and India is now more competitive internationally.

Also Read: Guidelines On Tax Deducted At Source With Relevant

Recent Changes in Indirect Tax Regime 

  • “Number of basic customs duty rates on goods, other than textiles and agriculture, reduced to 13 from 21.
  • Minor changes in the basic customs duties, cesses, and surcharges on some items, including toys, bicycles, automobiles, and naphtha.
  • Excise duty is exempted on GST-paid compressed biogas contained in blended compressed natural gas.
  • Customs Duty on specified capital goods/machinery for manufacturing the lithium-ion cell for use in electrically operated vehicles (EVs) batteries extended to 31.03.2024.
  • Customs duty exempted on vehicles, specified automobile parts/components, sub-systems, and tyres when imported by notified testing agencies for the purpose of testing and/or certification, subject to conditions.
  • Customs duty on the camera lens and its inputs/parts for use in the manufacture of the camera module of cellular mobile phones was reduced to zero, and concessional duty on lithium-ion cells for batteries was extended for another year.
  • Basic customs duty reduced on parts of open cells of TV panels to 2.5%.
  • Basic customs duty on electric kitchen chimneys increased to 15% from 7.5%.
  • Basic customs duty on heat coil manufacturing electric kitchen chimneys reduced to 15% from 20%.
  • Denatured ethyl alcohol used in the chemical industry is exempted from basic customs duty.
  • Basic customs duty reduced on acid grade fluorspar (containing by weight more than 97% of calcium fluoride) to 2.5% from 5%.
  • Basic customs duty on crude glycerin for use in the manufacture of epichlorohydrin reduced to 2.5% from 7.5%.
  • Duty reduced on key inputs for domestic manufacture of shrimp feed.”

Key Differences Between Direct and Indirect Tax 

  • Direct tax is levied on an individual’s or entity’s income, wealth, or assets.
     
  • It is a progressive tax, meaning that the tax rate rises proportionately to the taxpayer’s wealth or revenue.
     
  • Direct taxes are levied against people or organisations directly, and the user pays the tax.
     
  • The government collects direct taxes in many ways, including tax deducted at source (TDS), advance tax, and self-assessment tax. Income tax, wealth tax, corporate tax, and capital gains tax are some types of direct taxation in India.
  • On the other hand, an indirect tax is imposed on goods and services that a person or organisation uses or purchases.
     
  • It is a regressive tax, which means that regardless of the taxpayer’s income or wealth, the tax rate is always the same.
     
  • Businesses or manufacturers are subject to indirect taxes, which they then pass to customers through higher prices.
     
  • Businesses and producers collect indirect taxes and remit them to the government. India’s Goods and Services Tax (GST), Excise Duty, and Customs Duty are indirect taxes.
     

Conclusion 

India’s indirect tax system has significantly transformed recently, with the Goods and Services Tax (GST) introduced in 2017. GST has replaced multiple indirect taxes and created a uniform tax regime nationwide. It has simplified the tax structure, reduced tax cascading, and improved the ease of doing business in India. The GST system is technology-driven and online, making it more transparent and efficient, reducing tax evasion, and improving tax compliance. The Indian indirect tax system has increased revenue collection for the government, which can be used for various developmental activities.

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