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What is Indirect Tax?

The government of India has imposed the concept of taxes like indirect and direct taxes. Direct taxes refer to taxes levied on revenue, profits or income earned by firms or individuals. Some examples of direct taxes include surcharge, gift tax and income tax. Such Taxes are exercised and regulated by CBDT or Central Board of Direct Taxes. 

The second tax classification is the indirect tax, which is passed on to another entity or individual. Such taxes are usually levied on a supplier or manufacturer who transfers the tax to the ultimate customer. Some indirect tax examples include entertainment, excise, sales, etc. These taxes are levied on the providers of services or sellers of goods. Then, it is passed to the final consumer as service tax, entertainment tax, custom duty, excise duty, etc. The tax imposed on alcohol is a prominent example of an indirect tax

Read along to learn what is indirect tax, its workings, features of indirect tax, and benefits in detail.

Defining Indirect Tax- What is it?

So, what is indirect tax? This is a common question that many individuals want to know. One party in the supply chain, such as a manufacturer or retailer, collects and pays the government an indirect tax. Nonetheless, the producer or merchant includes the tax in the amount that the customer must pay when purchasing an item or service. Ultimately, the customer pays the tax by increasing the item’s cost.

The common difference between direct and indirect tax is, indirect taxes apply to entities or individuals, ultimately passed on to the final customer. The collecting body of the tax will remit the same to the government. Some prominent indirect tax examples include excise duties on liquor, fuel, cigarettes, etc. 

What are Common Types of Indirect Taxes in India?

There are seven types of indirect tax imposed in India: 

Service Tax

Entities that provide legal, consulting, and similar services are required to collect this tax. The Central Government receives payment for this tax, collected from the service beneficiaries. With the addition of the 0.5% Swachh Bharat Cess and the 0.5% Krishi Kalyan Cess, the service tax rate was 14% as of June 1, 2016, with the applicable rate rising to 15%. Small service providers are excluded from paying this tax if their annual revenue is less than ₹ 10 lakh.

Excise Duty

All commodities that are made in India are subject to this tax. Manufacturers must pay this indirect tax, which they frequently pass to buyers. The Central Excise Act of 1944 governs how this indirect tax is applied in India and is imposed by the Central Government.


All sales of moveable commodities in the country are subject to value-added tax, or VAT. All manufacturing and distribution channels, including value addition, are subject to VAT. The State Governments are required to levy this tax in accordance with State List Entry 54.

Customs Duty

This is an example of an indirect tax imposed on the importation of products into the nation. In some cases, export items may also be subject to this charge. Regulations regarding the imposition and collection of this duty, import and export processes, fines, bans, and offences are outlined in the Customs Act of 1962.

Securities Transaction Tax (STT)

When equities are bought or sold through an Indian stock exchange, an indirect tax is levied. Introduced in 2004, STT covers transactions involving shares, mutual funds, and futures and options. To do away with the long-term capital gains tax and lower the short-term capital gains tax, STT was implemented.

Stamp Duty

State governments impose this indirect tax on real estate transfer under their purview. Furthermore, stamp duty is required for all kinds of legal papers. States have different charges for it.

Entertainment Tax

The state governments levy these taxes on all entertainment-related transactions. Movie tickets, arcade games, stage performances, art exhibits, amusement parks, and sports-related events are a few indirect tax examples.

What Is Difference Between Direct and Indirect Tax?

Following table shows the difference between direct and indirect tax:

FeatureDirect TaxIndirect Tax
Nature of TaxTax levied directly on individuals or entities based on their income or profits.Tax imposed on the purchase and sale of goods and services.
Basis of AssessmentAssessment is based on the taxpayer’s ability to pay, such as income, profits, or wealth.Assessment is based on the value of goods and services, often at the point of sale.
Impact on BehaviorCan influence individual and business behavior, as higher income or profits may result in higher tax liability.Generally affects consumption patterns, as the tax is embedded in the price of goods and services.

Features of Indirect Tax

The features of indirect tax include:

  • Streamlined tax liability

Indirect taxation, when implemented correctly, guarantees a simplified tax structure. The customer’s tax bears the cost of the item or service. This tax is collected by the maker or seller, who then sends it to the government.

  • Progressive nature

When implemented more consistently throughout the nation, indirect taxes are progressive and give the government, merchants, and consumers several advantages. It has lessened overlapping or confusion. Moreover, there have been fewer tax scams.

  • Reduced tax evasion

Tax evasion has decreased due to taxes being imposed directly on selling and purchasing goods and services. This increases transparency in the administration and collection of taxes.

Advantages of Indirect Tax

The significant benefits of indirect taxes include:

  • Convenience: Since they are only paid when a transaction is made, indirect taxes are convenient and do not burden the taxpayer. In addition, indirect taxes are easier for state authorities to collect since they save much time and work by being collected directly from the manufacturers or retailers.
  • Ease of collection: When it comes to collection, indirect taxes are simpler than direct taxes. The government doesn’t have to worry about collecting indirect taxes because they are only collected at purchase.
  • Collection from people with low incomes: Individuals who make less than Rs. 2.5 lakh annually are not required to pay income tax, meaning they are not contributing to the government. All people, irrespective of their income tax bracket, contribute to the economy’s expansion since indirect taxes are levied at the point of sale.
  • Equitable contributions: The prices of goods and services are directly correlated with indirect taxes. In essence, this implies that taxes are levied more heavily on luxury goods while they are levied less heavily on essentials, ensuring that payments are made fairly.
  • Reduce Negative Consumption: Products detrimental to human health, such as alcohol, tobacco, and other items, are subject to the highest indirect taxes. Because of this, they are more costly, which helps reduce the amount of money spent and dangerous goods consumed. 

How GST is an Indirect Tax?

Due to the wide variety of indirect taxes that may be applied to a buyer’s expenses, the government has combined all these taxes into one single indirect tax known as the Goods and Services Tax (GST) to streamline the taxation process.

The country’s tax governance has improved due to the consolidation of all these taxes, which has decreased the burden of compliance with these indirect taxes. The cascading impact of numerous taxes was abolished with the introduction of the GST in 2017.


An essential factor in the expansion of the economy is indirect taxation. Although the government may occasionally alter it, it offers the government a practical and fair way to collect taxes. By knowing its benefits and implications, people may better appreciate indirect tax’s effects on daily purchases and the economy. Regardless of income, you will pay the same indirect sales tax on a product as other customers.


Can Indirect tax be subject to alteration?

Certainly, Indirect tax is susceptible to changes. Its adjustments hinge on economic conditions and factors that empower the Government of India to raise or reduce tax rates.

What sets apart direct and indirect taxes?

Direct taxes are levied on the income and profits of individual taxpayers paid directly to the government. On the other hand, indirect taxes apply to services and products offered by HUFs/businesses, paid through an intermediary to the government.

Are there drawbacks associated with Indirect tax?

Indeed, Indirect taxes can be regressive and unpredictable. They have the potential to induce inflation and hinder the growth of industries.

How can businesses counteract the impact of taxes?

Businesses may mitigate the tax burden by increasing the purchase price of goods and incorporating sales tax to recover some of the incurred tax expenses.

Do direct and indirect taxes feature distinct payment rates?

Certainly, the rates for direct taxes are determined based on an individual’s income or profits, whereas the rates for indirect taxes remain uniform for everyone.

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