Advantages And Disadvantages Of Indirect Taxes

In India, there are two main types of taxes that taxpayers pay to the government. The first type of taxes are called Direct Taxes, and they are levied directly on the income of an individual in the form of Income Taxes, Surcharges, etc.The second type of taxes are called Indirect Taxes and these are not directly levied on the income of an individual but rather on the expenses that they incur. Indirect Taxes are actually levied on sellers of commodities and services, but they pass it on to the consumers, and hence they end up indirectly paying such a tax.The Goods and Services Tax (GST) is a good example of indirect tax. GST is applicable to anyone selling goods or commodities, but they usually do not pay this out of their own pocket, but rather add it to the cost of the commodity and charge it to the consumer themselves.

Everyone can contribute in indirect taxes

Unlike Income Tax , which has to be paid by individuals in certain income brackets and not others, Indirect Taxes have to be paid by each and everyone who purchases the commodity. Persons not working in India like tourists and persons of lower economic strata also have to pay it because they will in some form purchase commodities.

Indirect taxes are convenient

Indirect taxes are very convenient as far as charging them is concerned. Firstly, the taxes can be very nominal and consumers do not feel burdened when paying such small amounts. Secondly, these indirect taxes are said to be ‘hidden in the price’, which means that the consumer only effectively sees the price of the commodity itself.

Indirect taxes cannot be evaded

Indirect taxes cannot be evaded, because they are part of the price of the commodity. So anyone who buys the commodity, will pay the tax.

Indirect taxes are spread over a wide range

Heavy taxation in any one aspect of a service or commodity will be highly noticeable as well as a burden on the consumer. In this regard, indirect taxes can be beneficial since they are spread out over a wide range of products in smaller amounts.

Indirect Tax can be regressive

Since indirect tax is the same for both the rich and the poor, it can be deemed unfair to the poor. Indirect tax is applicable to anyone who makes a purchase, and while the rich can afford to pay the tax, the poor will be burdened by the same amount of tax. Thus, indirect taxes may be seen as regressive.

Indirect taxes raise price of commodities

Sellers cannot always calculate and collect the exact fraction of tax applicable on all commodities that they sell. And hence they consciously charge more than the tax amount so they can be sure that every buyer paid the indirect tax . But this has a cumulative effect and increases the price of commodities.

Indirect taxes do not raise civic consciousness

Indirect taxes do not raise civic awareness because millions are not even aware that they’re paying a tax because it is hidden in the price.

Thus, indirect taxes have both advantages and disadvantages, but no one can deny that they are important to generate revenue. While direct taxes can be collected from the rich, indirect taxes give an opportunity to the poor to contribute in their own small way. So both have their own place in the economy.

Indirect taxes are those that are levied on commodities and services. Here are some of the key features of indirect taxes that differentiate them from any other form of tax.

• Transfer of tax liability – Indirect taxes are paid by the consumers of products and charged at every stage of a supply chain. When a manufacturer purchases raw material from a supplier, the supplier charges indirect taxes to the manufacturer. When the manufacturer creates and sells a product to the retailer, indirect taxes are levied, and the retailer also charges indirect taxes to the end consumer. Thus, there is a transfer of tax liability in indirect taxes.
• Controlled tax evasion – since there are many businesses concerned and good/services are directly taxed, evading indirect taxes is extremely difficult.
• One nation, one tax – With the implementation of GST in India , all of the existing indirect taxes have been eliminated. Now, a single tax – GST – is applied at every stage of the supply chain, making it extremely easy for businesses to adhere to indirect tax regulations.
• Holds businesses accountable – Some raw materials and products are taxed at higher rates after considering their harmful effects on society at large. At the same time, some essential items are tax-free to reduce their prices and make them affordable for everyone.
• Equally charged – Indirect taxes are not charged based on the economic standing of an individual. Everyone is taxed equally for the kind of products they wish to use.

After the introduction of GST, most of the indirect taxes came under the umbrella of GST itself. At present, customs duty and GST are the important and common indirect taxes paid by the citizens. However, excise duty and VAT is still charged on alcohol and petroleum products.GST is called the Goods and Services Tax. It is a single tax that is levied and distributed amongst center and state governments based on the nature and place of supply.Customs duty is charged on goods that are important or exported from India. The rate of customs duty charges depends on the origin and type of goods.

Indirect taxes in are India is split into two main components. One is GST which is Goods and Services Tax. It has enveloped all of the existing taxes like Service Tax, Value Added Tax (VAT) , Excise Duty, etc. GST is further split into Central GST, State GST and Integrated GST. This split helps the government split the revenue from GST between the center and the state. Based on the place and nature of supply, the different rates of GST can be applied to a transaction. These rates can be 5%, 12%, 18% or 28% while some essential commodities attract 0% GST.The other type of indirect tax in India is customs duty which is levied on goods imported or exported from India. The rate of customs duty differs on the basis of the type of goods, place of origin and usage of the goods.Both indirect taxes are governed by strict bodies overseeing the documentation. GST regulations contain a number of returns that different types of businesses have to file while paying GST. Failure to comply with indirect tax regulations results in heavy penalties.

Indirect taxes are levied on goods and services consumed. They are charged at each stage of a supply chain . In India, Customs Duty and GST are prominent indirect taxes charged.Customs duty is charged on goods imported or exported from India. The scope of customs duty extends to personal as well as business-related transactions. Export and import regulations are extremely strict and goods are not released from the ports until the customs duty is fully paid.GST is charged on most domestic products and services. The scope of GST extends to inter-state as well as intra-state transactions. Businesses that cross a certain threshold of annual revenue as required to register for GST. Only registered entities can charge GST to their customer.For products like alcohol and petroleum products, excise duty and VAT are still charged.

Indirect taxes are charged at every stage of the supply chain. The supplier charges indirect taxes, and the consumer pays indirect taxes. Ultimately, these indirect taxes are paid to the government.For example, a manufacturer pays GST on the raw material purchased from a supplier. The manufacturer then charges GST to the retailer who purchases products from the manufacturer. Ultimately, the end consumer pays GST on purchases made from the retailer. Those who collect GST are responsible for paying the GST to the government by filing periodic returns.In some cases of GST, a reverse charge mechanism may apply where the consumer/recipient of goods is supposed to pay the tax to the government. Examples of reverse charge mechanisms include notified services like recovery agent services, goods transport services, and insurance agents. GST products that fall under the ambit of the reverse charge mechanism include silk yarn, cashew nuts, raw cotton used vehicles, etc.

Direct taxes refer to taxes on the income of a taxpayer. Individuals and companies pay direct taxes on the income or profit they have earned in a financial year.Indirect taxes, on the other hand, are paid on the goods or services consumed, whether it is for personal use or business use.This table will help to simplify the difference between indirect and direct taxes.

Goods and Service Tax falls under the ambit of indirect tax because it is a tax charged on the consumption of goods and services and not on the income or profit of the taxpayers.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.