The Indian taxation system can be broadly classified into direct and indirect taxation. Direct tax, as the name suggests, is the tax paid directly to the government by the taxpayer. Indirect taxes are non-income-based taxes that place a burden on the end consumer.
What Is Indirect Tax
In layman’s terms, indirect taxes are taxes imposed on suppliers or manufacturers, who later pass them on to the end consumer.
Types of Indirect Taxes
Customs duty, goods and services tax (GST), excise duties, value-added tax (VAT), and sales tax are some of the prominent indirect taxes in India. Here is a quick snapshot of their definitions, applicability, and exceptions.
Also read: Direct Tax And Indirect Tax
The Goods and Services Tax (GST)
The GST was implemented in 2017 by the central and state governments. It was implemented by subsuming various taxes such as service tax (ST), central excise duty (CED), VAT, and central sales tax (CST), among others. However, there are exceptions when it comes to liquor and petroleum products, as they are still taxable under excise duties and VAT.
Dual structure levy
The GST has a dual structure regime as the Centre, States, and Union Territories can simultaneously levy it on the supplies of goods and services. The dual levy structure is explained as follows:
- Central GST (CGST) and State GST (SGST): It is levied on all taxable supplies within state or union territory.
- Integrated GST (IGST): It is levied on all taxable supplies between the two states or union territories and the export or import of goods and services from and to India. However, as per the arrangement, the share of the state will be passed on to the states where goods or services have been consumed.
- Compensation Cess: It is levied on specified supplies to compensate the states for the loss of revenue due to the implementation of GST.
Taxable event
GST fundamentally deals with the supply of goods and services. However, supply is a broad concept, and GST encompasses the supply of all kinds of goods and services such as sale, transfer, barter, exchange, license, rental, disposal, etc. Supply of goods or services like these is liable to taxation when carried out to advance business and for consideration.
As per GST, the term “consideration” includes payments made or agreed upon, whether in money or otherwise. Apart from this, certain transactions are tax-chargeable even if made without consideration, i.e., within the same legal entities or related parties.
Nature of supply
The levy of CGST and SGST, UTGST, or IGST will depend on the nature of the supply. The GST law has provided separate provisions for goods and services to identify the nature of supply. The location of the supplier and the place of supply of goods or services are two factors that determine the nature of supply. The various types of supply under GST are as follows:
- Intra-state supply: The location of the supplier and place of supply of goods or services are within the same state or union territory.
- Inter-state supply: The location of the supplier and place of supply of goods or services are with different states or union territories.
- Zero-rated supply is the supply of goods, services, or both to a special economic zone (SEZ) developer or an SEZ unit. Also, the export of goods here means transporting goods out of India.
- Export of services means the service supply when the service supplier is located in India and the service recipient is abroad. The conditions above for service export under the GST law must comply with receiving payment in convertible foreign exchange.
Tax rates
- All goods and services are dispersed into a four-tier rate structure: 5%, 12%, 18%, and 28%. While some specified essential items are exempted under GST, the demerit or luxury goods attract the highest tax rate and may invite cess.
- Regarding zero-rated supply, tax payment is optional for the supplier of goods or services. A registered individual may supply goods, services, or both without paying the integrated tax on furnishing bonds or letters of undertaking (LOU). The option to pay integrated tax on such supply is available but is subject to prescribed conditions under the GST law.
Further, the supplier is eligible to claim a refund of unutilized input tax credit or claim a refund of such tax paid on the supply of goods, services, or both. All the other benefits available to a general taxpayer are also available to a person making the zero-rated supply of goods or services.
Pre-GST taxes
- The previous indirect tax norms in India led to multiple points of levies. VAT or CST, CED, and ST were levied depending on the occurrence of an activity. They were levied in instances like CED on the manufacture of goods, VAT or CST on the sale of goods, and ST on the provision of the taxable service. However, introducing the GST subsumed most indirect taxes like ST, entry tax, luxury tax, octroi, etc.
- Taxes from the earlier regime, such as VAT, CST, and CED, continue to be levied on petroleum crude, high-speed diesel, motor spirit, natural gas, and aviation turbine fuel. The government intends to bring petroleum products under the ambit of GST soon.
- The higher taxation on non-essential products like alcohol or cigarettes results in higher costs of such products, discouraging their purchase. Similarly, the government intends to tax the essential products at a lower rate to reduce the tax burden on the end consumer. On the other hand, the government also exempts highly crucial goods or services that it intends to boost.
Customs Duty
Any goods imported to or exported from India must pay the customs duty. The rate of customs duty is determined based on factors such as the origin of the goods, places where such goods are made, components and use of the goods, etc. The rates are fixed under the below-mentioned categories:
- Ad valorem duties: It is calculated as a percentage of the value of imported goods.
- Specific duties: These are calculated based on the weight or quantity of imported goods.
- Any combination of specific and Ad valorem duties.
India adheres to the harmonized system of nomenclature (HSN) classification rules. Based on the HSN and corresponding tax rate, the applicable duties or taxes on imports are essential customs duty, social welfare surcharge (SWS), and IGST at appropriate rates. Exports are generally not eligible for any duties or taxes. However, export duties are levied on a few items mentioned in the export tariff schedule.
Bottom Line
Indirect taxation is easy to collect and convenient, as it originates mainly from the organized sector. However, indirect taxes have a wider reach, as they involve every product or service consumer. They are often judged as a regressive form of taxation, as they are collected equally from all, regardless of income.
