Indirect Tax, Difference between Direct & Indirect Tax - CA Final Notes

What is Indirect Tax? Difference between Direct & Indirect Tax takshilalearning.com/what-is-indirect-tax-difference-between-direct-indirect-tax/ September 10, 2021

Indirect tax definition

What is indirect tax?

Indirect taxes are a kind of tax where the incidence and impact of taxation do not fall on the same entity. The government collects it from an intermediary like a retailer or a manufacturer.

The customer pays the eventual tax amount of the products and services.

Simply put, indirect taxes are those taxes that get shifted from one individual to another.

Indirect taxes are not levied directly on the income of the taxpayer. The taxpayer pays it on the amount of the expenses incurred.

Some samples of indirect taxes include nuisance tax, entertainment tax, excise duty, etc.

Indirect Tax examples

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Types of indirect taxes in India There are seven main types of indirect taxes in India. GST (Goods and Services Tax) streamlined these taxes into one tax to scale back the hassles of compliance.

The following are the kinds of Indirect Taxes on India – 1.

2.

3.

4.

5.

6.

7.

Service Tax Excise duty Value Added Tax Custom Duty Stamp Duty Entertainment Tax Securities Transaction Tax

1. Service Tax : A service tax gets imposed on the services provided by an entity. The recipient of the services pays this tax. Service tax is collected by and deposited with the central government.

2. Excise duty: Excise duty tax gets levied on the products produced or manufactured in India. The manufacturer pays this tax on manufacturing. The manufacturer successively recovers the tax paid from its customers.

3. Value Added Tax: This tax gets levied on a product or service at each point of sale whenever some value gets added.

The Central or state governments collect the tax amounts on inter-state sales.

It is commonly called VAT. 4. Custom Duty: It is a tax levied on the products which get imported into India. In some cases, it is also applicable to the products that get transported out of India.

5. Stamp Duty: Stamp duty tax gets levied on the transfer of immovable property located within the state. It is charged by the government and varies in rate. It’s also applicable to all legal documents.

6. Entertainment tax: The state government charges this tax on all financial transactions related to entertainment.

Examples include movie shows, video games, arcades, sports activities, amusement parks etc.

7. Securities Transaction Tax: It is a tax levied at the time of trade of securities through the Indian stock market.

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Distinguish between direct tax and indirect tax

Difference between Direct & Indirect Tax Factor

Direct Tax

Indirect Tax

Tax Imposition

Direct tax is imposed on income and profits.

Indirect Tax is imposed on goods and services.

Passage of payment

These taxes are paid directly to the government.

The customers pay indirect taxes as a part of the good/service price. Therefore, the tax is paid to the middleman so it is the responsibility of the middleman to pay the taxes to the government.

Tax Rates

Tax rates are dependent on the income bracket of the individual.

The tax rate is the same for one and all.

Procedure of payment

Taxes are paid to the Income Tax department whenever the window opens.

These taxes are simply paid to the middleman at the time of payment of the good or service.

Ease of collection

Complex

Fairly easy

Tax bearer

Individuals and businesses

End consumers

Examples

Income Tax, Securities Tax

Excise duty, VAT

Advantages of Indirect Tax:

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Contribution of the poor: The population of the country that is less economically stable gets exempted from direct taxes. However, even the poor need to pay indirect taxes for goods and services. They can help towards the progress of the country that way.

Equitable: Indirect taxes are charged or levied on the society on goods and services consumed and used by the rich people mostly. The luxury tax is another example of equitable taxation.

Convenient: Indirect tax is typically charged in small amounts and is paid only while making purchases. The final price of the product or service includes the amount of the indirect tax. Collection of tax happens when goods are sold and purchased. It also requires minimal effort on the part of the government.

Broad-based: Indirect taxes are opened up evenly on a good range of products and services. In this manner, the taxpayer does not get burdened by complex direct taxation that could impact their economic and social life.

Disadvantages of Indirect Tax : Regressive : Since there are several indirect taxes, the poor have to pay the same tax rate as the rich on several items. It increases the gap between the rich and the poor.

For instance, the salt tax is applicable for everyone equally. Thus, implying that the rich and the poor need to pay an equivalent amount. However, the impact of this tax is going to be more on the poor than the rich.

Raises prices unduly: The method of indirect taxes is usually cumulative. On a pointbased transaction system, every middle-man tends to charge their service tax, leading to an increase in the worth of the commodity.

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