Direct and Indirect Taxes

Types of Indirect Taxes

1.Sales Tax

Sales Tax is charged on the sale of movable goods. It is collected by the Central Government in case of inter-state sales (Central Sales Tax or CST) and by the State Government for intra-state sales (Value Added Tax or VAT). The rates of taxation vary depending on the product type.

2. Service Tax

Service tax is applicable on all services provided in India except a specified negative list of services that are exempt. It is paid by the service provider to the government who in turn collects it from the end user by the service provider at the time of provision of such service. Service tax is applied generally at the rate of 12.36%, which has been revised to 14% from April 2015. This type of indirect tax is levied by the service tax provider and paid by the recipient of the services. However, in some cases the liability for the tax is divided between the recipient as well as the provider of service.

There is also a provision for abatement of service tax if the final price is a mixture of services as well as material, such as restaurant bills. In general, restaurants levy service tax on 40% of the bill amount as 60% of the amount is considered to be cost of materials. Service taxes fall under the ambit of the central government.

3. Excise Duty

The tax imposed by the government on the manufacturer or producer on the production of some items is called excise duty. The liability to pay excise duty is always on the manufacturer or producer of goods. The duty being a duty on manufacture of goods, it is normally added to the cost of goods, and is collected by the manufacturer from the buyer of goods. Therefore it is called an indirect tax. This duty is now termed as “Cenvat”. There are three types of parties who can be considered as manufacturers-

• Those who personally manufacture the goods in question
• Those who get the goods manufactured by employing hired labour
• Those who get the goods manufactured by other parties For example, excise duty on the production of sugar is an indirect tax because the manufacturers of sugar include the excise duty in the price and pass it on to buyers. Ultimately it is the consumers on whom the incidence of excise duty on sugar falls, as they will pay higher price for sugar than before the imposition of the tax.

In order to attract Excise duty liability, following four conditions must be fulfilled:

a) The duty is on “goods”.

b) The goods must be “excisable”

c) The goods must be “manufactured” or produced. d) Such manufacture or production must be “in India”

Merits of Indirect Taxes

1. Indirect taxes are usually hidden in the prices of goods and services being transacted and, therefore their presence is not felt so much.
2. If the indirect taxes are properly administered, the chances of tax evasion are less.
3. Indirect taxes are a powerful tool in molding the production and investment activities of the economy i.e. they can guide the economy in its resource allocation.
4. Variety is found in these taxes. Every citizen of the country has to pay these taxes in one form or the other.
5. By imposing these taxes on harmful goods such as wine,cigarettes etc. prices of these items can be made prohibitive.It may check their consumption and save the society of their harmful affect.
6. These taxes are convenient. Taxes are paid only when goods are purchased.This tax is convenient to the government also because the government realizes the amount of these taxes straight from the producers or importers.

 Demerits of Indirect taxes

1. It is claimed and very rightly that these taxes negate the principle of ability- to-pay and are therefore unjust to the poor. Since one of the objectives is to collect enough revenue, they spread over to cover the items, which are purchased generally by the poor. This makes them regressive in effect.
2. If indirect taxes are heavily imposed on the luxury items then this will only help partially because taxing the luxuries alone will not yield adequate revenue for the State.
3. Direct taxes take away a part of the purchasing power of the taxpayer and that has the effect of reducing demand and prices. On the other hand, indirect taxes are added to the sale prices of the taxed goods without touching the purchasing power in the first place. The result is that in their case inflationary forces are fed through higher prices, higher costs and wages and again higher prices.