Indirect Tax

  • An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).
  • The intermediary later files a tax return and forwards the tax proceeds to government with the return.
  • Here the incidence and impact are at two different points
  • Example: VAT, Service tax, GST, Excise duty, entertainment tax and Customs Duty.
(1) Sales Tax
(Tax on Consumption Stage. Tax on Intra-State sale (sale within State) (now termed as VAT) is by State Government – Change to goods to goods
Central Sales Tax (CST) – Interstate Sale by Union.
- Good Produced in TN & Sell in TN – Excess duty & Sales Tax by TN.
- Good produced in TN & Sell in Kerala – Excess duty by TN. CST & ST by Kerala. The CST given to TN (Manufacture state)).
  • Sales tax charged on the sales of movable goods.
  • Sale tax on Inter State sale is charged by Union Government, while sales tax on intra-State sale (sale within State) (now termed as VAT) is charged by State Government.
  • Sales tax is levied on the sale of a commodity that is produced or imported and sold for the first time.
  • If the product is sold subsequently without being processed further, it is exempt from sales tax. Sales tax is levied by either the Central or the State Government, Central Sales tax, or 4% is generally levied on all inter-State sales.
  • State sales taxes that apply to sales made within a State have rates that range from 4 to 15%. However, exports and services are exempt from sales tax.
(2) Service Tax
(Tax on Paid services)
  • Most of the paid services you take you have to pay service tax on those services. This tax is called service tax. Over the past few years, service tax been expanded to cover new services.
(3) Value Added Tax
(To avoid tax on tax, put tax on value added only)
  • The India’s indirect tax structure in sales tax regime was weak and produced cascading effects.
  • The structure was by, and large uncertain and complex and its administration was difficult.
  • As a result, various committees on taxation recommended ‘Value Added Tax’. The Indirect Taxation enquiry committee argued for VAT.
  • The VAT has a self-monitoring mechanism which makes tax administration easier.
  • It is levied only on the value addition done at each level of supply chain and the Input taxes are credited to the manufacturer
  • The VAT is properly structured removes distortions.
  • Accordingly, VAT has been introduced in India by all states and UTs (except UTs of Andaman Nicobar and Lakshadweep).
  • The State VAT being implemented till 1 July 2017, had replaced erstwhile Sales Tax of States.
  • The tax is levied on various goods sold in the state, and the amount of the tax is decided by the state itself.

(4) Custom duty & Octroi
(Custom Duty - On Goods Imported to India, Octroi Duty – Local tax on goods enter into municipality)
  • Custom Duty is a type of indirect tax charged on goods imported into India.
  • One has to pay this duty, on goods that are imported from a foreign country into India.
  • This duty is often payable at the port of entry (like the airport).
  • This duty rate varies based on nature of items.
  • Octroi is tax applicable on goods entering in to municipality or any other jurisdiction for use, consumption or sale.
  • In simple terms one can call it as Entry Tax.
(5) Excise Duty
(Tax by Union Government imposed on Production Stage & Given share to State.)
  • An excise duty is in the true sense is a commodity tax because it is levied on production of goods in India and not on the sale of the product.
  • This is opposite to custom duty which is charged on bringing goods from outside of country.
  • Another name of this tax is CENVAT (Central Value Added Tax).
  • If you are producer / manufacturer of goods or you hire labor to manufacture goods you are liable to pay excise duty.
One Nation, One Tax – GST, some goods are not under GST, Gold (VAT), Petrol (Excise Duty, Alcohol (Sales Tax))

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