Have you ever bought a chocolate, a mobile phone, or even a movie ticket and noticed that the price is a bit higher than expected? That extra amount you pay is often due to indirect tax. But what exactly is this tax? How does it affect your daily life? And where does all that money go?
This blog will clear all your doubts about what is indirect tax in India, how it works, types of indirect taxes, who pays them, and how they are different from direct taxes. Plus, we will explore how GST (Goods and Services Tax) has simplified the entire indirect tax system in India.
So, let’s dive in and uncover the world of indirect taxes, written in the simplest language just for you!
What is Indirect Tax?
An indirect tax is a tax that is not directly paid to the government by the person who bears the cost. Instead, it is collected by someone else (like a shopkeeper or a service provider) and then passed on to the government.
In simpler words, when you buy something, the seller includes the tax in the price. You pay it unknowingly while purchasing, and the seller later submits it to the government.
Example:
Suppose you buy a shirt for Rs. 1,000. If the GST rate is 5%, you will pay Rs. 1,050. The extra Rs. 50 is the indirect tax collected by the seller on behalf of the government.
Why is it Called "Indirect"?
The term “indirect” is used because the person paying the tax is not the one depositing it to the government. The actual taxpayer is you, the consumer. But the tax is collected and paid by the manufacturer, wholesaler, or retailer.
This makes it different from direct tax, where the person who earns the income pays the tax directly to the government.
Difference Between Direct Tax and Indirect Tax
Let’s break it down in a table so it’s easy to understand:
| Feature | Direct tax | Indirect tax |
| Who pays ? | Paid directly by the taxpayer | Paid indirectly via a third party (e.g., seller) |
| Transferable ? | Non-transferable | Transferable to the end consumer |
| Example | Income Tax | GST, Customs Duty |
| Collected form | Individuals, companies | Sellers, service providers |
| Tax burden | On the person earning income | On the person spending money |
Types of Indirect Taxes in India
Before the introduction of GST, India had several types of indirect taxes. Many of them were complex and overlapping. Today, GST has replaced many of them, but some still exist. Let’s look at the major types:
1. Goods and Services Tax (GST)
GST is the most important indirect tax in India today. It is a comprehensive, multi-stage, destination-based tax applied on the supply of goods and services.
Key Features:
Types of GST:
Example:
If you buy a mobile phone worth Rs. 20,000 and GST is 18%, you will pay Rs. 23,600. The Rs. 3,600 is the GST, which is divided between the center and state.
2. Customs Duty
This is the tax you pay when you import or export goods from India. It ensures fair pricing and protects Indian manufacturers.
🔍 Example:
If a product is imported from the USA, customs duty will be added to its base price. This is why imported goods are often more expensive.
3. Excise Duty (Now mostly merged into GST)
Excise duty was earlier charged on manufactured goods within India. After GST, it is only applicable on some products like alcohol and petroleum.
4. Stamp Duty
Charged on legal documents like property sales, contracts, and agreements. It is collected by the state government.
5. Entertainment Tax (Merged with GST in most states)
Earlier applied on movie tickets, shows, and amusement parks. Now included under GST except for local bodies in some states.
How Does Indirect Tax Work?
Let’s understand the working through a simple step-by-step example:
Scenario: You buy a refrigerator
Each link in the chain collects and passes on the tax. But the final burden of the tax falls on you, the end consumer.
How Is Indirect Tax Calculated?
The calculation depends on the tax rate applicable to the item or service. Here’s a basic formula:
Tax Amount = (Original Price × Tax Rate) ÷ 100
Let’s try this with an example:
Example:
Tax = (2000 × 12) ÷ 100 = Rs. 240
Total Price = Rs. 2,000 + Rs. 240 = Rs. 2,240
Easy, right?
Advantages of Indirect Tax
Let’s look at how indirect taxes help the economy and the people:
1. Convenient to Pay
You don’t have to fill out forms or file returns. The tax is included in the price, and you pay it without effort.
2. Wide Coverage
Everyone pays indirect tax—rich or poor. This helps generate a large pool of revenue for the government.
3. Less Evasion
It is difficult to avoid paying indirect taxes since they are automatically included in prices.
4. Promotes Fair Competition
Uniform tax rates (like GST) make pricing fair across India, reducing regional tax differences.
5. Boosts Compliance
With systems like GSTN (Goods and Services Tax Network), tracking and compliance have become easier.
Disadvantages of Indirect Tax
While indirect taxes have many benefits, they also have some downsides:
1. Regressive in Nature
It affects the poor more than the rich because the same tax rate applies to everyone, regardless of income.
2. Hidden Costs
People often don’t realize they’re paying tax, which can lead to less transparency.
3. Price Inflation
Indirect taxes can lead to higher product prices, reducing affordability.
🇮🇳 GST – The Game-Changer in Indian Taxation
Before 2017, India had a complex indirect tax structure. Different states had different VAT rates, and the center had its own taxes like excise and service tax. This led to confusion, double taxation, and inefficiencies.
With the introduction of GST on July 1, 2017, the tax system changed completely.
Objectives of GST:
GST Rates:
There are multiple GST slabs: 0%, 5%, 12%, 18%, and 28% depending on the product or service.
Cascading Effect – What GST Removed
Before GST, there was a major issue called the cascading effect, or tax on tax. This means you were paying tax on a price that already included another tax.
Example:
GST removed this cascading by allowing input tax credit, which means businesses can claim back the tax they paid on their purchases.
Who Needs to Register for Indirect Tax?
Under GST, businesses need to register if:
Once registered, they get a GSTIN (Goods and Services Tax Identification Number) and must file returns regularly.
How Consumers Can Check Indirect Tax?
You can check the GST amount in the following ways:
How the Government Uses Indirect Tax Revenue
The money collected through indirect taxes helps in:
In short, your spending contributes to national development!
Fun Facts About Indirect Tax
Tips for Businesses to Manage Indirect Taxes
If you run a business, here’s how you can stay GST-compliant:
Future of Indirect Taxes in India
The government is constantly working to make indirect taxes more transparent and easier to manage. In the future, we can expect:
Conclusion: Why You Should Care About Indirect Tax
Whether you’re a student, a homemaker, or a business owner, indirect taxes affect you every day. Every time you eat out, buy groceries, book a cab, or shop online—you are paying these taxes.
By understanding what is indirect tax in India, you can:
Indirect tax is not just a part of economics—it’s a part of your daily life!
FAQs: What People Also Ask About Indirect Tax
Q1: Is GST an indirect tax?
Yes, GST is a type of indirect tax and has replaced many other indirect taxes in India.
Q2: What are examples of indirect taxes?
GST, customs duty, stamp duty, and excise duty are common examples.
Q3: Who pays indirect tax?
The final consumer pays the tax, but it is collected and submitted by businesses.
Q4: What is the GST rate in India?
GST has multiple slabs—0%, 5%, 12%, 18%, and 28%, depending on the product or service.
Q5: Are all products in India under GST?
No, some products like alcohol, petrol, and electricity are outside GST and taxed separately by states.
If you found this blog helpful, share it with your friends and stay tuned for more such easy-to-understand financial guides. Knowledge about taxes is the first step to becoming financially smart.
If you found this article useful, don’t forget to share it and help others understand the hidden world of indirect taxes in India. Stay informed. Stay smart.
Keep following VENTURA for more such easy guides on personal finance and taxation in India.
For android only
What Are Taxes on Stocks in the Share Market?