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What is indirect tax and its types?

The Central and State governments levy indirect taxes on expenditures, consumption, services, rights and privileges but not on property or income. Read on to learn more about it.

  • Jan 17, 2023

    Key takeaways

    Different types of Indirect taxes are as follows:

  • Service Tax
  • Value Added Tax
  • Excise Duty
  • Custom Duty
  • Entertainment Tax
  • Stamp Duty
  • Goods and Service tax

The taxes taken by the Indian government can be classified as either direct or indirect. Direct Taxes include income tax, Surcharge, and Gift Tax, which are charged on an individual or company’s income, revenue, or profits. The Central Board of Direct Taxes administers them (CBDT).

Indirect tax is a form of tax transferred to another person or organisation. Typically, indirect taxes are imposed on the manufacturer or supplier, who then passes the tax on to the final customer. Instances of indirect taxes include sales, entertainment, excise duty, etc. In the form of service tax, excise duty, entertainment tax, customs duty, etc., these are charged to the sellers of goods or providers of services and then passed on to the final consumer. A typical example of indirect taxation is the excise duty on alcoholic beverages.

What is Indirect Tax?

People are subject to an indirect tax when they use products and services. A person’s income is not directly taxed when they pay indirect taxes. However, in addition to the actual cost of the goods or services the seller paid for, he must pay the tax. In general, sellers who pass the tax on to the final customer are subject to indirect tax.

There is a distinction between the person bearing the burden and the person paying the tax in indirect taxes. These taxes must be paid to the government by the sellers (e.g., manufacturers and retailers). However, businesses pass on the cost of paying the tax to you because they sell items to consumers.

Excise tax, Value Added Tax, service tax, customs duty, sales tax, entertainment tax, and Securities Transaction Tax are all examples of indirect taxes.

For instance, assume you are eating at a restaurant. Your total amount plus GST will be shown on the bill (Indirect tax). For example,

The total bill is ₹2500,

and the GST rate is 5%.

Then you must pay a total of 2500+125=₹2625.

This ₹125 is the indirect tax the service provider passes you.

Different Types of Indirect Taxes

There are different types of Indirect tax that are levied on the consumers, and a few of them are mentioned below

Service Tax

A service tax can be defined as a type of Indirect Tax that you are responsible for paying to the government as and when you consume a taxable service offered by numerous service providers, for instance, restaurants, hotels, travels agents, cab services, cable providers etc. The consumer pays the service charge to the service provider, who pays the tax to the central government.

Value Added Tax

The value-added tax, also known as VAT, is a type of flat tax levied on a commodity. It is similar to the sales tax, except that in the sales tax, the entire amount owed to the government is paid by the shopper at the time of sale. On the contrary, when the transaction takes place with VAT, different parts of the tax are paid by different parties.

Excise Duty

Excise duty or excise tax is a sort of indirect tax payable on the goods produced within the country. It can be termed as a tax on the sale of goods. It has been renamed and is now known as Central Value Added Tax (CENVAT). For example, taxes are imposed on selling things like tires, airline tickets, fuel and heavy trucks.

Custom Duty

Custom Duty is a tax charged on all the goods imported to the country or exported from the country. Therefore, its two classifications are import duty and export duty.

Entertainment Tax

Entertainment Tax is a tax charged on all the sources of entertainment, such as feature films which get a wide release in the country, amusement parks, sports activities, primary commercial exhibits and big parties and celebrations.

Stamp Duty

Stamp duty is imposed on the transfer of immotile possessions located within the state, levied by the State Government, and may differ in rates. It is also applicable to all legal documents. In older times, a physical revenue stamp was meant to be impressed upon the document to notify that the stamp duty was paid.

Goods and Service tax

Goods and Service tax, GST, is a tax assessed on the supply of goods and services from the one manufacturing it to the one buying it. It is of three kinds, State Goods and Service Tax (SGST), Central Goods and Service Tax (CGST) and Integrated Goods and Service Tax (IGST).

Benefits of Indirect Tax

Indirect taxation comes with multiple benefits that are not attainable in the Direct Tax system. Some of the primary advantages of Indirect Tax are

1. Helps in maintaining Equity

2. Easy to Pay/Collect

3.Convenience at hand

4.Reduce Harmful Consumption

5.Wider Scope


To summarise, Indirect Taxes are for the benefit of the economic growth of the country. Once you understand the fundamental dynamics of the indirect taxation process, you will eventually realise and fulfil your duty towards the central government.

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- A Consumer Education Initiative series by Kotak Life

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