KG College of Arts and Science

Affiliated to Bharathiar University and Accredited by

NAAC
ISO 9001:2015 Certified Institution
KGiSL Campus, Saravanampatti, Coimbatore, Tamilnadu,
India.
Department of Commerce with Professional Accounting
Subject Name :Indirect taxes
Subject Code : 63C
Class : III B.Com.PA “A & B”
Semester : VI
Prepared by : V.Suganya
Assistant Professor
Department of Commerce with professional
Accounting
KG College of Arts and Science
 Unit – I
INDIRECT TAXES
UNIT-I
Indirect taxes – Meaning and Nature -Special
features of Indirect Taxes-Contribution to
government revenues-Taxation under the
Constitution-Advantages and Disadvantages of
Indirect Taxes.
Enhancement : Tax systems in India.
 MEANING AND DEFINITION OF TAX
• The word tax was derived from the Latin word
'tax ore' which means to estimate, appreciate or
value. Taxes are compulsory payments to the
Government without expectation of direct return
or benefit to the tax-payer. The following two
quotable definitions will further clarify the
idea regarding taxes. According to Bastable, "Tax
is a compulsory contribution of the wealth of a
person or body of persons for the service of
public power"
Definition of taxes:
“Tax is a price which each citizen pays to the
state to cover his share of the cost of general
public services which he will consume”. It is
compulsory charge imposed by the government
to the people without getting any return
directly.
FEATURES OF TAXES
The features of taxes are as follows:
1. It is a compulsory contribution; refusal to pay is a
punishable offence.
2. In the payment of a tax, the element of sacrifice
is involved because tax payer can not claim direct
benefit against tax.
3. Taxes are imposed by the Government only. Tax
should be paid regularly and periodically.
4. The aim of taxation is the welfare of the
community as a whole.
Classification of taxes
DIRECT TAXES AND INDIRECT TAXES
A) Direct Taxes: They are imposed on a person’s income,
wealth, expenditure, etc. Direct Taxes
charge is on person concern and burden is borne by
person on whom it is imposed.
Example- Income Tax, Wealth Tax.
B) Indirect Taxes: They are imposed on goods/ services.
The Immediate liability to pay is of the manufacturer/
service provider/ seller but its burden is transferred to
the ultimate consumers of
such goods/ services. The burden is transferred not in
form of taxes, but, as a part of the price of goods/
services.
Example- Excise Duty, Customs Duty, service Tax, Value-
Added Tax (VAT), Central Sales
Tax (CST)
Particulars Direct Taxes Indirect Taxes
Meaning Direct Taxes are those taxes Indirect Tax is a tax where
where the incidence and incidence and impact fall on two
impact falls on the same person. different person.

Nature of tax Direct Tax progressive in Indirect Taxes is regressive in

nature. nature.
Taxable Event Taxable Income / Taxable Purchase / Sale / Manufacture
Wealth of the Assessees. of goods and provision of
services.
Levy & Collection Levied and collected from the Levied & collected from the
Assessee. consumer but paid / deposited to
the Exchequer by the Assessee /
Dealer.
Shifting of Burden Directly borne by the Tax burden is shifted or the
Assessee. Hence, cannot be subsequent / ultimate user.
shifted.
Collected After the income for a year is At the time of sale or
earned or valuation of assets is purchases or rendering of
determined on the valuation services.
date.
Definition of Indirect Tax
According to Dalton,"In the case of a direct tax,
the tax payer who pays a direct tax is also the
tax bearer. In the case of indirect taxes, the
taxpayer and the tax bearer are different
persons.
Features of Indirect Taxes
1. Liability of Tax – Here the seller or service provider makes
payment on indirect taxes which are transferred to final
consumer.
2. Investment and Saving - Most indirect taxes are largely growth-
oriented since they de-motivate the consumer and encourage
savings.
3. Social Coverage - The indirect tax has a much larger coverage
since their charge falls upon each individual buying products or
services.
4. An important source of revenue: Indirect taxes are a major
source of tax revenues for Governments worldwide and
continue to grow as more countries move to consumption
oriented tax regimes. In India, indirect taxes contribute more
than 50% of the total tax revenues of Central and State
Governments.
5. Tax on commodities and services: It is levied on commodities at
the time of manufacture or purchase or sale or import/export
thereof. Hence, it is also known as commodity taxation. It is also
levied on provision of services.
6. Shifting of burden: There is a clear shifting of tax burden in respect of
indirect taxes. For example, GST paid by the supplier of the goods is
recovered from the buyer by including the tax in the cost of the commodity.
7. No perception of direct pinch: Since, value of indirect taxes is generally
inbuilt in the price of the commodity, most of the time the tax payer pays the
same without actually knowing that he is paying tax to the Government. Thus,
tax payer does not perceive a direct pinch while paying indirect taxes.
8. Inflationary: Tax imposed on commodities and services causes an all-round
price spiral.In other words, indirect taxation directly affects the prices of
commodities and services and leads to inflationary trend.
9. Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base.
Majority of the products or services are subject to indirect taxes with low
thresholds.
10. Promotes social welfare: High taxes are imposed on the consumption of
harmful products (also known as ‘sin goods’) such as alcoholic products,
tobacco products etc. This not only checks their consumption but also
enables the State to collect substantial revenue.
11.Regressive in nature: Generally, the indirect taxes are regressive in nature.
The rich and the poor have to pay the same rate of indirect taxes on certain
commodities of mass consumption. This may further increase the income
disparities between the rich and the poor.
CANONS OF TAXATION
A Canon in the context of taxation can be taken as a general
rule or principle.
Adam Smith’s canons of Taxation
4 canons of Taxation as general principles or rules of
taxation
1. Canon of Equality
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy
5. Canon of Productivity
6. Canon of Elasticity
7. Canon of Diversity
8. Canon of Simplicity
9. Canon of Expendiency
Taxation system in India
India’s tax system is a three-tier federal structure which is made up of the following:
• Union List (List 1 of the 7th schedule to the Constitution of India) contains those
matters on which the Central Government has the power to make laws [Article
246(1)].
• The State List has only those matters on which the State Government has the power
to make laws [Article 246(3)].
• The Concurrent List has those matters on which both the Central and State
Governments have the power to make laws [Article 246(2)].
Law made by Union Government prevails whenever there is a conflict between the
Centre and state concerning entries in the concurrent list. But if any provision
repugnant to earlier law made by parliament is part of law made by the state, if the law
made by the state government gets the assent of the President of India, it prevails.
• List 1 in the 7th schedule to the constitution has the powers of the Central
Government listed in Entries 82-92B.
• List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
• As regards list 3, it doesn’t deal with taxation and hence both centre and state do
not have any concurrent powers of taxation.
• Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation
belonging only to the centre.
UNION LIST (LIST I)
• 82.Taxes on income other than agricultural income.
• 83. Duties of customs including export duties.
• 84. Duties of excise on the following goods manufactured or produced in India, namely:— (a)
petroleum crude; (b) high speed diesel; (c) motor spirit (commonly known as petrol); (d) natural
gas; (e) aviation turbine fuel; and (f) tobacco and tobacco products
• 85. Corporation tax.
• 86. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and
companies; taxes on the capital of companies.
• 87. Estate duty in respect of property other than agricultural land. 88. Duties in respect of
succession to property other than agricultural land.
• 89. Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares
and freights.
• 90. Taxes other than stamp duties on transactions in stock exchanges and futures markets.
• 91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading,
letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts. 92.
Taxes on the sale or purchase of newspapers and on advertisements published therein. (omitted
as per 101st Amendment Act)
• 92A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase
takes place in the course of inter-State trade or commerce.
• 92B. Taxes on the consignment of goods (whether the consignment is to the person making it or
to any other person), where such consignment takes place in the course of inter-State trade or
commerce.
• 97. Any other matter not enumerated in List II or List III including any tax not mentioned in either
of those Lists.
State List (List II)
• 45. Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for
revenue purposes and records of rights, and alienation of revenues.
• 46. Taxes on agricultural income.
• 47. Duties in respect of succession to agricultural land.
• 48. Estate duty in respect of agricultural land.
• 49. Taxes on lands and buildings.
• 50. Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral
development.
• 51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the
same or lower rates on similar goods manufactured or produced elsewhere in India:- (a) alcoholic liquors for human
consumption;
• (b) opium, Indian hemp and other narcotic drugs and narcotics, but not including medicinal and toilet preparations
containing alcohol or any substance included in sub-paragraph (b) of this entry.
• 52. Taxes on the entry of goods into a local area for consumption, use or sale therein.
• 53. Taxes on the consumption or sale of electricity.
• 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.
• 55. Taxes on advertisements other than advertisements published in the newspapers and advertisements broadcast
by radio or television.
• 56. Taxes on goods and passengers carried by road or on inland waterways.
• 57. Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars subject
to the provisions of entry 35 of List III.
• 58. Taxes on animals and boats.
• 59. Tolls.
• 60. Taxes on professions, trades, callings and employments.
• 61. Capitation taxes.
• 62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.
• 63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to
rates of stamp duty.
• List III-Concurrent List
List III of the seventh Schedule of the
Constitution, Popularly called “ Concurrent
concurrent list” , contains 47 entries. They are
in respect of functions and revenue raising
powers of both the union and the states. Both
Central Government and State Governments
can make laws in relation to these entries.
• FEATURES OF THE INDIAN TAX SYSTEM.
(1) Increasing importance of tax revenue:
The tax revenue collected both by the Central and state Governments have
increased from Rs 460 crore In 1951-52 to Rs 10,17,107 crore in 2008-09
registering an average growth of 13.9 per cent (over the 59 years period).
There has thus been a significant increase in tax revenue. However, looked at
another way, the tax revenue, which formed 88.6 per cent of-the total
revenue receipts in 1951-52 declined to 84.1 per cent in 2008-09.
Two possible inferences that can be drawn from these figures are:
(a) The Central and State governments have been relying less on tax revenue
to finance their expenditure; or
(b) Revenue from non-tax sources has been increasing at a faster rate.
(2) Tax revenue as a percentage of national income:
The total tax revenue as a percentage of GDP has increased from 6.7 per cent
in 1950-51 to 19.2 per cent in 2008-09. Although this is a good growth, this
can be contrasted to the tax GDP ratio of developed countries, which ranges
between 25 and 45 per cent.
Again, while it is likely to give the impression that our tax effort is relatively
low, it should not be ignored that in a low-income country like India, a tax
GDP ratio of about 20 per cent imposes quite a heavy burden on the majority
of population.
• (3) Structure of Taxes:
• These are classified into two types, vis.
• (i) direct taxes and
• (ii) indirect taxes.
• Direct taxes include taxes on income and property, whereas indirect taxes cover
taxes on commodities and services. Important direct taxes are income tax, corporate
tax and wealth tax. Important examples of indirect tax are VAT, service tax, excise
duties, import duties, etc. Over the years, India’s tax structure had come to rely
more on indirect taxation.
• The underlying rationale was that since it is difficult to reach all the individuals, the
alternative of pursuing a broad based indirect tax is preferable. However, following
measures initiated in the direction of rationalisation and simplification of the tax
structure, there has been a decline in the proportion of indirect taxes in the country.
The trend has revealed that lower tax rates are compatible with higher tax
realisation, given better tax administration and compliance.
• (4) Shift in Relative Importance of Taxes:
• As a consequence of the fact that indirect taxation had been increasing till the onset
of 1990s, there occurred a shift in the relative importance of different taxes. For
instance, corporate and income taxes which were the major source of the Union
revenue during early-1950s, yielded place to excise duties and customs duties.
Advantages of Indirect Taxes:
(i) The Poor Can Contribute:
(ii) Convenient:
(iii) Broad-based:
(iv) Easy Collection:
(v) Non-evadable:
(vi) Elastic:
(vii) Equitable:
(viii) Check Harmful Consumption:
Disadvantages of Indirect taxes:
(i) Regressive:
ii) Uncertain:
(iii) Raising Prices Unduly:
(iv) Uneconomical
(v) No Civic Consciousness:
(vi) Harmful to Industries:
 INDIRECT TAXES IN INDIA
• Indirect taxes levied by Central Government
1. Central Excise duty
2. Customs duty
3. Central sales tax
4. Service tax
• Indirect taxes levied by State Governments
1. State sales tax
2. Value added tax
3. State Excise Duty
4. Entertainment tax
5. Other Indirect tax
• Indirect Taxes at local government level
1. Specific duties
2. Advalorem duties