CHAPTER

1 INDIRECT TAXES
(AN INTRODUCTION)

TAX
may be defined as a "pecuniary burden laid upon individuals or property
AtaxSupport
Ownersto
the Government, a payment exacted by legislative authority. Atax
Ota voluntary payment or donation, but an enforced contribution, exacted pursuant
to legislativeauthority"
have to pay to the
In simple words, tax is nothing but money that people
Government, which is used to provide public services.
CLASSIFICATION OF TAX
Taxes are conventionally broadly classified as Direct Taxes' and Indirect Taxes'.
DIRECT TAXES
Direct taxes include those assessed upon property, person, business, income, etc.
while Indirect taxes are levied upon commodities before they reach consumers.
According toDalton, a direct tax is really a tax which is paid by a person on whom
to any other person. The
it is legally imposed and the burden ofwhich cannot be shifted anybody else. Thus, the
Derson from whom it is collected cannot shift its burden to
ultimate burden ofa direct
impact, i.e.,the initial or first burden, and the incidence, the
tax bearer.
tax-is on the same person. The tax-payer is the
capital gains tax,
In the group of direct taxes, thus, income tax, corporate tax,
capital levy may be included.
Advantages of Direct Taxes
capacity and their burden is
(1) Justifiable : Direct taxes are based on the taxable
justifiably distributed. higher rates of taxes on higher
(2) Progressive : Direct taxes are progressive as are imposed. Poor people are
groups
ncome groups and lower rates on lower income
exempted under direct taxes.
Certain: The government can estimate the proceeds from taxes and can balance
(8)
certain about ammount of tax.
IS income and expenditure. Assessee isalso the sense that high proceeds to the
(4) Elastic : Direct taxes are elastic in rates of these taxes.
30vernment become possible by increasing the
productive as in short run these do not affect
0) Productive : Direct taxes are capacity.
uctive capacity. Indirect taxes have larger impact on productivity
Distributive Justice
Direct taxes are based on principle of
0)Distributive Justice :
income and wealth.
as they help in reducing the glaringinequalities of
 GOODS AND SERVICES TAX
2

Disadvantages of Direct Taxes

arbitrarily fixed by the governments. The ra ar
(1) Arbitrary: The rates of taxes are
incomne tax depends upon the political will rather than justification. ta
of the tax-payers to conceal their income ang pr
(2) Evasion : Direct taxes encourage accounts and do not pay the taxe,
maintain bogus
leadsto black-money. Tax-payers direct taxes reduces the saving capacity
Saving:The higher rate of and it affe fo
(3) Reduce income is taken away in form of taxes
as a significant part of the
the people to
the rate of capital formation adversely. cover only a part of
Limnited tax base : Direct taxes do not reach all. These manipulati n
(4) and evade direct taxes by
SOciety-salaried class. Business class avoid
accounts.
INDIRECT TAXES
taxes which have their primary burden or immpact or t
Indirect taxes are those shifting his burden to others. In
other wor
succeeds in
Single person. But that person person but is paid partly or wholly by another. Indiri
on one
an indirect tax is imposedincidence other than the origir
of these taxes falls on persons
taxes are shifted and the Government comprise: (i)
Customs Du
of the Union
payers. Indirect taxes
Service Tax.
(i) Excise Duty, (iiü) CST and (iv)
TAX

INDIRECT TAX
DIRECT TAX
" The person paying the tax to the
to the
The person paying the tax Government collects the samne from
Government directly bears the the ultimate consumer. Thus,
incidence ofthe tax.
incidence of the tax is shifted to the
rate of
" Progressive in nature high other person.
taxesfor people having higher ability " Regressive in
nature-All the
to pay. consumers equally bear the burden.

Burden of tax
Burden of tax
shifted to another
borne by the
person himself person

Direct Tax Indirect Tax

 INDIRECT TAXES: AN
Indirecttaxes are convenient for
INTRODUCTION
both the tax-payer and the government. As taxes
3

onlywhen goods are purchased,

paid SO, tax-payer doeg not feel the burden of the
e Thistaxis convenient to the government as it collects the amount directly from
ducersor importers.
SPECIAL FEATURES OF
1.Animportant source of revenue: Indirect. INDIRECT
taxes are aTAXES
major source of tax revenues
Governments worldwide. In India, indirect taxes contribute more than 50% of the
altax revenues of Central and State Governments.
2. Tax on commodities and services : It is levied on commodities at the time of
anufactureorpurchase or sale or import/export thereof. It is
also levied on provis10n
services.
3. Shifting of burden :There is a clear shifting of tax burden in respect of indirect
example, GST paid by the supplier of
es. For the goods is recovered from the buyer
including the tax in the cost of the commodity.
4. No perception of direct pinch : Since, value of indirect taxes is generally inbuilt
the price ofthe commodity. Thus, tax payer does not perceive a direct pinch while
yingindirect taxes.
5. Inflationary : Taxmposed on commodities and services causes an all-round price
aral and leads to inflationary trend.
6. Wider tax base : Unlike direct taxes, the indirect taxes have a wide tax base.
aiority of the products or services are subject to indirect taxes with low thresholds.
7. Regressive in nature :Generally, the indirect taxes are regressive in nature. The
hand the poor have to pay the same rate of indirect taxes on certain commodities of
ass consumption.
MERITS OF INDIRECT TAXES
1, Convenient : Indirect taxes are more convenient to pay. These taxes, generally
ng on commodities,are wrapped up in prices.
2. Disguised: The effect of indirect taxes does not provoke resentment, because they
use less annoyance to the publicas these taxes are not felt directly.
3. Not Easily Evadable : Indirect taxes are difficult to evade as they are usually
erged with prices.
4. Broad-based : Indirect taxation usually being commodity taxes has a broader
Cope. The low income strata of society which are exempt from direct taxes can be easily
Aught in the net of such tax.
5. Social Value:Indirect taxes have a high social value. They can serve to improve
Deial morale and public health by discouraging consumption of such harmful
Dmmodities as intoxicants,tobacco, ete.
6.Forced Savings:Indirect taxes are an effective means of mopping up consumer's
uplus and thereby diverting the saving potential of the community at large into the
ands of the government.
. Complementary : Additional revenue can be easily obtained by introducing an
ndirect tax. Indirect taxesin fact can serve as complementary to direct taxes.
0. Progressive: Indirect taxes on luxuries and semi-luxuries are progressive in
, as they fall on the rich people's consumption outlays.
 4 GOODS AND SERVICES TAX

DEMERITS OF INDIRECT TAXES

1.Inequitability : Indirect taxes are unjust and inequitable as they are regrese:
in effect. Since they are charged at a proportional rate on commodities of gen
consumption.
2. Less Productive : Indirect taxes do not conform to the canons of
productivity. As these taxes involve many stages, the cost of collection iseconomy
usuallv h
in relation to the revenue yielded.
3. Inflationary Potentiality:Indirect taxes prove to be inflationary when excessiv
relied upon. In India, for instance,excessive indirect taxation on commodities of m:
consumption may be blamed as being an important factor contributing to t
inflationary price spiral in the country.
4. Disincentive Effect on Savings : Indirect taxes discourage savings when the peor
have to spend more witha rise in the prices of commodities.
5. No Educative Value : Indirect taxes being invisible, and as they are collect
through middlemen like traders, hence, they do not promote any civic sense.
DIFFERENCES BETWEEN DIRECT TAXES AND INDIRECT TAXES
Following are some of the main points of distinction between direct and indir
tax:
Direct T'axes IndirectTaxes
1. These do not have any impact on costs and 1. Increase in rates of indirect taxes leads
prices of goods. increase in costs and prices of goods.
2. Income tax, wealth tax, expenditure tax and 2 Central excise duty, customs duty, VA
corporation tax are instances of direct taxes. service tax are instances of indirect taxes.
These taxes conform of the Principle of 3. These do not discriminate between rich an
equity. poor. The levy is against the Principle
equity.
4. Income tax is tax levied on income and wealth The burden of indirect taxes fall on the ric
tax is tax levied on property/assets of an and poor alike. These are taxes o
assessee. Thus, they do not affect those with Consumption.
low income/wealth from that level.
5. These have an element of certainty. The tax 5 Tax evasion is less likely in the case
payer knows the amount of tax payable. indirect taxes.
6. There is no shifting of burden. The There is clear shifting of burden in respect
and incidence of direct taxes fall on theimpact
6.
same indirect taxes. For instance, the MRP of
person.
product includes central excise duty and VA!
The burden falls on consumers.
7. Imposition of direct taxes does not create 7. Imposition of indirect taxes create
imbalance in the use of productive resources. imbalance in the use of productive resource
EARLIER INDIRECT TAXES IN
Some important indirect taxes prevailed in India INDIA
were as under :
Exciseduty
Sales Tax
Service Tax
Customs Duty
VAT.
Excise Duty
This duty imposed by the government on the
goods was called excise duty. The Central manufacture or production of so
Government levied excise duty under
Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise du
 INDIRECI TAXES: AN INTRODUCTION

which wAs charged on such oxcisable Koods that were manufactured in India
wasmeantfor domestic consumption. The liability to pay oOxcine duty was always on
tax
andmanufueturer or producer of goods who collected it from the buyer of yo0ds.
the Duty
Customw
customs were levied on goodsimported or exported from India at therate
Duties of t
underthe Customs TariffAct, 1975 as amended from time to time or any other
specified time being in force. The Customs Act
the was formulated in 1962to prevent
lawfor
imports.
illegal
and exports of goods. Besides, allimports were sought to be subject toa
a view to providing protection to indigenous industries.
duty with
ServiceTax
service providers in India were required to pay a service tax under the
The the service taxX was
provisionsoftheFinance Act of 1994. Under section 67 offtthis Act, from the service
the gross or aggregate amount charged by the service provider
leviedon
receiver:
SalesTax sales tax.
Tax paidby the consumer on the purchase of some items was called the
Sales taX was imposed under both Central Government (Central Sales
Tax) and State
states in ndia
Government (Sales Tax) Legislations. From the year 2006, most of the
(VAT).
hed supplemented sales tax with a new Value Added Tax
VAT
intra-state sale i.e., sale of
VAT was a tax on the sale of goods. It was imposed on Value Added Tax as it was
or
gnods within the state. It is known as Tax on Value Added
imposed on the amount of value addition made, mean
Value addition =Sale price - Purchase price.
purchases was allowed to be set
It was a tax paid on value addition, as the tax paid on tax only on value addition.
the
offagainst the tax payable on sales, the resultant being
Difference between Excise Duty, Custom Duty and Sales Tax
Sales Tax
Basis Excise Duty Custom Duty
This tax was charged on
Basis of This duty was imposed on This duty was imposed on intra and inter-state sales
charge the manufacture of goods the export or import of within India
in India goods
Taxable Event was when Taxable Event was when Taxable Event was when
Taxable Event sales within India takes
and point goods was manufactured goods was exported out or
produced in India imported in India. place.
or It was collected and
It was collected by the
Collection It was collected by the Central Government. retained by the States.
Central Government.
Central Excise Act, 1944 Custom Act, 1962 and Central Sales Tax Act,
Act 1956 and State VAT Acts.
Custom Tariff Act, 1975.
and Central Excise Tariff
Act, 1985.
Payment of this duty was Payment of this duty was Payment of this duty was
Payment made on removal of goods made before custom
made after sales takes

from factory. clearance of goods. place.

It was charged on It was charged on turnover
Charged on It was charged On
assessable value of goods assessable value of goods or sales price.
manufactured or produced imported or exported.
in India,
 GOODS AND SERVICES TAX

VAT AND GST MECHANISM

After the introduction of VAT in the area of manufacture and services, a
uniformity arose wherein similar aystem was propo8ed to be incorporated in need
of state taxation thereby replacing thesales tax ystem. the ar
The Indian Union is a federal structure under constitution of India.,
Government and State Government derive their powers through union The
list, Cent
list and the concurrent list. So far as powers of taxation are concerned, there the
specified areas over which the CentralGovernment and theStates can exerciu are clear
jurisdiction.
VAT is a core concept in GST. Concept of VAT was developed to avoid
effect of taxes, VAT was found to be a tax evasion, ensures better compliance .
increase in tax revenue.
cascad1
Actually, GST mechanismisacomprehensive form ofVAT. Under VAT mechanis.
there are certain limits to input tax credit. Such as input tax credit of tax paid i
specific Stateand be claimed against output tax payable in that State only.Credit
tax paid in other States and Central Government cannot be claimed.
Under GST regime tax credit of tax paid in any state or Central Government.c
be claimed as one nation one tax. Ünder GST system, Central tax (CGST) and Sta
tax (SGST) paid anywhere, can be claimed input tax credit even inter changeab
transactions without any limitations, except as provided under rules. Besides tax pa
on Inter-state transaction, also available as tax credit as per rules.
GST is implemented to give a boost toinput tax credit mechanism in comparisc
to VAT system.
Earlier applicable VAT system in the area of indirect taxation, has originally be
followed under newly implemented GST system w.e.f. lst July, 2017. After goir
through GST mechanism under foregoing chapters and better understanding of GE
system seriously, you wll surely appreciate this system with a clear objective of 0
Nation One Tax'.
QUESTIONS
Long Answer Type Questions
1. Explain the salient features of indirect taxes.
2. State the merits and demerits of indirect taxes.
3. State the merits and demerits of direct taxes.
4. Distinguish between Direct Taxes and Indirect Taxes.