Indirect Taxes In India: Types, Impact And The Evolution Of Goods And Service Tax

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Index 

  1. Introduction 
  2. What Is A Direct Tax?
  3. What Is An Indirect Tax?
  4. Types Of Indirect Tax
  5. Overview Of Goods And Services Tax (GST) In India
  6. Current Status Of Indirect Taxes In India
  7. Principal Indirect Taxes In India
  8. State Levies By State Governments
  9. Other Key Indirect Taxes
  10. Understanding Impact Of Indirect Taxes
  11. Journey Of Goods And Services Tax (GST) In India
  12. GST Return Filing And Penalties
  13. Types Of Returns And Deadlines
  14. Benefits Of Indirect Taxes
  15. Drawbacks Of Indirect Taxes 
  16. Miscellaneous
  17. Conclusion 

Introduction 

In India, individuals and businesses must pay taxes on earnings and purchases of goods and services. Taxes are mandatory fees paid to the Central and state governments, serving as their main revenue source. This revenue funds essential public services like healthcare, infrastructure, education, and welfare. Types of taxes in India include income tax, goods and services tax (GST), excise tax, and customs duties.

What Is A Direct Tax?

A direct tax is a tax that the taxpayer pays directly to the authority imposing the tax. The taxpayer bears the tax burden and cannot transfer this liability to another entity. In India, the Central Board of Direct Taxes (CBDT) oversees the collection and administration of direct taxes. The CBDT operates under the Department of Revenue, which advises the government on direct tax implementation. Examples of direct taxes include Income Tax, Capital Gains Tax, and Securities Transaction Tax.

What Is An Indirect Tax?

Indirect taxes are levied on goods and services rather than on income or profits. Taxpayers pay these taxes to the government through intermediaries, making the payment indirect. The Central Board of Indirect Taxes and Customs (CBIC) manages the collection and administration of indirect taxes, also under the Department of Revenue. Examples of indirect taxes include Excise Duty, Entertainment Tax, Customs Duty, Value Added Tax (VAT), Service Tax, and Goods and Services Tax (GST).

Types Of Indirect Tax

Service Tax: When purchasing services from an organisation, you pay a service tax. The Indian government imposes this tax on service providers when they offer their services.

Excise Duty: Manufacturing units in India pay excise duty on goods produced within the country. This tax is passed on to customers by the producers. Excise duty was the first indirect tax implemented in India.

Customs Duty: The Government of India imposes customs duty on all imports and exports. This tax is typically a percentage of the goods’ declared value, but it can also be a specific amount per unit. Customs duties generate government revenue, protect domestic industries, and regulate the flow of goods in and out of the country.

Value Added Tax (VAT): Value Added Tax is a consumption tax levied on the value added to goods and services at each production stage. Applied as a percentage of the product or service price, businesses collect VAT on behalf of the government.

Stamp Duty: Stamp duty in India is a tax on various legal documents and transactions, including property transfers, financial transactions, and commercial agreements. It is governed by state governments, so rates and rules vary between states.

Entertainment Tax: State governments impose an entertainment tax on commercial entertainment events. For instance, you pay an entertainment tax (28% under GST) when booking movie tickets, attending sporting events, or visiting theme parks.

Securities Transaction Tax: Securities transaction tax is similar to a tax collected at source. It is imposed on every purchase and sale of securities listed on recognized stock exchanges in India, including equity, derivatives, and equity-oriented mutual funds.

Overview Of Goods And Services Tax (GST) In India

GST is a unified tax system introduced on July 1, 2017, by the President and the Government of India, replacing multiple indirect taxes levied by both the Central and state governments. There are four GST slabs: 5%, 12%, 18%, and 28%. The system follows a dual structure comprising Central GST (CGST) and State GST (SGST), levied by the central and state governments respectively. Integrated GST (IGST) is applied to interstate supplies and imports, collected by the central government and apportioned to the destination state. The GST framework is established under the Central Goods and Services Tax Act, 2017 and the State Goods and Services Tax Act, 2017.

Also Read  Customs Duties And Taxes In India

Current Status Of Indirect Taxes In India

In India, the implementation of the Goods and Services Tax (GST) has consolidated several indirect taxes into a single system. These merged taxes include Purchase Tax, Central Excise Duty, Central Sales Tax, Additional Excise Duty, Entertainment Tax, Service Tax, Additional Customs Duty, Value Added Tax (VAT), Octroi and Entry Tax, and Luxury Tax.

Principal Indirect Taxes In India

Union Levies by the Central Government

Central GST (CGST): Central GST applies to the intra-state supply of goods and services and is levied by the central government.

Integrated GST (IGST): Integrated GST is levied under the Integrated Goods and Services Tax Act on the supply of goods and services in the course of inter-state trade.

Customs Duty: This tax is levied on goods imported into and exported out of the country.

Anti-dumping Duty: Levied on goods sold in the domestic market at a price lower than their fair market value, this duty aims to protect local industries from unfair competition.

Safeguard Duty: A temporary tax imposed on imports of specific products to protect domestic industries from sudden and significant increases in foreign goods.

State Levies By State Governments

State GST / Union Territory GST (SGST/UTGST): This tax is levied on the intra-state supply of goods and services.

Other Key Indirect Taxes

Professional Tax: A state-level tax that individuals earning an income from their profession are required to pay.

Property Tax: Levied by municipal authorities and local government bodies on real estate properties within their jurisdiction.

Understanding Impact Of Indirect Taxes

Indirect taxes affect consumer behaviour and economic decisions by increasing the prices of goods and services. Higher prices can alter consumer buying patterns and have broader economic implications, as consumers may reduce spending or shift their purchases to less-taxed items.

The burden of indirect taxes falls on the consumer. While sellers are responsible for collecting and submitting the tax to the government, they pass on this cost to consumers by charging higher prices for goods and services. Thus, the consumer ultimately bears the tax burden.

Indirect taxes tend to be regressive, as they impose a flat rate regardless of income level. This means that lower-income individuals spend a larger proportion of their income on these taxes compared to higher-income individuals, leading to income inequality. The introduction of GST in India aims to mitigate some of the regressive aspects of indirect taxes.

Evasion of indirect taxes is generally difficult because these taxes are included in the price of goods and services. However, there are still potential loopholes that individuals and businesses might exploit to evade or avoid paying these taxes, despite the fact that they are typically collected at the point of sale by intermediaries.

Journey Of Goods And Services Tax (GST) In India

GST is a destination-based indirect tax on goods and services at the national level, aimed at consolidating multiple indirect taxes into a single tax system. It simplifies taxation and ensures fair taxation on consumption.

Timeline of GST Implementation:

  1. November 2009: Empowered Committee releases first discussion paper on GST.
  2. November 2012: Committee on GST design is constituted.
  3. December 19, 2014: Constitution Bill 2014 introduced in Lok Sabha by Mr. Arun Jaitley.
  4. May 6, 2015: Constitution Bill passed in Lok Sabha and referred to a 21-member Select Committee of Rajya Sabha.
  5. August 3, 2016: Constitution Bill passed in Rajya Sabha with amendments.
  6. September 2016: Bill adopted by majority state legislatures.
  7. September 8, 2016: Bill received assent of the President, becoming the Constitution Act, 2016.
  8. April 12, 2017: CGST Bill 2017, IGST Bill 2017, UTGST Bill 2017, and GST Bill 2017 receive President’s assent.

The GST Council is established as the main decision-making body for GST planning and implementation.

The Constitution Act, 2016, guides the GST Council to ensure a harmonised structure of GST and the development of a unified national marketplace for goods and services.

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GST Return Filing And Penalties

Every registered person, except for specific categories, must file various returns as per the Central Goods and Services Tax Act, 2017. Different returns apply to different entities, depending on their scheme (regular or composite) and have specific timeframes, rules, and procedures.

The GST late filing penalties are structured as follows:

  1. For delayed return filing, a penalty of Rs 100 per day is imposed, with a maximum cap of Rs 5000.
  2. For delayed annual return filing, a penalty of Rs 100 per day is charged, capped at a quarter of the person’s registration.

Types Of Returns And Deadlines

  1. Outward Supplies: Report on GSTR 1 by the 10th of the next month.
  2. Inward Supplies: Auto-populated in GSTR 2 after the 10th of the next month based on GSTR 1 reports.
  3. Monthly Return: Pay taxes and file GSTR 3B by the 20th of the next month.

Benefits Of Indirect Taxes 

Indirect taxes offer a less burdensome and more convenient taxation system compared to direct taxes. This is primarily because indirect taxes are integrated into the prices of goods and services, making them less noticeable to taxpayers. Since these taxes are part of daily consumption activities and add to overall costs, individuals may not immediately feel the impact of paying taxes, unlike with direct taxes.

Moreover, indirect taxes provide convenience by not requiring lump-sum payments, unlike direct taxes that must be paid once a taxpayer crosses the threshold limit. Indirect taxes can be avoided by choosing not to purchase taxed items, but once a person surpasses the exemption limit, they become liable for direct taxes. These factors collectively contribute to making indirect taxes more user-friendly and less burdensome.

Another advantage of indirect taxes is their broad-based impact on the community, affecting almost everyone to some extent. In contrast, direct taxes have a limited base, where individuals with lower incomes may be exempt from income tax. However, indirect taxes do not offer such income-based exemptions, making them applicable to all individuals engaging in taxable purchases.

Furthermore, indirect taxes exhibit elasticity and productivity. Their elasticity allows for flexible adjustments to meet government requirements and respond to changing economic conditions. Unlike direct taxes, which involve complex legislative processes for alterations, indirect taxes can be revised to increase or decrease revenue collection as needed by the government.

The fundamental structure of indirect taxes poses significant challenges for tax evasion. Since indirect taxes are embedded within the prices of goods and services, evading these taxes becomes more complex. The inclusion of indirect taxes at the point of sale means that businesses are responsible for collecting and remitting taxes transparently to the government. This transparency reduces opportunities for individuals or businesses to manipulate transactions to evade tax payments.

Indirect taxes also serve important social objectives. They are applied to harmful and luxury goods, making them effective tools for promoting public health, reducing inequality, and improving overall quality of life. For instance, higher tax rates on harmful items like tobacco, alcohol, sugary beverages, and unhealthy foods discourage their consumption, thus mitigating associated health risks and lessening the burden on healthcare systems and the economy.

Furthermore, indirect taxes play a crucial role as anti-inflationary measures. While they can influence consumer spending habits and stabilise the economy, they can also lead to price increases in certain cases. By making certain goods more expensive through additional taxes, people may choose to refrain from purchasing them, thereby curbing inflationary pressures and maintaining economic stability. Thus, indirect taxes contribute to controlling prices and regulating consumer spending, which are vital aspects in economic stability.

Drawbacks Of Indirect Taxes 

Indirect taxes are often criticised for their regressive nature, as they do not adhere to the principle of equitable taxation. The issue lies in how the tax burden is distributed, regardless of one’s income level, everyone pays the same tax when purchasing goods or services. This can disproportionately affect individuals with lower incomes, as they end up spending a larger portion of their earnings on essential items like food or clothing, resulting in a lower overall tax contribution compared to their income.

Also Read  Customs Duties And Taxes In India

Moreover, indirect taxes may not always be cost-effective considering the resources spent on their collection. These taxes are already embedded in the prices of goods and services, meaning consumers indirectly pay them with their purchases. While these taxes are intended to fund public welfare initiatives such as infrastructure development and education, the process of collecting indirect taxes involves expenses like monitoring transactions, ensuring compliance with tax regulations, and addressing issues like tax evasion. Businesses also incur costs to manage their transactions, comply with tax laws, and fulfil tax obligations.

Furthermore, indirect taxes may not effectively foster civic consciousness among citizens. Unlike direct taxes, which are visibly deducted from income, indirect taxes are integrated into the prices of consumer goods, making them less noticeable to individuals. This lack of transparency can lead to reduced awareness of how much individuals contribute to government revenue. Direct taxes, such as those deducted from salaries, create a clearer connection between taxpayers and government revenue usage. However, with indirect taxes, this link is less evident, potentially diminishing citizens’ understanding of the government’s financial operations and public spending.

Tax evasion remains a concern within the realm of indirect taxes. This evasion often occurs through collusion between buyers and sellers, where buyers may refuse to accept sales receipts to avoid paying taxes, and sellers may neglect proper record-keeping and accounting practices to evade tax obligations.

Contrary to their intended purpose, higher rates of indirect taxes can potentially contribute to inflationary pressures in the economy. This phenomenon, known as wage-price push, occurs when increased tax rates lead to higher prices for goods and services. Consequently, this can trigger a cycle where higher costs result in demands for higher wages, leading to further price increases and creating a wage-price spiral.

Additionally, indirect taxes can lead to uncertain revenue collection for the government. As taxes are embedded in product prices, higher tax rates can reduce consumer demand for those products, impacting the overall revenue generated from taxes. This unpredictability in revenue contradicts the principle advocated by renowned economist Adam Smith, who emphasised clear and predictable taxation systems for effective governance.

The government’s goal is to simplify and rationalise India’s tax system, leading to the creation of GST, which consolidates numerous taxes into a single, unified tax applicable to both goods and services. This consolidation aims to ensure uniformity in the tax base across sectors. Additionally, technological advancements are being leveraged to streamline compliance procedures for businesses. While the current system features multiple tax rates for various products and services, future efforts will focus on simplifying this structure to enhance business convenience. Furthermore, customs duties and compliance processes related to import-export activities are being streamlined to facilitate smoother cross-border transactions. Initiatives such as E-bill implementation and restrictions on Input Tax Credit (ITC) claims have contributed to a decrease in tax evasion.

Conclusion

In summary, indirect taxation in India offers both advantages and disadvantages. Taxes like excise duty, value added tax (VAT), service tax, and goods and services tax (GST) are vital for government revenue, funding public services, infrastructure, and social welfare programs. These taxes, embedded in prices, are less conspicuous to consumers. They have a broad reach, impacting many individuals and aiding revenue collection. However, their regressive nature can disproportionately affect lower-income groups, challenging income equality.

The introduction of GST aimed to mitigate regressive elements, streamlining taxation. Indirect taxes provide flexibility, adjusting to economic shifts and government spending needs. They also discourage harmful goods consumption and can manage inflation, though they may contribute to cost-push inflation. Revenue unpredictability due to consumer response to price changes poses a design challenge for a clear tax system.

In essence, while indirect taxes are vital for revenue and have benefits, finding a balance between revenue generation, economic stability, and fair tax distribution is crucial. A well-structured approach to indirect taxation, considering the discussed pros and cons, is vital for sustainable economic growth and equitable tax distribution.

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