IIMS, PUNE

Finance Specialization – Batch 23-25

Direct and Indirect Taxation (Semester 2)

Study Material- Unit 4

Indirect Tax: -
Indirect tax is something that a manufacturer pays to the Government of his country. The burden of tax
payment is on end consumer as they are the ones purchasing the products. Unlike direct taxes, these
are levied on materialistic goods.

Indirect tax is a tax that can be passed on to another individual or entity. Indirect tax is generally
imposed on suppliers or manufacturers who pass it on to the final consumer. Excise duty, customs duty,
and Value-Added Tax (VAT) are examples of Indirect taxes.

Indirect tax is defined as the tax imposed by the government on a taxpayer for goods and
services rendered. Unlike direct taxes, indirect tax is not levied on the income, revenue or profit
of the taxpayer and can be passed on from one individual to another.

Indirect taxes are basically taxes that can be passed on to another entity or individual. They are usually
imposed on a manufacturer or supplier who then passes on the tax to the consumer. The most common
example of an indirect tax is the excise tax on cigarettes and alcohol. Value Added Taxes (VAT) are also
an example of an indirect tax.

Features of Indirect Tax: -

Here are the key features of indirect taxes:
 Tax liability: The service provider or seller pays indirect taxes to the government, and the liability
is transferred to the consumer.
 Payment of tax: The seller pays indirect taxes to the government and the same is transferred to
the consumer.
 Nature: Indirect taxes were initially regressive in nature, but thanks to the implementation of
the Goods and Services Tax, they are now pretty progressive.
 Saving and investment: Indirect taxes are generally growth-oriented considering the fact that
they encourage consumers to save and invest.
 Evasion: It is difficult to evade indirect taxes because they are now implemented directly
through products and services.

Advantages of Indirect Tax

Here are the main advantages of indirect taxes
 Convenience: Indirect taxes do not burden the taxpayer and are convenient as they are paid
only at the time of making a purchase. Moreover, state authorities find it convenient to levy
indirect taxes because they are collected directly at the stores/factories which helps in saving a
lot of time and effort.
 Ease of collection: Indirect taxes are easy to collect in comparison with direct taxes. Since
indirect taxes are only collected at the time of making purchases, the authorities need not worry
about their collection.
  Collection from the poor: Those who earn less than Rs.2.5 lakh p.a. are exempt from income
tax, which means that they do not contribute to the government. Since indirect taxes are
charged at the point of sale, all individuals, regardless of the income tax slab under which they
fall, contribute towards the growth of the economy.
 Equitable contributions: Indirect taxes are directly related to the costs of products and services.
What this essentially means that the basic necessities attract lower rates of tax while luxury
items are charged at higher tax rates, thereby ensuring that contributions are equitable.

Disadvantages of Indirect Tax

Some of the disadvantages of Indirect Tax are given below:
 Indirect Tax charged sometimes are cumulative. This means that in a point-based transaction
system, middlemen involved are likely to charge their own service tax which may result in the
overall price of the product increasing.
 Indirect Tax can be regressive in nature. For example, salt tax remains the same for both poor
and rich, However, if a rich person defaults the payment, then the penalties imposed will be
higher as well.
 Indirect Tax are not industry friendly. Taxes are levied on raw materials and goods which in turn
increases the cost of production, thus not allowing industries to expand as their competitive
capacity is restricted.

Different Types of Indirect Tax

There are different types of indirect tax in India. However, after the implementation of GST, all these
indirect taxes were bundled into one singular tax for the citizens of India. We will have a look at the
different types of indirect tax in India:
 Service tax: This tax is levied by an entity in return for the service provided by them. The service
tax is collected by the Government of India and deposited with them.
 Excise duty: When any product or good is manufactured by a company in India, then the tax
levied on those goods is called the Excise Duty. The manufacturing company pays the tax on the
goods and in turn recover the amount from their customers.
 Value Added Tax: Also known as VAT, this type of tax is levied on any product sold directly to
customer and are movable. VAT consists of Central Sales Tax which is paid to the Government of
India State Central Sales Tax which is paid to the respective State Government.
 Custom Duty: This a tax levied on the goods imported to India. Sometimes, Custome Duty is also
levied on products which are exported out of India.
 Stamp Duty: This is a tax levied on the transfer of any immovable property in a state of India.
The state government in whose state the property is located charges this type of tax. Stamp tax
is also applicable on all legal documents too.
 Entertainment Tax: This tax is charged by the state government and is applicable on any
products or transactions related to entertainment. Purchasing of any video games, movie shows,
sports activities, arcades, amusement parks, etc. are some of the products on which
Entertainment Tax is charged.
 Securities Transaction Tax: This tax is levied during the trading of securities through Indian
Stock Exchange.
GST: -

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes
in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the
Parliament on 29th March 2017 and came into effect on 1st July 2017.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and
Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on
every value addition. GST is a single domestic indirect tax law for the entire country.

GST is a multi-stage tax system which is comprehensive in nature and applied on the sale of goods and
services. The main aim of this taxation system is to curb the cascading effect of other Indirect taxes and
it is applicable throughout India.

GST stands for Goods and Services Tax. It is an Indirect tax which introduced to replacing a host of other
Indirect taxes such as value added tax, service tax, purchase tax, excise duty, and so on. GST levied on
the supply of certain goods and services in India. It is one tax that is applicable all over India.

Objectives Of GST: -
1. To achieve the ideology of ‘One Nation, One Tax’: - GST has replaced multiple indirect taxes,
which were existing under the previous tax regime. The advantage of having one single tax
means every state follows the same rate for a particular product or service. Tax administration is
easier with the Central Government deciding the rates and policies. Common laws can be
introduced, such as e-way bills for goods transport and e-invoicing for transaction reporting. Tax
compliance is also better as taxpayers are not bogged down with multiple return forms and
deadlines. Overall, it’s a unified system of indirect tax compliance.

2. To subsume a majority of the indirect taxes in India: - India had several erstwhile indirect taxes
such as service tax, Value Added Tax (VAT), Central Excise, etc., which used to be levied at
multiple supply chain stages. Some taxes were governed by the states and some by the Centre.
There was no unified and centralised tax on both goods and services. Hence, GST was
introduced. Under GST, all the major indirect taxes were subsumed into one. It has greatly
reduced the compliance burden on taxpayers and eased tax administration for the government.

3. To eliminate the cascading effect of taxes: - One of the primary objectives of GST was to
remove the cascading effect of taxes. Previously, due to different indirect tax laws, taxpayers
could not set off the tax credits of one tax against the other. For example, the excise duties paid
during manufacture could not be set off against the VAT payable during the sale. This led to a
cascading effect of taxes. Under GST, the tax levy is only on the net value added at each stage of
the supply chain. This has helped eliminate the cascading effect of taxes and contributed to the
seamless flow of input tax credits across both goods and services.

4. To curb tax evasion: - GST laws in India are far more stringent compared to any of the erstwhile
indirect tax laws. Under GST, taxpayers can claim an input tax credit only on invoices uploaded
by their respective suppliers. This way, the chances of claiming input tax credits on fake invoices
are minimal. The introduction of e-invoicing has further reinforced this objective. Also, due to
GST being a nationwide tax and having a centralised surveillance system, the clampdown on
 defaulters is quicker and far more efficient. Hence, GST has curbed tax evasion and minimised
tax fraud from taking place to a large extent.

5. To increase the taxpayer base: - GST has helped in widening the tax base in India. Previously,
each of the tax laws had a different threshold limit for registration based on turnover. As GST is
a consolidated tax levied on both goods and services both, it has increased tax-registered
businesses. Besides, the stricter laws surrounding input tax credits have helped bring certain
unorganised sectors under the tax net. For example, the construction industry in India.

6. Online procedures for ease of doing business: - Previously, taxpayers faced a lot of hardships
dealing with different tax authorities under each tax law. Besides, while return filing was online,
most of the assessment and refund procedures took place offline. Now, GST procedures are
carried out almost entirely online. Everything is done with a click of a button, from registration
to return filing to refunds to e-way bill generation. It has contributed to the overall ease of doing
business in India and simplified taxpayer compliance to a massive extent. The government also
plans to introduce a centralised portal soon for all indirect tax compliance such as e-invoicing, e-
way bills and GST return filing.

7. Improved logistics and distribution system: - A single indirect tax system reduces the need for
multiple documentation for the supply of goods. GST minimises transportation cycle times,
improves supply chain and turnaround time, and leads to warehouse consolidation, among
other benefits. With the e-way bill system under GST, the removal of interstate checkpoints is
most beneficial to the sector in improving transit and destination efficiency. Ultimately, it helps
in cutting down the high logistics and warehousing costs.

8. To promote competitive pricing and increase consumption: - Introducing GST has also led to an
increase in consumption and indirect tax revenues. Due to the cascading effect of taxes under
the previous regime, the prices of goods in India were higher than in global markets. Even
between states, the lower VAT rates in certain states led to an imbalance of purchases in these
states. Having uniform GST rates have contributed to overall competitive pricing across India
and on the global front. This has hence increased consumption and led to higher revenues,
which has been another important objective achieved.

Advantages Of GST
GST has mainly removed the cascading effect on the sale of goods and services. Removal of the
cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax, the cost
of goods decreases.

Also, GST is mainly technologically driven. All the activities like registration, return filing, application for
refund and response to notice needs to be done online on the GST portal, which accelerates the
processes.
Types / Components of GST: -

The four different types of GST are given below:

 Central Goods and Services Tax : CGST is charged on the intra state supply of products and
services.
 State Goods and Services Tax : SGST, like CGST, is charged on the sale of products or services
within a state.
 Integrated Goods and Services Tax : IGST is charged on inter-state transactions of products and
services.
 Union Territory Goods and Services Tax : UTGST is levied on the supply of products and services
in any of the Union Territories in the country, viz. Andaman and Nicobar Islands, Daman and
Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied along with CGST.

Under the GST law, the central government will collect CGST, SGST or IGST depending upon whether the
transaction is intrastate or interstate.

When the supply of goods or services happens within a state called intra-state transactions, then both
the CGST and SGST will be collected. Whereas if the supply of goods or services happens between the
states called as inter-state transactions, then only IGST will be collected.

It is to be noted that the GST is a destination-based tax, which is received by a State in which the goods
are consumed but not by a state in which such goods are manufactured. Unlike earlier when there were
multiple taxes such as Central Excise, Service Tax and State VAT etc., under GST, there is just one tax
with three components- CGST, SGST and IGST.

Central Goods and Services Tax (CGST)

Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the Central
Government and will be governed by the CGST Act. SGST will also be levied on the same Intra State
supply but will be governed by the State Government.

This implies that both the Central and the State governments will agree on combining their levies with
an appropriate proportion for revenue sharing between them. However, it is clearly mentioned in
Section 8 of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or services but
the rate of tax shall not be exceeding 14%, each.

State Goods and Services Tax (SGST)

Under GST, SGST is a tax levied on Intra State supplies of both goods and services by the State
Government and will be governed by the SGST Act. As explained above, CGST will also be levied on the
same Intra State supply but will be governed by the Central Government.
Note: Any tax liability obtained under SGST can be set off against SGST or IGST input tax credit only.

An example for CGST and SGST:

Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to Anand in Maharashtra worth Rs.
10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case, the dealer
collects Rs. 1800 of which Rs. 900 will go to the Central Government and Rs. 900 will go to the
Maharashtra Government.

What is Union Territory Goods and Services Tax (UTGST)?

Similar to how SGST is levied by the state governments on the intra-state supply of goods and services,
Union Territory Goods and Services Tax or UTGST is levied by the Union Territory governments. It refers
to the tax levied on the intra-Union Territory supply of goods and services. It is governed by the UTGST
Act and is levied along with CGST.

UTGST is similar to SGST and is levied in Union Territories which do not have their own legislature.
UTGST is applicable on the supplies that take place in the Union Territories of Andaman and Nicobar
Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, and Lakshadweep. Please note that the
Union Territories of Delhi and Puducherry will fall under SGST law as they have their own legislature.
The order of ITC utilisation of UTGST is similar to SGST. ITC of UTGST should first be set off against
UTGST. Any balance remaining may be used to set off any IGST liability.

What is Integrated Goods and Services Tax (IGST)?

Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be governed
by the IGST Act. IGST will be applicable on any supply of goods and/or services in both cases of import
into India and export from India.
Note: Under IGST,
 Exports would be zero-rated.
 Tax will be shared between the Central and State Government.

An example for IGST:

Consider that a businessman Rajesh from Maharashtra had sold goods to Anand from Gujarat worth Rs.
1,00,000. The GST rate is 18% referring to 18% IGST. In such a case, the dealer has to charge Rs. 18,000
as IGST. This IGST will go to the Centre.

Excise Duty: -
Excise Duty in India
Excise duty is a form of indirect tax that is levied by the Central Government of India for the production,
sale, or license of certain goods. Excise duty charges are also collected by state governments for alcohol
and narcotics.

Note: Excise duty has been replaced by the Goods and Services Tax(GST) w.e.f. 1 July 2017.
This year, the finance minister Nirmala Sitharaman has announced the Union Budget for 2022 on 1
February 2022. In the latest budget, an additional excise duty of Rs. 2 has been proposed on unblended
fuel October 2022 onwards. The move has been taken to promote usage of unblended fuel as it will
reduce air pollution and fuel imports.

Excise duty is a kind of indirect tax charged on the sale of certain products. The customer does not pay
excise duty directly to the authorities, but it is added to the cost of the product by the producer or
merchant and then passed on to the consumer by way of increased prices. The Excise Duty Act, 1944
governs the regulations related to excise duty in India and the tax is administered by the Central Board
of Excise and Customs.

Excise duty is a form of tax imposed on goods for their production, licensing and sale. An indirect tax
paid to the Government of India by producers of goods, excise duty is the opposite of Customs duty in
that it applies to goods manufactured domestically in the country, while Customs is levied on those
coming from outside of the country.
At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty,
etc. However, the Goods and Services Tax (GST), introduction in July 2017, subsumed many types of
excise duty. Today, excise duty applies only on petroleum and liquor.

Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is
levied on the supply of goods and services.

Alcohol does not come under the purview of GST as an exclusion mandated by constitutional provision.
States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.

After GST was introduced, excise duty was replaced by central GST because excise was levied by the
central government. The revenue generated from CGST goes to the central government.

The Budget estimate of the government's excise duty revenue for the year 2020-21 was Rs 2,67,000
crore. The revised estimates of excise duty for the 2019-20 Budget came at Rs 2,48,000 crore, while the
actuals for the 2018-19 Budget stood at Rs 2,30,992 crore.

Types of Excise Duty

Here are the different types of excise duties:
1. Basic Excise Duty: Basic Excise Duty is levied under Section 3 of the Central Excises and Salt Act,
1944. Under this section, all excisable products apart from salt, manufactured of produced in
India, are subject to Basic Excise Duty. Central Value Added Tax or CENVAT, as it is also called, is
charged at the rates mentioned in the Central Excise Tariff Act.
2. Special Excise Duty: Central Excise Duty is charged under Section 37 of the Finance Act, 1978. It
is levied on all excisable products that are subject to Basic Excise Duty under Section 3 of the
Central Excises and Salt Act, 1944. The rate at which Special Excise Duty is charged is mentioned
in the Second Schedule to Central Excise Tariff Act, 1985.
3. Education Cess on Excise Duty: According to Section 93 of Finance (No. 2) Act, 2004, Education
Cess is an excise duty that must be computed on the aggregate of all excise duties including
special excise duty or other excise duties, but not including Education Cess of excisable goods.
4. Natural Calamity Contingent Duty: Section 136 of the Finance Act, 2001, has imposed the
Natural Calamity Contingent Duty under clause 129 of the Finance Bill, 2001. The Natural
Calamity Contingent Duty is charged on cigarettes, chewing tobacco, and pan masala.
5. Excise Duty in case of clearances by Export Oriented Units: The Export Oriented Units have an
obligation to export all the goods produced by them. However, if their final product is cleared in
a domestic tariff area, the rate at which excise duty is charged will be the same as customs duty
on a similar article if imported in India.
6. Duties under other Acts: Certain duties as well as cesses are charged on manufactured goods
under other Acts. The taxes, however, are collected under the administrative machinery of
central excise. The rules and provisions of the Central Excise Act are responsible for the levy as
well as collection of these duties and/or cesses/
7. Additional Duty on Goods of Special Importance: Additional Excise under Additional Duties of
Excise (Goods of Special Importance) Act, 1957 is levied on certain goods of special importance.
The ‘Additional Duty’ is charged along with excise duty. The Additional Duty on Goods of Special
Importance scheme was implemented due to the suggestions made to the Government by
manufacturers. The suggestions were made to avoid multiple taxes and duties at different
levels. The levy of all taxes as well as their collection at one stage by one authority was expected
 to make it convenient to not only pay the tax, but to also administer it. Therefore, the Central
and State Governments agreed to charge additional duty on certain items instead of
charging sales tax. The additional duty was distributed among different states, and the State
Government share the revenue from this duty based on the percentages specified in the second
schedule of the Act.
8. Additional Customs Duty commonly known as Countervailing Duty (CVD): This duty is charged
on imports.
9. Additional Duty on Mineral Products: Under the Mineral Products (Additional Duties of Excise
and Customs) Act, 1958, additional duty must be paid on mineral products such as motor spirit,
furnace oil, diesel and kerosene.
10. Duty on Medical and Toilet Preparations: Under the Medical and Toilet Preparations (Excise
Duties) Act, 1955, excise duty is charged on medical preparations.
11. Special Additional Duty of Customs: Special Additional Duty of Customs is charged on items that
are bound under the Information Technology Agreement (apart from information technology
software), and also on certain raw materials or inputs for the manufacture of IT or electronic
products.

Custom Duty: -
The Government of India levies a Customs Duty on all the imports within and some of the exports from
the country. The amount to be paid as customs duty can be determined by several factors such as value,
weight, dimensions, etc. of the item in question.

Note: Custom Duty has been replaced by the Goods and Services Tax(GST) starting 1 July 2017

Customs duty is a variant of Indirect Tax and is applicable on all goods imported and a few goods
exported out of the country. Duties levied on import of goods are termed as import duty while duties
levied on exported goods are termed as an export duty. Countries around the world levy customs duties
on the import/export of goods as a means to raise revenue and/or shield domestic institutions from
predatory or efficient competitors from other countries.

Customs duty is levied as per the value of goods or dimensions, weight, and other such criteria
according to the goods in question. If duties are based on the value of goods, then they are called ad
valorem duties, while quantity/weight-based duties are called specific duties. Compound duties on
goods are a combination of value as well as various other factors.

Types of Customs Duty: -

Customs duties are levied almost universally on all goods imported into the country. Export duties are
levied on a few goods as specified under the Second Schedule. Import duties are not levied on a few
items including lifesaving drugs/equipment, fertilizers, food grains etc. Import duties are further divided
into basic duty, additional customs duty, true countervailing duty, protective duty, education cess and
anti-dumping duty or safeguard duty.
1. Basic Customs Duty:
Basic customs duty is applicable on imported items that fall under the ambit of Section 12 of the
Customs Act, 1962. These duties are levied at the rates prescribed in First Schedule to Customs Tariff
Act, 1975, under the terms specified in Section 2 of the act. The levied rates may be standard or
preferential as per the country of import.
 2. Additional Customs Duty (Countervailing Duty (CVD)):
This duty is levied on imported items under Section 3 of Customs Tariff Act, 1975. It is equal to the
Central Excise Duty that is levied on similar goods produced within India. This duty is calculated on the
aggregate value of goods including BDC and landing charges.

3. Protective Duty:
Protective duty may be imposed to shield the domestic industry against imports at a rate recommended
by the Tariff Commissioner.

4. Education Cess:
This duty is levied at 2% and higher education cess at another 1% of aggregate of customs duties.

5. Anti-dumping Duty:
Anti-dumping duty may be imposed if the good being imported is at below fair market price, and is
limited to the difference between export and normal price (dumping margin).

6. Safeguard Duty:
Safeguard duty is levied if the government feels that a sudden increase in exports can potentially
damage the domestic industry.