Indirect Taxes Definition – Indirect Taxes Types and Meaning

indirect taxes definition

Indirect Taxes Definition and Types

Indirect Taxes Definition – “Taxes that are not directly levied on the income of the individual. However the burden to pay is indirectly transfer to the consumer.”

In simple words, indirect taxes are those taxes which are imposed on the manufacturers or retailers. However due to indirect nature of the taxes, these parties transfer the burden of these taxes on the consumer who purchase their goods or services. Basically these parties play the role of intermediaries. Instead of charging taxes directly on consumer income, government earn taxes through the intermediaries.

Indirect taxes are different from direct taxes as direct taxes are directly imposed on the income of the consumer. Some of the example of direct taxes are income tax, wealth tax and house tax. However the examples of indirect taxes are VAT, service tax, sales tax, etc.

Features of Indirect Taxes

  • The most important feature of indirect tax is that it is imposed actually on manufacturers or retailer. However the burden of paying lies on the shoulder of the consumer of the goods or services.
  • These taxes are already paid by the party on which they are charged, however later on these parties can repay that amount by charging the same on the consumers.
  • These taxes come under the regulation of both Central and State government. VAT is paid to state government whereas CST is paid to central government.

Types or Example of Indirect Taxes

Let’s discuss different types of indirect taxes in order to understand the indirect taxes definition more clearly –

Service Tax –  The current rate of service tax is 15% due to the inclusion of 0.5 % Krishi Kalyan cess. The tax is originally imposed on the service providers. However, at the end service receivers have to pay the tax. Central government of India collect this tax.

Excise Duty – This tax is also collected by Central government and is levied on the manufacture of the goods. This tax applies on the storage of goods and services rather than the sale of goods and services.

VAT – The abbreviation is Value Added Tax. It applies on those goods and service that are directly sold to the consumers. Currently VAT is 12.5 % in India.

Advantages of Indirect Taxes

  • Every individual tries to save as much tax as she or he can. Some even use illegal methods in order to save the tax. Hence with the help of indirect taxes, government is able in taking out the taxes from such people as well.
  • Paying tax that is imposed on individual income sort of pinch the individual somewhere. However, if he has to pay the direct taxes, psychology of the individual is different.
  • These taxes create a sense of uniformity as these are paid by everyone no matter what class or cadre he or she belongs.

Related Financial Terms of Indirect Taxes

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