Indirect Tax

Overview

The Indian Government’s tax revenue is divided into Direct and Indirect Taxes. Direct Taxes are primarily imposed on the income, earnings, or profits of individuals or corporations, such as Income Tax, Surcharge, and Gift Tax, and are regulated by the Central Board of Direct Taxes (CBDT).

An Indirect tax is a tax transferred to another party. Typically, indirect taxes are charged to manufacturers or vendors who then shift the burden to the ultimate buyer. Indirect taxes include sales tax, entertainment tax, and excise duty. These taxes are applied to goods sellers or service providers and are ultimately borne by the consumer as service tax, excise duty, entertainment tax, custom duty, etc. In India, Indirect Tax is primarily governed by the Goods and Services Tax (GST) Act.

Understanding indirect tax with examples

Indirect Tax Examples: Indirect taxes include excise tax, VAT (Value Added Tax), service tax, customs duty, sales tax, entertainment tax, and Securities Transaction Tax.

Indirect Tax Illustration: For example, if you dine out, the bill will show the total amount plus GST (Indirect Tax). If the bill is Rs 2000 and the GST rate is 5%, your total payment would be Rs 2100. The additional Rs 100 represents the indirect tax passed on to you by the service provider.

Various Types of indirect tax

India’s indirect tax system encompasses various taxes. Here’s a concise overview of some common indirect taxes:

1. Goods and Services Tax (GST): This is a unified tax system that replaced multiple indirect taxes at the national and state levels. GST is a value-added tax that is levied on the supply of goods and services.
2. Customs Duty: This is a tax levied on goods that are imported into India. Customs duty is based on the value of the imported goods, and is levied by the Central Government.
3. Excise Duty: This is a tax that is levied on the production or manufacture of goods in India. Excise duty is levied by the Central Government, and is based on the quantity or value of the goods produced.
4. Service Tax: This is a tax that is levied on services provided in India. Service tax is levied by the Central Government, and is based on the value of the services provided.

Indirect tax Features

Indirect Taxes in India have distinct features, applicable across various goods, imports, manufacturing, and services. Key characteristics include:

1. Levied on Goods and Services Indirect taxes are imposed on tangible items like goods and services, not on personal income.
2. Transfer of Tax Burden While sellers are initially responsible for paying indirect taxes to the government, they pass this cost onto consumers.
3. Mitigates Tax Evasion Since indirect taxes are incorporated into commodity prices, consumers indirectly pay taxes upon purchase, reducing the likelihood of evasion.
4. Consumer Responsibility The obligation to pay indirect taxes is shifted from sellers to consumers, who pay the tax at the point of sale.
5. Significant Government Revenue Indirect taxes are difficult to evade and widely applicable, making them a substantial source of government revenue, surpassing direct taxes.
6. Indirect Impact on Consumers Unlike direct taxes, which are charged directly on income and often evaded, indirect taxes do not directly impact consumers, thus avoiding this issue.

Documents Required for Indirect Tax:

1. GST registration certificate
2. PAN card of the business entity
3. Bank account details
4. Proof of place of business
5. Identity and address proof of authorized signatory

Benefits of Indirect Tax:

Indirect Tax offers several advantages not found with direct taxes:

1. 1. Promotes Fairness: Indirect taxes are considered fair as they are proportional to the price of goods; more expensive items incur higher taxes, so those who afford luxury goods contribute more in taxes.
   2. Simplicity in Payment and Collection For taxpayers, indirect taxes are simpler since they’re paid during purchase, eliminating the need for tax return filings. For authorities, collection is straightforward as taxes are gathered at the point of sale.
   3. Convenience Indirect taxes avoid the complex income calculation required for income tax, thereby reducing evasion, as they are paid at the time of purchase.
   4. Deters Unhealthy Consumption High indirect taxes on products like tobacco and alcohol raise their prices, discouraging excessive consumption due to increased costs.
   5. Wider Application Indirect taxes apply to a vast array of goods and services, ensuring a broad tax base. Unlike the lump-sum nature of direct taxes, indirect taxes are incremental and paid with each transaction.

Eligibility for Indirect Tax Payment

The Goods & Services Tax (GST) has largely absorbed the various indirect taxes that were previously in place in India. Here’s a look at who is liable to pay GST:

Goods & Services Tax (GST): GST, implemented on 1st July 2017, operates on a slab system with different rates for various commodities. It’s charged on the supply of goods. Consumers pay GST at the rate applicable to the product they purchase. Businesses with an annual turnover exceeding Rs 20 lakhs are also required to pay GST. While GST has subsumed many taxes, certain taxes remain active and are paid by specific entities.

Customs Duty Tax Individuals engaged in international trade must pay customs duty on goods exported from India.

Excise Duty Despite GST’s broad coverage, excise duty persists on certain items like liquor, petroleum, and fuel, charged when these goods leave the warehouse.

Indirect Tax Compliance Timeline

How Corporate Raasta Consulting can help you with the process

Comprehensive Indirect Tax Advisory: Corporate Raasta Consulting offers expert advice and guidance on various indirect tax matters, including VAT, GST, customs duty, excise duty, and other applicable taxes. We help businesses understand the implications of these taxes on their operations and provide strategic recommendations to optimise tax efficiency while ensuring compliance with regulatory requirements.

Tax Planning and Structuring: We assist businesses in developing effective tax planning strategies to minimise their indirect tax liabilities. This may involve analysing the business structure, supply chain, and transaction flows to identify opportunities for tax optimization and risk mitigation.

Compliance Management: Corporate Raasta Consulting helps businesses navigate the complex landscape of indirect tax compliance. This includes ensuring timely registration under relevant tax laws, filing accurate tax returns, maintaining proper records and documentation, and complying with tax payment deadlines. By staying updated on changes in tax laws and regulations, the firm helps businesses avoid penalties and legal consequences associated with non-compliance.

Audit Support: In the event of a tax audit or investigation by tax authorities, Corporate Raasta Consulting provides support and representation to businesses. We assist in preparing and organising relevant documents, responding to audit queries, and negotiating with tax authorities to resolve issues effectively.

Training and Education: We conduct training sessions and workshops for businesses to educate their staff on indirect tax laws, compliance requirements, and best practices. This helps businesses build internal capabilities and awareness to ensure ongoing compliance with indirect tax regulations.

Technology Solutions: Corporate Raasta Consulting offers technology solutions such as tax compliance software or platforms to streamline and automate indirect tax processes. These solutions can help businesses improve efficiency, accuracy, and transparency in managing their indirect tax obligations.

Strategic Support: Beyond day-to-day compliance, Corporate Raasta Consulting provides strategic support to businesses by advising on the tax implications of business decisions, mergers and acquisitions, cross-border transactions, and international expansion plans. This strategic insight helps businesses make informed decisions while optimising their tax positions.