Indirect Taxation

Indirect Taxation Definition:

Indirect taxes are the taxes levied on goods and services. These are not levied on individuals directly. Customers pay them in the form of higher prices. In other words indirect tax is money charged by a retailer to the customer who buys an item from him. Here the economic burden is shifted from one person to the other.

Indirect Taxation Structure:

The tax structure is distributed among the central and state governments. The tax is actually looked after by the revenue department which comes under the ministry of finance. The central and state governments play a significant role in deciding the tax which is to be levied on the public of a country.

The central government takes care of the tax on income, central excise, service tax, customs tax.
The state government levies charge on VAT or sales tax, land revenue, state excise.
Local bodies are also empowered to levy taxes on properties, octroi and for utilities like water supply, drainage etc.

Taxes levied by the central government come under two categories, direct and indirect.

Direct Taxes Include:

Taxes on corporate income
Personal income tax
Capital gains tax
Property tax

Indirect Taxes Include:

Excise duty
Customs duty
Service tax
Securities transaction tax

Indirect Taxation Levied By State Governments and Local Bodies

Sales or VAT
Other taxes
Indirect tax examples:

Excise Tax:

It is type of indirect tax levied and collected on manufacture of a specific good. It is vital source of revenue for the government.

Calculation of excise duty: most of the products attract an excise duty of 16%. But for some products it is 8%. In addition to the prescribed rate 2% education cess is also levied.

Indirect Taxation Examples: excise duty on petrol and diesel oils is 6%. It used to be 8% earlier but now it is reduced to 6%.

Service Ttax:

Tax imposed on specified services which come under the taxable services list. Service tax cannot be levied on the services which are not included in the “taxable services” list. The object behind the service tax is to lower the degree of taxation on manufacturing as well as trade without forcing the government to conciliation on revenue needs. Some of the examples of service tax are telephone, stock broker, general insurance, packaging services, telegraph, telex, scientific and technical consultancy services etc.

Calculation: service tax is levied at a rate of 10% plus 2% education cess.

Customs Tax:

It is an indirect tax collected and retained by the government on the import and export of goods. The levy and rates of customs duty in India is taken care by customs act 1962 and customs tariff act 1975. Customs duty is calculated on the transaction value of the good. Imported goods India attract basic customs duty, additional customs duty and education cess. The rate of basic customs duty is specified under the Tariff act. Its peak rate is reduced by 15%. The additional customs duty is equivalent to the excise duty payable on the similar goods manufactured in India. In addition education cess of 2% is levied on the aggregate of customs duty imported.

Calculation: customs duty on non-agricultural products is 10%.

Securities Transaction Tax:

Transaction in equity shares, derivatives and units of equity oriented funds entered in a stock exchange come under securities transaction tax.

Sales Tax or VAT (Value Added Tax):

It is a type of indirect tax levied by the government at the point of sale on retail goods and services. This tax is collected by the retailer, which is forwarded to the government. In India each state has its own sales tax act. The sales tax is also governed by the central government under central sales act.

Indirect Taxation Calculation: there are 4 slabs of sales tax
0% for essential commodities
1% on bullion and precious stones
4% on industrial and capital goods and items of mass consumption
Other items 12.5%
Petroleum products, tobacco, liquor attract very high VAT rates and they vary from state to state.
A central sales tax is also levied on inter-state sales at a rate of 4%.

Other state taxes include:

Entry Tax:

This is type of indirect tax levied on the vehicles by the government under going inter state travel.

Stamp Duty:

This is a further charge levied on the documents, like promissory notes, bills of exchange, insurance policies and debentures.

Agriculture income tax levied on income from plantations

TDS Calculation:

In the direct tax, personal income tax which is deducted directly at source is calculated by considering the income which the individual comes into. The tax deduction at source chart is as follows:
The form of tax collection where the amount is deducted at source by the employer is called as Tax Deduction at source. Since it is deducted by the employer from the income earned by the individual per annum it is a form of direct tax.

TDS rates for the financial year 2009-10 are as follows:

Up To Earning Tax (%)
Up to Rs. 1,60,000  Nil tax
Up to Rs. 1,90,000 (for women) Nil tax
Up to Rs.2,40,000 (for residents ,65 Yrs or above) Nil tax
Up to
From Rs.1,60,001 - Rs. 300000 10% tax
From Rs.300001 to Rs. 500000 20% tax
From Rs.500001 & above 30% tax
Education Cess 3% tax