All You Need to Know About Indirect Taxes

Sep 28, 2017 | 1 year ago | Read Time: 4 minutes | By iKnowledge Team

In response to the question of the important of taxes in a country, Former US Supreme Court justice Oliver Wendell Holmes gave this answer in 1927: “Taxes are the price we pay for civilization.” While not the only person to express the sentiment, he did quite easily sum up the essence of our taxation system. Taxation is government’s way to generate enough revenue to fund development project it oversees, as well as provide basic, common goods for the public. This revenue is generated through two types of taxes – direct and indirect taxes. While almost everyone is aware of direct taxes in India that are levied by the government such as income tax is a form of direct tax, most are unsure about the latter. Let’s see what it’s all about.

All you Need to Know about Indirect Taxes - Aegon Life Blog

What is indirect tax?

Indirect tax can be defined as a type of tax where the incidence and impact of taxation does not fall on the same entity. It is collected by the government from an intermediary such as a retailer or a manufacturer. The eventual tax amount is paid by the buyer of the goods and services. To put it simply, indirect taxes are those taxes that can be shifted from one individual to another. It is not levied directly on the income of the taxpayer, but is levied on the expenses incurred by them. Some examples of indirect taxes include sales tax, entertainment tax, excise duty, etc.

Types of indirect taxes in India

There are 7 main types of indirect taxes in India. However, after the implementation of GST, these taxes are streamlined into one singular tax to reduce hassles of compliance. You can learn about all the different types of taxes in India here:

  1. Service Tax: A tax levied on the services provided by an entity and paid by the recipient of the services. Service tax falls under the ambit of the Central Government, meaning the central government it is collected by and deposited with the central government.
  2. Excise duty: Tax levied on the goods produced or manufactured in India. It is a tax on manufacturing which is paid by the manufacturer, who in turn recovers the amount from his customers.
  3. Value Added Tax: Also known as VAT, this tax is levied on the sale of movable goods in India. Goods sold directly to the customers are levied VAT, which is exacted by the respective state governments on intra-state sales, as well as Central Sales Tax, which is collected by the Central Government on inter-state sales.
  4. Custom Duty: A tax levied on the goods which are imported into India. In some cases, it is also applicable on the goods being transported out of India.
  5. Stamp Duty: A tax levied on the transfer of immovable property located in the state. It is charged by the State Government and varies in rates. It is also applicable on all legal documents.
  6. Entertainment tax: Charged only by the respective state governments, this tax is levied on all financial transactions related to entertainment. Examples include video games, movie shows, amusement parks, arcades, sports activities, etc.
  7. Securities Transaction Tax: A tax levied at the time of trade of securities through Indian Stock Exchange.


Indirect taxes have a number of benefits and advantages. Some of them are:

  • The poor can contribute: The less economically stable population of the country are often exempted from most direct taxes. However, with indirect taxes, the government can reach the poor sections of the society as well.
  • Equitable: Indirect taxes are also levied on the upper rungs of society through taxes on goods and services consumed by only the rich. Luxury tax is another example of equitable taxation.
  • Convenient: Indirect tax is usually charged in small amounts and is paid only while making purchases. It is also included in the final price of a good or service. Collection of indirect tax happens automatically when goods are sold and purchased. It also requires minimal effort on the government’s part to collect.
  • Broad-based: Indirect taxes are spread out evenly on a wide range of goods and services. This way the taxpayer is not burdened by a heavy direct taxation which might impact their economic and social life.


The flip side of the coin, these are the disadvantages of indirect taxes:

  • Regressive: Since there are multiple forms of indirect taxes, some of them may bridge the gap between the rich and the poor, there are others which directly target subsistence goods. For example, the salt tax is applicable for everybody equally. Thus implying the rich and the poor have to pay the same amount. However, the impact of this penalty will be higher on the poor than the rich
  • Raises prices unduly: The process of indirect taxes is sometimes cumulative. On a point-based transaction system, every middlemen tends to charge their own service tax, resulting in the price of the commodity to increase.

Not industry-friendly: By charging raw materials and goods, indirect taxes increase the cost of production and impairs the competitive capacity of industries. This in turn discourages industries to expand.

Want to know your taxes? Access our easy to use tax calculator, and plan your finances.

Get a detailed explanation on tax sections under 80C, 80CCC & 80CCD here.

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