Indirect tax

Meaning of Direct Tax

Direct taxes are taxes that are imposed directly on individuals or entities
and are paid directly to the government. These taxes are typically based
on an individual's income or a company's profits, and they are not
shifted to others. Here are the meaning and key features of direct taxes.
Direct taxes are levied on individuals, businesses, and other entities by
the government, and the burden of paying these taxes falls directly on
the taxpayer.

Key Features of Direct Taxes:

1. Taxpayer Identification: Direct taxes are imposed on specific
taxpayers, and the tax authorities identify and collect these taxes from
the individuals or entities obligated to pay them.

2. Progressive Taxation: Direct taxes often follow a progressive tax rate

structure, meaning that the tax rate increases as the taxable income or
profits increase. This is intended to distribute the tax burden more
equitably and ensure that higher-income individuals or businesses pay a
larger share of their income as taxes.

3. Income Tax: One of the most common forms of direct tax is income
tax, which is levied on an individual's or business's income. Income tax
can include various categories such as individual income tax, corporate
income tax, and capital gains tax.

4. Self-Assessment: In many cases, taxpayers are responsible for

assessing their own tax liability, reporting their income or profits, and
calculating the amount of tax they owe. They must file tax returns with
accurate financial information.
5. Deductions and Exemptions: Tax laws often allow for deductions and
exemptions, which reduce the taxable income or profits, thus lowering
the tax liability. These deductions and exemptions can vary widely and
may include expenses, allowances, and tax credits.

6. Administrative Procedures: The collection of direct taxes involves

various administrative procedures, including tax assessment, filing of
tax returns, audits, and enforcement measures by tax authorities to
ensure compliance.

7. Payment Frequency: Direct taxes are typically paid periodically

throughout the tax year. For individuals, this often means regular
withholding from their paychecks, while businesses may make
estimated tax payments throughout the year.

8. Examples of Direct Taxes: Common examples of direct taxes include

individual income tax, corporate income tax, capital gains tax, property
tax, and estate tax. These taxes are typically levied directly on the
income or assets of individuals or entities.

9. Redistributive Purpose: Direct taxes are sometimes used as a tool for

wealth redistribution, as progressive tax rates can help transfer income
from higher-income individuals or entities to support government
programs and services for the broader population.

10. Legal Framework: Direct taxes are imposed and regulated by tax
laws and regulations established by the government. Tax authorities are
responsible for enforcing these laws and collecting the taxes owed.

Indirect taxes
Indirect tax are taxes that are not directly levied on individuals or
entities but are instead imposed on the consumption of goods and
services. These taxes are ultimately passed on to the end consumer as
part of the purchase price of goods or services. Here are the meaning
and key features of indirect taxes:

Meaning: Indirect taxes are taxes that are collected by an intermediary,

such as a business or retailer, on behalf of the government. These taxes
are typically imposed on the production, sale, or consumption of goods
and services, and the burden of paying the tax is shifted from the
businesses to the final consumers.

Key Features of Indirect Taxes:

1. Indirect Taxation: Indirect taxes are not directly paid by individuals
or entities to the government. Instead, they are collected by businesses at
various points in the supply chain and are passed on to consumers as
part of the purchase price of goods or services.

2. Consumption-Based: Indirect taxes are typically based on

consumption. The more a person or entity consumes, the more indirect
tax they are likely to pay. This can create an incentive for individuals
and businesses to make consumption choices that may reduce their tax
liability.

3. Regressive Nature: Indirect taxes are often considered regressive

because they tend to have a larger impact on lower-income individuals
or households. Since these taxes are a fixed percentage of the purchase
price, they represent a higher proportion of income for those with lower
earnings.

4. Variety of Forms: Indirect taxes can take various forms, including

value-added tax (VAT), sales tax, excise tax, customs duties, and tariffs.
Each of these taxes is applied differently and at different stages of the
supply chain.
5. Collection at Multiple Stages: In some cases, indirect taxes are
collected at multiple stages of production and distribution. For example,
in a VAT system, businesses collect the tax on the value they add to a
product or service, and this tax is passed on to the next stage until it
reaches the end consumer.

6. Hidden Tax: Indirect taxes are often considered hidden taxes because
they are not clearly visible to consumers. The tax is included in the
purchase price, making it less apparent to consumers compared to direct
taxes like income tax.

7. Revenue Source: Indirect taxes can be a significant source of revenue

for governments. They generate revenue each time a taxable transaction
occurs, making them a relatively stable source of income.

8. Compliance by Businesses: Businesses are responsible for collecting

and remitting indirect taxes to the government. This requires businesses
to keep accurate records, calculate the tax owed, and submit the tax to
tax authorities within specified timeframes.

9. Goods and Services Tax (GST): Some countries have implemented a

Goods and Services Tax (GST) or similar system, which combines
various indirect taxes into a single tax regime. GST is designed to
simplify the tax structure and reduce administrative complexities.

10. Government Policy Tool: Indirect taxes can also be used by

governments to influence consumer behavior and promote certain
policy objectives. For example, governments may use excise taxes on
tobacco and alcohol to discourage consumption for health reasons.

Difference between the Direct and indirect tax

1. Definition:
- Direct Taxes: Direct taxes are taxes that are levied directly on
individuals or entities, and the burden of paying these taxes falls directly
on the taxpayer. Examples include income tax, corporate tax, property
tax, and wealth tax.
- Indirect Taxes: Indirect taxes are taxes that are not directly paid by
individuals or entities to the government. Instead, they are collected by
intermediaries, such as businesses, and passed on to consumers as part
of the purchase price of goods and services. Examples include sales tax,
value-added tax (VAT), excise tax, and customs duties.

2. Taxpayer:
- Direct Taxes: The taxpayer is the individual or entity that earns
income or holds the assets subject to taxation. They are directly
responsible for calculating, reporting, and paying these taxes to the
government.
- Indirect Taxes: The taxpayer is the end consumer who pays the tax
indirectly through the purchase of goods or services. Businesses or
intermediaries collect and remit the tax on behalf of the government.

3. Tax Base:
- Direct Taxes: The tax base for direct taxes is typically income, profits,
assets, or wealth. The tax liability is determined based on the specific
criteria related to these factors.
- Indirect Taxes: The tax base for indirect taxes is the consumption of
goods and services. Taxes are imposed on the value added at different
stages of production and distribution.

4. Progressivity:
 - Direct Taxes: Direct taxes often follow a progressive rate structure,
meaning that the tax rate increases as income or profits increase. This is
designed to distribute the tax burden more equitably.
- Indirect Taxes: Indirect taxes are generally regressive as they are
applied uniformly to the purchase price of goods and services. Lower-
income individuals or households may bear a higher proportion of their
income in indirect taxes.

5. Visibility:
- Direct Taxes: Direct taxes are typically more visible to taxpayers, as
individuals and businesses are directly aware of their tax obligations
and often file tax returns.
- Indirect Taxes: Indirect taxes are often considered hidden taxes
because they are included in the purchase price of goods and services,
making them less apparent to consumers.

6. Collection:
- Direct Taxes: Taxpayers are responsible for assessing their tax
liability, reporting income or profits, and making payments directly to
tax authorities.
- Indirect Taxes: Businesses or intermediaries collect and remit indirect
taxes on behalf of the government, making the collection process less
burdensome for individual consumers.

7. Revenue Stability:
- Direct Taxes: Direct taxes can be more stable sources of government
revenue because they are less influenced by economic fluctuations
compared to indirect taxes, which depend on consumer spending.

8. Use as Policy Tools:

 - Direct Taxes: Direct taxes are often used to achieve redistributive
goals and to influence economic behavior.
- Indirect Taxes: Indirect taxes can be used to influence consumer
behavior and promote certain policy objectives, such as discouraging
consumption of harmful products.

Types of Indirect tax

Before the implementation of the Goods and Services Tax (GST) in India
on July 1, 2017, the country had a complex system of indirect taxes,
which included several different types of indirect taxes at the central and
state levels. Here are some of the main types of indirect taxes that were
in place in India before GST:

1. Value Added Tax (VAT): VAT was a state-level tax imposed on the
sale of goods within a state. Different states had their own VAT rates
and rules. It was a significant source of revenue for state governments.

2. Central Excise Duty: Central Excise Duty was a central government

tax imposed on the manufacture of goods. Manufacturers were required
to pay excise duty on the production of goods, which was often passed
on to consumers as part of the product's price.

3. Service Tax: Service Tax was a central government tax levied on

various services provided by service providers. It applied to a wide
range of services, including telecommunications, transportation,
insurance, and more.

4. Central Sales Tax (CST): CST was a central government tax

applicable to the sale of goods between states. It was imposed to avoid
double taxation of goods during interstate trade.
5. State Entry Tax: State Entry Tax was a tax levied by some states on the
entry of goods into their territory. This tax applied to goods being
transported from one state to another.

6. Entertainment Tax: Entertainment Tax was imposed by state

governments on the entertainment industry, including cinemas,
amusement parks, and live performances.

7. Octroi: Octroi was a local tax collected by municipal authorities on the

entry of goods into a municipal area. It was mainly applicable in certain
cities.

8. Luxury Tax: Some states imposed Luxury Tax on certain high-end

services and accommodations, such as luxury hotels and resorts.

9. Purchase Tax: A few states imposed Purchase Tax on specified goods

purchased within the state.

10. Customs Duty: Customs Duty is a duty imposed on goods imported

into India from other countries. It is collected at the national level and is
separate from the other indirect taxes.

11. Excise Duty on Alcohol and Tobacco: Excise duties were imposed
on alcohol and tobacco products at both the central and state levels.

Before the implementation of the Goods and Services Tax (GST) in India,
the indirect tax system had several shortcomings and challenges, which
prompted the need for reform. Some of the main shortcomings of the
pre-GST era indirect tax system included:
1. Complexity and Multiplicity of Taxes: One of the most significant
shortcomings was the complexity and multiplicity of taxes at both the
central and state levels. There were various taxes such as Central Excise
Duty, Value Added Tax (VAT), Service Tax, Central Sales Tax (CST),
and others, each with its own set of rules, rates, and compliance
requirements. This complexity made it challenging for businesses to
navigate and comply with the tax regime.

2. Tax Cascading: The pre-GST tax system suffered from tax cascading
or the "tax on tax" effect. Taxes were levied at multiple stages of
production and distribution, leading to an increase in the overall tax
burden on goods and services. This resulted in higher prices for
consumers and reduced the competitiveness of Indian products in the
global market.

3. Interstate Trade Barriers: Central Sales Tax (CST), which was levied
on interstate sales of goods, created trade barriers within the country. It
discouraged the free flow of goods across state borders and hindered the
development of a common market.

4. Compliance Burden: Businesses had to comply with a multitude of

tax laws, maintain extensive records, and file multiple tax returns, both
at the central and state levels. This compliance burden was time-
consuming and resource-intensive for businesses, especially small and
medium enterprises (SMEs).

5. Tax Evasion: The complex and fragmented tax structure provided

opportunities for tax evasion and fraud. Some businesses exploited
loopholes and engaged in tax evasion, leading to revenue loss for the
government.
6. Uncertainty and Litigation: Disputes and litigation related to tax
interpretation, classification, and eligibility for input tax credit were
common under the pre-GST regime. This uncertainty and litigation
added to the administrative burden on both taxpayers and tax
authorities.

7. Inefficiency and Inequity: The pre-GST tax system was often

inefficient in terms of resource allocation and tax collection. It also
tended to be inequitable as it burdened lower-income segments of the
population disproportionately due to regressive taxes like excise duties
on essential goods.

8. Lack of Transparency: The tax structure lacked transparency, making

it difficult for consumers to understand the tax components included in
the prices of goods and services.

1. Meaning of Evaluation of GST:

- Evaluation of GST refers to the process of assessing the performance,
impact, and effectiveness of the Goods and Services Tax system in a
particular country or region. This evaluation is typically conducted by
governments, tax authorities, policymakers, and economists to gauge
how well GST has been implemented and to identify areas for
improvement.

2. Advantages of Evaluating GST:

- Assessment of Effectiveness: Evaluation helps determine whether
GST has achieved its intended goals, such as simplifying the tax system,
reducing tax evasion, and promoting economic growth.
- Policy Adjustments: It provides insights into the need for policy
adjustments or refinements in the GST framework.
- Revenue Collection: Authorities can assess whether GST is
generating the expected revenue for the government.
 - Compliance: It allows for an examination of tax compliance levels
and identifies areas where compliance can be improved.
- Economic Impact: Evaluation helps measure the economic impact of
GST on businesses, consumers, and the overall economy.
- Fairness: It assesses the fairness and equity of the tax system,
ensuring that the tax burden is distributed equitably among different
segments of the population.
- Simplification: Evaluation helps determine whether GST has
simplified tax procedures and reduced the compliance burden on
businesses.
- Global Comparisons: It facilitates comparisons with GST systems in
other countries, offering insights into international best practices.

3. Disadvantages of Evaluating GST:

- Complexity: Conducting a comprehensive evaluation of GST can be a
complex and resource-intensive process, requiring data collection,
analysis, and expert input.
- Time-Consuming: Evaluation may take time to yield meaningful
results, and it may not provide immediate solutions to issues identified.
- Subjectivity: The assessment of GST can involve subjective
judgments, especially when evaluating its impact on economic growth,
job creation, or income distribution.
- Political Factors: The evaluation process may be influenced by
political considerations, potentially affecting the objectivity of the
findings.
- Data Limitations: Availability and accuracy of data can be a
limitation, especially in developing countries or regions with limited
data infrastructure.
- Resistance to Change: Stakeholders, such as businesses and
taxpayers, may resist changes or reforms suggested based on evaluation
findings, especially if it affects their interests.
 - Unforeseen Consequences: Implementing changes based on
evaluation findings may have unforeseen consequences, necessitating
continuous monitoring and adjustment.

Structure of GST types

The Goods and Services Tax (GST) structure in India is a dual GST
system, meaning it has both a central component (Central GST or CGST)
and a state component (State GST or SGST). Additionally, there is an
Integrated GST (IGST) for the taxation of interstate transactions and a
Union Territory GST (UTGST) for Union Territories with legislatures.
Here's a brief overview of each:

1. Central GST (CGST):

- Nature: CGST is a component of GST levied by the central
government on the supply of goods and services within a state.
- Authority: It is governed by the Central Goods and Services Tax Act,
2017.
- Revenue Collection: The revenue collected through CGST goes to the
central government.
- Rates: The rates for CGST are determined by the central government
in consultation with the GST Council.
- Applicability: It is applicable on intra-state supplies of goods and
services.

2. State GST (SGST):

- Nature: SGST is the state component of GST, and it is levied by the
respective state governments on the supply of goods and services within
their state.
- Authority: It is governed by the State Goods and Services Tax Act,
2017, passed by each state's legislative assembly.
 - Revenue Collection: The revenue collected through SGST goes to the
respective state government.
- Rates: States have the authority to set their own rates for SGST,
although they often align them with CGST rates.
- Applicability: SGST is applicable on intra-state supplies of goods and
services.

3. Integrated GST (IGST):

- Nature: IGST is used for the taxation of interstate supplies of goods
and services.
- Authority: It is governed by the Integrated Goods and Services Tax
Act, 2017.
- Revenue Collection: The revenue collected through IGST is shared
between the central and state governments based on a formula
determined by the GST Council.
- Rates: The rates for IGST are typically the sum of the applicable
CGST and SGST rates, ensuring that the revenue is split between the
central and state governments.
- Applicability: IGST is applicable on transactions involving the
movement of goods and services between different states and union
territories.

4. Union Territory GST (UTGST):

- Nature: UTGST is applicable to Union Territories with legislatures,
which have their own elected governments.
- Authority: It is governed by the Union Territory Goods and Services
Tax Act, 2017.
- Revenue Collection: The revenue collected through UTGST goes to
the respective Union Territory government.
 - Rates: Similar to SGST, Union Territories have the authority to set
their own rates for UTGST.
- Applicability: UTGST is applicable on intra-Union Territory supplies
of goods and services.

Important Definations under GST act

The Goods and Services Tax (GST) Act in India contains various
definitions of terms used in the law to provide clarity and interpretation.
Here are some important definitions under the GST Act:

1. Aggregate Turnover: This refers to the total value of taxable supplies,

exempt supplies, exports of goods or services, and inter-state supplies of
a person having the same PAN (Permanent Account Number) and is
calculated on an all-India basis.

2. Assessment: It is the determination of tax liability under GST. The

process involves examining returns, books of accounts, and other
records to verify the correctness of the declared turnover and tax
liability.

3. Input Tax: The GST paid on the purchase or acquisition of goods and
services, which can be used as a credit against the output tax liability.

4. Input Service: Any service used or intended to be used by a supplier

in the course or furtherance of business, except for a few specified
services.

5. GSTIN (Goods and Services Tax Identification Number): A unique

15-digit alphanumeric code assigned to each registered person under
GST. It is used for tax compliance purposes.
6. Output Tax: The GST liability on the outward supply of goods and
services by a registered person.

7. Place of Supply: It determines whether a supply is intra-state or inter-

state. The GST liability and rates can vary based on the place of supply.

8. Reverse Charge Mechanism (RCM): A provision under which the

recipient of goods or services is liable to pay the GST instead of the
supplier. RCM is typically applicable in certain specified cases.

9. Taxable Person: Any person who is registered or liable to be

registered under GST and is involved in the supply of taxable goods or
services.

10. Time of Supply: The point in time when GST becomes payable on a
supply. It varies depending on the type of supply, whether it's goods or
services.

11. Tax Invoice: A document issued by a registered supplier containing

details of the supply, such as the GSTIN of the supplier and recipient,
description of goods or services, and the amount of GST charged.

12. Value of Supply: The amount on which GST is calculated. It includes

the transaction value, any taxes, duties, cesses, and other charges.

13. Composition Scheme: A simplified scheme under GST for small

businesses with a lower turnover, allowing them to pay tax at a fixed
rate based on their turnover.
14. Electronic Commerce Operator: A platform that facilitates the
supply of goods or services between suppliers and customers through
an electronic platform.

15. Input Tax Credit (ITC): The mechanism that allows a registered
person to claim a credit for the GST paid on inputs (goods and services)
against the GST liability on output.