Tax is an indispensable part of the policies that sustain any government both in terms of achievement and authority. Discussing the types of indirect taxes: advantages and disadvantages is one of the most important discourses for any citizen who aims to help their government reach the core of both national progress and development.
Tax therefore is a compulsory financial charge or some other type of levy imposed on a taxpayer who may be an individual or a legal entity recognized by a governmental organization in order to fund government spending and various public expenditures based on regional, local, or national divide.
The concept of tax has been prevailing since ancient times. Previously the apex of the socio-political system used to charge a share of crops or liquid money from the citizens. Even in present days, governments impose taxes to generate fiscal revenue. There are two main types of taxes that taxpayers pay to the government.
Types of Indirect Taxes: Advantages and Disadvantages
In our discussion about the types of indirect taxes: advantages and disadvantages, we shall help you understand that there are some taxes called Direct Taxes, and they are levied directly on the income of an individual in the form of Income Taxes, Surcharges, etc. Other taxes are called Indirect Taxes and these are not directly levied on the income of an individual but rather on the expenses that they incur.
Indirect Taxes are actually levied on sellers of commodities and services, but they pass it on to the consumers, and hence they end up indirectly paying such a tax. The reason indirect tax is named in contrast to direct tax is because the government does not impose it on an individual’s income or the revenue or profit of an entity, unlike direct tax. It is a tax that an intermediate like a retailer collects from a customer. It passes on from one person to another.
Types of Indirect Taxes
There are various types of indirect taxes. Though all these taxes came under one group after the introduction of GST. The Goods and Services Tax (GST) is a good example of indirect tax. GST is applicable to anyone selling goods or commodities, but they usually do not pay this out of their own pocket, but rather add it to the cost of the commodity and charge it to the consumer themselves.
However, the pre-existing types are as follows –
- Service Tax
A consumer pays service tax to purchase a service from any entity. The government collects service tax on certain transactions that a service provider performs to sell a service.
- Value Added Tax
State governments collect this tax on a good or service at each point of purchase where a value has been added. This tax is applicable from the point of a raw material purchase to the sale of a finished product.
- Custom Duty
The government collects this indirect tax on an import of a product in any country. Timely, it is applicable on products exported from India.
- Excise Duty
Our government collects excise duty from the manufacturers of goods manufactured in a company. The manufacturers collect it from their buyers through the price of the goods.
- Sales Tax
Central or Federal government imposes this tax on an Inter-state sale and the State government on an Intra-state sale of a good.
- Entertainment Tax
State government charges this tax on the purchase of any entertainment-related goods and services. This can be purchasing goods like video games or services like movies, theatres, sports, amusement parks
Advantages of Indirect Taxes
As there are numerous benefits to be gained in our information on the types of indirect taxes: advantages and disadvantages, we want you to have a taste of some of them:
- Everyone can contribute in indirect taxes
Unlike Income Tax, which has to be paid by individuals in certain income brackets and not others, Indirect Taxes have to be paid by each and everyone who purchases the commodity. Persons not working in India like tourists and persons of lower economic strata also have to pay it because they will in some form purchase commodities.
- Indirect taxes are convenient
Indirect taxes are very convenient as far as charging them is concerned. Firstly, the taxes can be very nominal and consumers do not feel burdened when paying such small amounts. Secondly, these indirect taxes are said to be ‘hidden in the price’, which means that the consumer only effectively sees the price of the commodity itself.
- Indirect taxes cannot be evaded
Indirect taxes cannot be evaded, because they are part of the price of the commodity. So anyone who buys the commodity, will pay the tax.
- Indirect taxes are spread over a wide range
Heavy taxation in any one aspect of a service or commodity will be highly noticeable as well as a burden on the consumer. In this regard, indirect taxes can be beneficial since they are spread out over a wide range of products in smaller amounts.
Disadvantages of Indirect Taxes
Sharing the pros and cons of something also is as crucial as enlightening you about the types of indirect taxes: advantages and disadvantages. Look at the red flags about indirect taxes:
- Indirect Tax can be regressive
Since indirect tax is the same for both the rich and the poor, it can be deemed unfair to the poor. Indirect tax is applicable to anyone who makes a purchase, and while the rich can afford to pay the tax, the poor will be burdened by the same amount of tax. Thus, indirect taxes may be seen as regressive.
- Indirect taxes raise price of commodities
Sellers cannot always calculate and collect the exact fraction of tax applicable on all commodities that they sell. And hence they consciously charge more than the tax amount so they can be sure that every buyer paid the indirect tax. But this has a cumulative effect and increases the price of commodities.
- Indirect taxes do not raise civic consciousness
Indirect taxes do not raise civic awareness because millions are not even aware that they’re paying a tax because it is hidden in the price.
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