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What is Indirect Tax? Meaning and Types

Taxes collected by the government get categorized into indirect and direct taxes. Now, what are direct and indirect taxes? Simply put, they are the taxes levied on a firm or individual’s income, profits, or revenue. The best examples are gift tax, surcharge, income tax, and more. These get implemented & governed by the CBDT or Central Board of Direct Taxes.

The indirect tax is the tax typedelivered to another entity or individual. These taxes get levied on the supplier or manufacturer who passes the tax to the consumer. The best examples of these types of taxes are entertainment tax, sales tax, and excise duty, to mention a few.

These taxes get levied on the goods’ sellers or service providers, where it gets distributed in the method of excise duty, service tax, custom duty, and entertainment tax. The best example of this type happens to the the excise taxation on alcohol. Here is a comprehensive post to learn about the meaning and types of indirect taxation.

Indirect Tax Meaning

So, indirect tax happens to be the tax levied on an individual upon the consumption of services and goods. The indirect tax does not get directly levied on an individual’s income. The individual needs to pay this form of tax besides the actual prices of services and goods bought by a seller. Truth be told, the indirect tax gets givento another individual. And it is levied on shoppers who pass it on to consumers.

Considering indirect taxation, the individual on whom this tax falls and the individual who pays are not the same. They are different people. Factually speaking, the sellers need to pay taxes to the central or state government (for instance, retailers and manufacturers). But given that they sell services and goods to consumers, they can easily avoid paying taxes. So, while purchasing goods, paying the seller an inclusive tax is imperative. Note that the seller will then need to pay it to the government.

Types of Indirect Taxes

If you are here to learn about the different types of indirect tax levied on consumers, note them from the following narration:

1.Service Tax

First comes the service tax. Well, this type of tax is defined as the Indirect Tax type that you can pay to the government if and when you consume taxable services by various service providers. Let’s give you a few examples –  hotels, restaurants, cab services, travels agents, and cable providers. The consumer needs to pay the charges to that service provider. And then, the service provider will pay the tax to the government.


The next type of tax is the value-added tax. Also referred to as VAT, the value-added tax is the flat tax that gets levied on any commodity. The fact is that it is quite similar to sales tax. But except for the sales tax, the whole amount is paid by the seller. On the other hand, if the transaction occurs with the VAT amount, various tax parts need to be paid by various parties.

3.Custom Duty

Now comes the discussion of custom duty. Well, it is a tax charged on the goods exported from a nation or imported to that country. Thus, the two classifications are import duty as well as export duty.

4.Excise Duty

The excise tax or duty is another indirect tax type that’s payable on goods produced within a nation. It is termed as the tax on sales of goods. But now, the tax type has been renamed, and it has received the name – CENVAT or Central Value Added Tax. These taxes get imposed on the selling things such as tyres, fuel, heavy trucks, and airline tickets.

5.Entertainment Tax

So, this type is the tax charged on entertainment sources. The best examples of these types of taxes are feature films that get released in the nation, sports activities, amusement parks, primary commercial exhibits, big celebrations, and parties.

6.Stamp Duty

This sort of indirect tax gets imposed on the immotile possessions transfers located within a state. The state government levies it, and the rates may differ accordingly. This type of taxis applicable to all types of legal documents.

Back in those days, it required a physical revenue stamp impressed on the documents to notify that it was a paid stamp.

7.Goods &Service Tax

The last one on this list is the goods and service tax. Better called GST, it is the tax assessed on the supply of services and goods from the one who manufactures it to the one who buys it. There are three types of GST in India. The first kind is the State Goods & Service Tax (SGST). The second one is the Central Goods & Service Tax or CGST. Lastly, Integrated Goods and Service Tax or IGST is the last type.

Wrapping up

To wrap up, indirect taxation has a multitude of benefits that the Direct Tax system does not have. First, it helps maintain equity. Besides, it is easy to collect and pay. It is extremely convenient at hand and can reduce harmful consumption. So, indirect taxes are perfect for the economic growth of any nation. As soon as you understand the dynamics of the taxation process, you can learn about your duties toward the government.

IEMLabs is an ISO 27001:2013 and ISO 9001:2015 certified company, we are also a proud member of EC Council, NASSCOM, Data Security Council of India (DSCI), Indian Chamber of Commerce (ICC), U.S. Chamber of Commerce, and Confederation of Indian Industry (CII). The company was established in 2016 with a vision in mind to provide Cyber Security to the digital world and make them Hack Proof. The question is why are we suddenly talking about Cyber Security and all this stuff? With the development of technology, more and more companies are shifting their business to Digital World which is resulting in the increase in Cyber Crimes.


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