What is indirect tax?

The interim Budget for the upcoming fiscal year 2024-25 will be presented by the Union Finance Minister Nirmala Sitharaman on February 1.

Taxes play a major role in funding a government and shaping its economy. They are mandatory payments made to central and state governments. The government taxes people in mainly two ways - direct and indirect taxes.

Direct taxes

They are paid directly to the government and are levied on individuals and corporations based on their earnings. These are mainly called income tax, corporate tax, property tax, etc.

What is indirect tax?

Indirect taxes are imposed on goods and services. They are paid by consumers indirectly at the time of buying goods and services. Simply put, indirect taxes are applied to things that a person purchases.

Indirect taxes are levied on the seller of goods and service providers but often gets passed on to the end consumer and thus, the consumer bears the tax. Hence, indirect taxes can be moved around and between different people or groups involved.

The collection and administration of indirect taxes is taken care by the Central Board of Indirect Taxes and Customs (CBIC) which is governed by the Department of Revenue.

Indirect taxes are levied at the same rate for every person irrespective of their income. So how much ever rich or poor one is, they have to pay indirect taxes.

Goods and Services Tax (GST), Value Added Tax (VAT), excise duty, entertainment tax, customs duty, stamp duty and sales tax are some of the widely applied indirect taxes.

Indirect taxes are commonly used and generally imposed by the government to generate revenue. It is considered as an easy-to-collect, convenient taxation having a wide-reaching potential involving every possible buyer or consumer for a product or service.

Indirect taxes are also considered regressive as they burden people with low incomes, making them pay the same amount of taxes as to those who fall under higher income groups.