Indirect tax refers to a type of tax that is not directly paid by an individual to the government but is instead levied on goods and services. It is collected by intermediaries (like retailers or service providers) from the consumers and then paid to the government. Common examples of indirect taxes include Goods and Services Tax (GST), Customs Duty, Excise Duty, and VAT (Value Added Tax). These taxes are embedded in the price of goods or services, meaning consumers often pay them without realizing it. Indirect taxes play a vital role in government revenue and are structured to ensure broad-based collection across different consumption points.
Under Indian tax law, the most prominent indirect tax is GST, governed by the Central Goods and Services Tax (CGST) Act, 2017. According to Section 9 of the CGST Act, GST is levied on the supply of goods and services on a value-added basis. It mandates that businesses exceeding the prescribed turnover threshold must register and collect tax. In addition, Section 2(105) of the CGST Act defines the term “supplier,” while Section 2(93) defines the “recipient,” showing how tax liability flows through the supply chain. For imports, Section 3 of the Customs Tariff Act, 1975 imposes duties on goods entering India. These legal frameworks together shape the comprehensive structure of indirect taxation in India.
Indirect taxes are designed to be regressive in nature, as they affect all consumers equally regardless of income. However, they are efficient tools for mass revenue collection and compliance. One of the key features of modern indirect taxation (especially under GST) is the Input Tax Credit (ITC) system, which avoids tax cascading and ensures only the value addition is taxed at each stage. Businesses must maintain accurate documentation, including invoices and e-way bills, to claim ITC and remain compliant. Understanding indirect tax is essential for every business and consumer to stay aware of their financial responsibilities and pricing dynamics.
🧠 Mnemonic to Remember: “I-N-D-I-R-E-C-T”
- I – Input Tax Credit (key feature under GST)
- N – Not directly paid by individuals
- D – Defined under Section 2 of GST Acts
- I – Imposed on goods/services, not income
- R – Registered suppliers collect and remit
- E – Embedded in product pricing
- C – Collected by intermediaries
- T – Turnover threshold governs registration
