In India, taxes can be divided into two broad categories – direct and indirect. While the taxpayer pays direct taxes directly to the govt., indirect taxes are charged on the expenses incurred by taxpayers. As a taxpayer, you need to understand the scope and extent of both kinds of taxes to plan your tax* liability better. While most people are aware of direct taxes (income tax*, surcharges, etc.), the awareness of indirect taxes is not so widespread.

This article will talk about taxes and the advantages and disadvantages of indirect tax.

Indirect Taxes Meaning
 

As the name suggests, Indirect Taxes are levied indirectly to the taxpayer. These taxes are levied on the manufacturers and/or sellers of commodities that are passed on to the consumers. Hence, they indirectly pay the tax*. The best example of indirect tax* is the Goods and Services Tax (GST^@). The government levies this tax* on the sellers of goods. However, they pass it on to the buyers by adding it to the cost of the product.
 

There are many merits and demerits of indirect tax as explained below.
 

Advantages of Indirect Tax
 

The government levies various types of taxes to generate revenue for the running and management of the country. Of these, indirect taxes are levied on consumers via the sellers of goods or commodities. Here are some benefits of indirect tax:
 

• Tax participation from the entire country – Direct taxes, like Income tax*, are levied on people from certain income brackets only. There is a large part of the population that does not pay income tax*. However, indirect taxes are applicable to anyone who purchases goods or commodities regardless of their income bracket. This makes indirect tax an inclusive taxation model.
  
  
• Convenient – Usually, indirect taxes are very nominal and levied as a part of the purchase price of a good or commodity. Hence, consumers don’t feel the pinch while paying them. Also, levying indirect tax* is easy since the sellers incorporate it into the selling price.
  
  
• No tax evasion – Many people avoid paying income tax*. Being a populous country, it is very difficult to track and penalize tax* evaders. However, there is no way to evade an indirect tax*. Every time someone buys a commodity, a tax* is paid.
  
  
• Spread over a wide range – Some people have to pay as high as 30% income tax. This can feel like a burden. However, indirect taxes are spread across a wide range of products and the tax* rate is very small. Therefore, consumers do not feel the burden of paying them.
   

Disadvantages of Indirect Taxes
 

Indirect taxes have certain disadvantages too:
 

• Can be perceived as regressive – Indirect taxes are not levied based on the income of the taxpayer. They are standard across the rich and poor. While affluent people might not mind paying indirect taxes, the poor can feel the burden. Hence, many people might perceive indirect taxes as regressive.
  
  
• Increase the price of commodities – Since the tax* is included in the price of the commodity, indirect tax* can result in an increase in the overall price of goods and commodities. Not all sellers calculate the exact tax* amount and add it to the selling price. Many sellers charge a slightly more amount to ensure complete tax* adherence. This can also have an undue inflationary effect on prices.
   

A Quick Note on Saving Taxes

As long as you are buying goods and commodities, you cannot escape or reduce indirect taxes. However, you can make some tax*-saving investments to reduce your Income Tax* liability. One such saving is a life insurance policy.
 

When you buy life insurance, you can get a tax* deduction on the premium paid for it apart from creating financial cover for your loved ones after you are gone. Make sure that you look for a reliable life insurance company like Tata AIA. Every Tata AIA policy offering life insurance has a range of features that can help you create a financial safety net for your family while availing of tax deductions under Section 80C of the Income Tax* Act 1961.
 

Conclusion
 

As you can see, there are many advantages and disadvantages of indirect tax. They allow all sections of society to contribute to the growth and development of the country.  While indirect taxes can result in an increase in the price of commodities, the government tries to regulate these prices in every way possible.

L&C/Advt/2022/Oct/2511