Indirect Tax Response in India

Indirect Tax Response in India- An Overview

In India, businesses need to follow several crucial steps when dealing with indirect taxes. Firstly, they must identify which indirect taxes are applicable to their business, such as GST, customs duty, excise duty, or service tax. If the tax authorities issue a show cause notice, it is vital to take immediate action. This involves preparing a response to the notice with all the relevant information and evidence that supports the business's position. Moreover, submitting supporting documents may also be necessary. This step requires guidance on the documents required and ensuring their accurate and timely submission.

Different Types of Indirect Taxes in India

After implementing GST in India, most indirect taxes were consolidated into one tax. However, prior to that, there were several different types of indirect taxes in India.

Let's explore some of these taxes:

• Service tax: This tax was charged by service providers in exchange for their services, and the collected amount was deposited with the Government of India.
• Excise duty: The tax levied on goods produced by companies in India is called Excise Duty. The manufacturing companies paid the tax on their goods and recovered the amount from their customers.
• Value Added Tax (VAT): VAT is imposed on movable products sold directly to customers. It consists of Central Sales Tax, which is paid to the Indian government, and State Central Sales Tax, which is paid to the respective state governments.
• Custom Duty: A tax on imported goods is called Custom Duty. Sometimes, products exported from India may also be subject to Customs Duty.
• Stamp Duty: This is a tax charged by state governments on transferring immovable property within their jurisdiction. Stamp Duty is also levied on all legal documents.
• Entertainment Tax: This tax is imposed by state governments on various entertainment-related transactions such as movie shows, sports events, arcades, amusement parks, etc.

Types of Indirect Notices

Show Cause: This notice is issued by the tax authorities to a taxpayer to explain why they should not be held liable for a tax liability or penalty.

Assessment Order: This notice is issued by the tax authorities to determine the amount of tax that a taxpayer owes based on the information available to them.

Demand Order: This notice is issued when the tax authorities determine that the taxpayer owes a certain amount of tax that has not been paid.

Assessment Order: This notice is issued by the tax authorities to inform a taxpayer that they are entitled to a refund of excess tax that has been paid.

Features of Indirect Taxation

Here are some key features of indirect taxation:

Levied on Goods and Services

Indirect tax is levied on goods and services, meaning it is not a direct tax on income or property. Instead, it is an indirect way of collecting revenue from consumers who purchase these goods and services.

Paid by Consumers

Although indirect tax is collected from the seller, it is ultimately paid by the consumer as a higher price for the goods or services. This means that the burden of indirect tax falls on the final consumer.

Variety of Taxes

Several indirect taxes include Value Added Tax (VAT), excise duty, customs duty, service tax, entertainment tax, and securities transaction tax. These taxes are levied on different goods or services and have unique features.

Can be Regressive

Indirect tax can be regressive, which means that it can have a disproportionate impact on low-income earners. This is because the tax is based on the value of the goods or services, and those with lower incomes may spend a higher percentage of their income on these items.

Can be Complex

The administration and collection of indirect tax can be complex due to the various types of taxes, exemptions, and different rates for different goods and services. This can make it difficult for businesses and consumers to understand and comply with tax laws.

Can be a Source of Revenue for Governments

Indirect tax can be an important source of revenue for governments, as it can generate significant revenue without imposing a direct burden on individuals or businesses. However, governments must balance the need for revenue with the potential impact on consumers and businesses.

Advantages of Indian Indirect Taxes

Convenience

Indirect taxes are convenient as they are paid only when making a purchase. They do not burden the taxpayer and are collected directly at the stores/factories, which saves time and effort for state authorities.

Ease of Collection

Indirect taxes are easy to collect in comparison to direct taxes. Authorities need not worry about collection since they are only collected at the time of making purchases.

Collection from Low-Income Earners

Those who earn less than Rs. 2.5 lakh p.a. are exempt from income tax, which means they do not contribute to the government. However, since indirect taxes are charged at the point of sale, all individuals, regardless of their income tax slab, contribute towards the growth of the economy.

Equitable Contributions

Indirect taxes are directly related to the costs of products and services. This ensures that contributions are equitable, with basic necessities attracting lower tax rates while luxury items are charged at higher rates.

Reduction of Negative Consumption

Indirect taxes help reduce the negative consumption of harmful products. The highest taxes are placed on goods that are bad for our health, such as alcohol and tobacco, making them more expensive and curbing their consumption.

Disadvantages of Indian Indirect Taxes

Cumulative Taxes

Indirect taxes can sometimes be cumulative, leading to go-betweens charging their own service tax, resulting in the overall price of the product increases.

Regressive in Nature

Indirect taxes can be regressive, with the same tax rate applied to both rich and poor. However, if a rich person defaults on payment, the penalties imposed will be higher.

Not Industry-Friendly

Indirect taxes are not industry-friendly since they are levied on raw materials and goods, which increases the cost of production, thus restricting industries' competitive capacity.

Unpredictable

The amount of indirect taxes collected is unpredictable and based on the buying of goods and services. As a result, it is impossible for the government to predict how much money will be raised through indirect taxes.

Why is GST an Indirect Tax?

On July 1, 2017, the Goods and Services Tax, commonly known as GST, was implemented to consolidate various indirect taxes in the country. The new tax regime has eliminated the compulsory taxes that were previously in place. GST has the main advantage of removing the cascading effect of tax, ensuring that consumers do not have to pay for every value addition made.

Among the taxes subsumed by GST at the state level are service taxes, state excise duties, countervailing duties, additional excise duties, and additional customs duties. A number of taxes are included under GST at the central level, including sales, central sales, purchase, entertainment, luxury, octroi, entry, and betting and lottery taxes. GST took effect in July 2017, encompassing 17 indirect taxes. GST now includes all significant services and service taxes.

Why Vakilsearch?

Vakilsearch can offer expert guidance and assistance in understanding and complying with indirect tax laws, including registration, filing returns, and handling disputes.

Vakilsearch can also provide personalised solutions tailored to each client's specific needs, ensuring that they comply with all applicable regulations while minimizing their tax liability. Moreover, Vakilsearch can help clients stay up-to-date with changes in indirect tax laws and regulations, ensuring they are aware of new obligations or benefits.