The Indian taxation system can be broadly classified into direct and indirect taxation. Direct tax, as the name suggests, is the tax paid directly to the government by the taxpayer. Indirect taxes are essentially non-income-based taxes where the burden is on the end-consumer.
In layperson’s terms, indirect taxes are the taxes imposed on suppliers or manufacturers who later pass it on to the end-consumer. Customs duty, goods and services tax (GST), excise duties, value added tax (VAT), sales tax are some of the prominent indirect taxes applicable in India. Here is a quick snapshot on its definition, applicability and exceptions.
The Goods and Services Tax (GST)
The GST was implemented in 2017 by the central and state governments. It was implemented by subsuming various taxes such as service tax (ST), central excise duty (CED), VAT, central sales tax (CST), among others. However, there are exceptions when it comes to liquor and petroleum products as they are still taxable under excise duties and VAT.
Dual structure levy
The GST has a dual structure regime as the Centre, States, and Union Territories can simultaneously levy it on the supplies of goods and services. The dual levy structure is explained as under:
- Central GST (CGST) and State GST (SGST): It is levied on all taxable supplies within state or union territory.
- Integrated GST (IGST): It is levied on all taxable supplies between the two states or union territories and the export or import of goods and services from and to India. However, as per the arrangement, the share of the state will be passed on to the states where goods or services have been consumed.
- Compensation Cess: It is levied on specified supplies to compensate the states for the loss of revenue on account of implementation of GST.
GST fundamentally deals with the supply of goods and services. However, supply is a broad concept, and GST encompasses the supply of all kinds of goods and services such as sale, transfer, barter, exchange, license, rental, disposal, etc. Supply of goods or services like these is liable to taxation when they are carried out with the intent to advance business and for consideration.
As per GST, the term “consideration” includes payments made or agreed upon: be it in money or otherwise. Apart from this, certain transactions are chargeable to tax even if they are made without any consideration i.e., if they are made within the same legal entities or related parties.
Nature of supply
The levy of CGST and SGST, UTGST, or IGST will depend on the nature of the supply. The GST law has provided separate provisions for goods and services to identify the nature of supply. Location of the supplier and the place of supply of goods or services are two factors that determine the nature of supply. The various type of supply under GST is as below:
- Intra-state supply: Location of supplier and place of supply of goods or services are within the same state or union territory.
- Inter-state supply: Location of supplier and place of supply of goods or services are with different states or union territories.
- Zero-rated supply: This is the supply of goods, services, or both to a special economic zone (SEZ) developer or an SEZ unit. Also, the export of goods here means transporting goods out of India.
Export of services means the supply of any service, when the supplier of service is located in India and the recipient of service is located abroad. The aforesaid conditions for export of service under the GST law need to comply with the receipt of payment in convertible foreign exchange.
- All goods and services are dispersed into a four-tier rate structure: 5%, 12%, 18%, and 28%. While some specified essential items are exempted under GST, the demerit or luxury goods attract the highest rate of tax and may invite cess.
- When it comes to zero-rated supply, tax payment is optional for the supplier of goods or services. A registered individual may supply goods, services, or both without paying the integrated tax on furnishing bonds or letter of undertaking (LOU). The option to pay integrated tax on such supply is available but is subject to prescribed conditions under the GST law.
Further, the supplier is eligible to claim a refund of unutilized input tax credit or claim a refund of such tax paid on the supply of goods, services, or both. All the other benefits available to a general taxpayer are also available to a person making the zero-rated supply of goods or services.
- The previous indirect tax norms in India led to multiple points of levies. VAT or CST, CED, ST were levied depending on the occurrence of an activity. They were levied in instances like CED on the manufacture of goods, VAT or CST on the sale of goods and ST on the provision of the taxable service. However, the introduction of the GST subsumed the majority of the indirect taxes like ST, entry tax, luxury tax, octroi, etc.
- Taxes from the earlier regime such as VAT or CST and CED continue to be levied on petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel. The government intends to bring petroleum products under the ambit of GST soon.
- The higher taxation on non-essential products like alcohol or cigarettes results in higher cost of such products discouraging their purchase. Similarly, the government intends to tax the essential products at a lower rate for reducing the tax burden on the end-consumer. On the other hand, the government also provides exemption on highly essential goods or services which it intends to boost.
Any goods imported to or exported from India is liable to pay the customs duty. The rate of customs duty is determined based on factors such as origin of the goods, places where such goods are made, components and use of the goods etc. The rates are fixed under the below mentioned categories:
- Ad valorem duties: It is calculated as a percentage of the value of imported goods.
- Specific duties: It is calculated based on the weight or quantity of imported goods.
- Any combination of specific and Ad valorem duties.
India adheres to the harmonized system of nomenclature (HSN) classification rules. Based on the HSN and corresponding tax rate, the applicable duties or taxes on import are basic custom duty, social welfare surcharge (SWS) and IGST at applicable rates. Exports are generally not eligible for any duties or taxes. However, export duties are levied on a few items mentioned in the export tariff schedule.
Indirect tax is considered to be an easy-to-collect and convenient taxation as they originate largely from the organized sector. However, indirect taxes have a wider reach as it involves every consumer of a product or service. It is often judged as a regressive form of taxation as it is collected in equal measure from all irrespective of their income.
Vikas Vasal is the national managing partner of tax at Grant Thornton Bharat LLP. He is a chartered accountant and has 20 years of experience in advising clients on tax and regulatory issues. He pursued a senior leadership programme at Saïd Business School, Oxford University, and is a graduate of Shri Ram College of Commerce, University of Delhi.