Budget Terms Explained II: Indirect Taxes

- Team Orbis Economics

Image Source: www.freedigitalphotos.net

In our previous edition on Union Budget concepts we started explaining taxes, with a focus on direct taxes. In this one, we look at indirect taxes. Along with announcements on direct taxes like income tax and corporate tax, the annual Union Budget also announces changes to indirect taxes like service tax, excise duty, customs duties and value added tax. Indirect taxes are important because they impact the final price that can be charged to the consumer by a business and the costs as well and the general price levels for the consumer.

What are indirect taxes?

An indirect tax is levied on goods and services, as compared to a direct tax that is levied on persons or organisations. While a direct tax obligation has to be borne by the person or organisation concerned, the indirect tax obligation can be passed on to customers or consumers.

What are the major indirect taxes in India today?

·   Exise Duty or Central Value Added Tax (CENVAT) – is the tax charged on the manufacture or sale of a good in India by the Central Government. The standard rate of excise duty was increased to 12% from 10% in the last budget. A change in this tax could affect the price of semi-finished inputs as well as the price of a product for a manufacturer.  

·     Value Added Tax (VAT) – is a tax charged on the difference between the price of a product and the cost of producing it. It is essentially a sales tax charged by the State Government. Being a state tax, the VAT is different for various parts of India. Being a state subject, changes to this tax rate are not announced in the Union Budget.

·     Service Tax – is a Central Government tax charged to service providers. It is a tax on the gross value of service provided to consumers. The current service tax rate in India is at 12%, after having been increased from 10% in the last budget. For a service provider, changes to this tax will change the final price of the service. As a customer availing of a service, this tax will impact your costs of living or costs for business.

·     Customs Duty – are the duties charged on both imports and exports of goods from India, with import duty being the major customs duty. The peak rate of customs duty for non-agricultural goods was maintained at 10% in the last budget.

What is expected in Union Budget 2013-14 with respect to indirect taxes?

The implementation of a uniform Goods and Services Tax (GST) is one of the most awaited indirect tax moves of the government. GST aims to be an umbrella indirect tax that will replace all the other indirect taxes in India today.