Monday, 23 December 2019

Unit 1: Introduction to Indirect Taxes

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Unit 1: Introduction to Indirect Taxes

The state governments charge tax on goods sold within the state.

Service tax is levied on services provided by the businessman, professional or any other service provider.

An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax.

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.

In this economic context, the law may actually determine the person or entities from which the tax will be collected, but has nothing to do with how that tax burden is distributed in the market.

The legal distinction between direct and indirect taxes was important enough to warrant the passage of a Constitutional amendment.

The 16th Amendment forever changed the tax code and paved the way for the passage of a wide assortment of indirect taxes that affect virtually every aspect of modern life.

The allocative effects of direct taxes are superior to those of indirect taxes.

An indirect tax involves excessive burden as it distorts the consumer’s preference regarding goods due to price changes   Direct taxes are progressive and they help to reduce inequalities.

But indirect taxes are regressive and they widen the gap of inequalities.

The administrative costs of direct taxes are more than that of indirect taxes.

Notes   Direct taxes are more flexible than indirect taxes.

Indirect taxes are more growth oriented than direct taxes.

Taxes are financial levies or burden imposed by governments upon its citizens to realize money for various purposes.


Administrative Costs: The administrative costs of direct taxes are more than that of indirect taxes.

Direct taxes are narrow based and has many exemptions.

Indirect taxes can be conveniently collected and cost of collection is constant overtime.

Allocation Effect: The allocative effects of direct taxes are superior to those of indirect taxes.

Growth Orientation: Indirect taxes are more growth oriented than direct taxes.

Direct taxes, being progressive, reduce savings.

When savings and investments are discouraged, economic growth is adversely effected.

Service Tax: Sales tax is levied on the sale of movable goods.

Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005.

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