GST and Direct vs. Indirect Tax

TheĀ GST full form is Goods and Services Tax. It is an indirect form of tax that the Government of India levies on the goods and services. It is called goods and services tax because it is applicable on the supply of both goods and services.

GST is imposed on most of the goods and services used for domestic consumption. GST is paid by the consumers that is the end user of the goods and services. If the businesses add value to the product manufactured, the GST will be applied to the added value. This is applicable to all stages where and when the addition in value of the goods and services takes place.

The GST meaning is clear. GST has been introduced by the Government of India to replace multiple indirect taxes. GST replaces 17 of the existing central and state taxes. A few of them are as follows:

  • Central excise duty
  • Customers duty
  • Value Added Tax (VAT)
  • Entertainment tax
  • Service tax

It is a step to normalize the taxation in India and simplify the tax system. This would provide the tax payers with a simplified system of filing and paying taxes. On the other hand, through this simplified approach, government would prevent tax leakages and tax evasion by the tax payers.

Although GST is a type of indirect tax, it is important to understand the difference between direct tax and indirect tax.

Direct Tax Indirect Tax (GST)
Direct tax, as the name suggests, is the tax paid directly to the Government of India by the tax payers Indirect tax is a tax, which is applied on the manufacturing of goods or sale of goods. It is also rendered on the services provided.

These taxes are paid to a government intermediary.

Examples include income tax, corporation tax, wealth tax, state duty, gift tax, fringe benefit tax(FBT) Examples include sales tax, GST, excise duty
The amount of tax payable is dependent on the income of the individual or income earned during the assessment year from various sources like salary, house rent, and much more. The amount of tax payable is dependent on the cost (MRP) of goods and services manufactured or provided. It is borne by the end user.

 

Understanding of direct and indirect tax is essential as it provides the basic knowledge of the structure of taxation in India. It is important for the tax payers to understand the category they fall in and how the tax needs to be paid under the stipulated law.