Indirect Taxes in India
Indirect taxes occupy a central place in India’s fiscal system because they are levied on goods and services but ultimately borne by consumers. Historically, India’s indirect tax regime was highly fragmented, with multiple taxes levied by the Centre, States, and even local bodies. This fragmentation was one of the biggest motivations behind the introduction of Goods and Services Tax (GST).
What Are Indirect Taxes?
Indirect taxes are those taxes:
- Which are not paid directly to the government by the person bearing the burden
- Whose incidence can be shifted to another person, usually the final consumer
- Which are embedded in the price of goods and services
Because of this shifting of burden, indirect taxes are often considered regressive in nature.
Major Indirect Taxes in India (Pre- and Post-GST Context)
Let us first understand the important indirect taxes that existed in India, along with the level of government that levied them.
A. Taxes Levied Jointly by Centre and States
| Tax | Description | Levied by |
| Goods and Services Tax (GST) | Tax on supply of goods and services, replacing multiple indirect taxes | Centre & States |
GST represents a destination-based, value-added tax and marks a shift towards cooperative federalism.
B. Taxes Levied by the Centre
| Tax | Description |
|---|---|
| Central Excise Duty | Tax on manufacture or production of goods |
| Customs Duty | Tax on imports and exports |
| Service Tax | Tax on provision of specified services |
| Protective Duty | To protect domestic industries from foreign competition |
| Safeguard Duty | To protect domestic industry from sudden surge in imports |
| Countervailing Duty (CVD) | To offset subsidies given by foreign governments |
| Anti-dumping Duty | To prevent dumping at unfairly low prices |
| Central Sales Tax (CST) | Tax on inter-state sale of goods |
C. Taxes Levied by States
| Tax | Description |
|---|---|
| Value Added Tax (VAT) | Tax on value addition at each stage |
| Entertainment Tax | Tax on movies, amusement parks, etc. |
| Luxury Tax | Tax on luxury goods and services |
| Entry Tax | Tax on entry of goods into a state |
| Purchase Tax | Tax on purchase of goods |
| State Excise Duty | Tax on manufacture or sale within a state |
D. Taxes Levied by Local Bodies
| Tax | Description |
| Octroi | Tax on goods entering a city or town |
Problem with the Pre-GST Indirect Tax System
Before GST, India’s indirect tax system suffered from:
- Multiplicity of taxes
- Tax-on-tax (cascading effect)
- Compliance burden
- Fragmented national market
- Centre–State tax conflicts
For example, a single product could attract excise duty, VAT, CST, entry tax, octroi, and service tax, each at different stages.
➡️ This complexity increased costs and reduced economic efficiency.
Taxes Subsumed Under GST
With the introduction of GST, a large number of indirect taxes were merged into a single tax framework.
Taxes No Longer Levied Separately After GST
- Central Excise Duty
- Service Tax
- Additional Customs Duty / Countervailing Duty (CVD)
- Special Additional Duty of Customs (SAD)
- Central Sales Tax (CST)
- State VAT / Sales Tax
- Entertainment Tax (except local body levies)
- Octroi and Entry Tax
- Purchase Tax
- Luxury Tax
- Taxes on lottery, betting, and gambling
➡️ This subsuming of taxes is the core reform achievement of GST.
Taxes That Continue Even After GST
It is important to note that GST is not a blanket replacement of all indirect taxes.
Still Levied by the Centre:
- Customs Duty on imports and exports
- Certain cesses and surcharges
Outside GST (Important for UPSC):
- Alcohol for human consumption
- Petroleum products (temporarily outside GST framework)
Exemptions and Lower Taxation Under GST
To address concerns of equity and welfare:
- Essential goods are either exempt or taxed at lower rates
- Healthcare services are largely exempt
- Educational services are largely exempt
This ensures that GST does not unduly burden basic consumption.