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Indirect Tax in India

Indirect Tax in India
February 21, 2024


Indirect taxation in India is not directly levied on the taxpayers. In other words, the burden of such tax is transferable to someone else.

What is Indirect Tax?

As the name suggests, Indirect tax is not directly levied on the taxpayers. This tax is often levied on goods and services which results in their higher prices. A few examples of  indirect taxes in India include service tax, central excise and customs duty, and value added tax (VAT).

What are Common Types Of Indirect Taxes in India?

Here are seven commonly imposed indirect taxes in India:

  1. Service tax

    This tax is levied by entities for rendering services like consulting, legal, and other such services. This tax is collected from the service recipients and paid to the Central Government. From 1st June 2016,service tax was 14% with Swacch Bharat Cess (0.5%) and Krishi Kalyan Cess (0.5%) bringing up the applicable rate to 15%. Small service providers with an income of less than INR 10 lakh per annum are exempted from paying this tax.
  2. Excise duty

    This duty is applicable on all goods that are manufactured in India. This indirect tax is payable by the manufacturers and often passed on to the customers. This indirect tax in India is levied by the Central Government and works according to the provisions of the Central Excise Act, 1944.
  3.  VAT

    Value Added Tax (VAT) is imposed on the sale of movable goods in the nation. VAT is levied at all stages of the production and distribution channel that include an instance of value addition. This tax is levied by the State Governments under Entry 54 of the State List.
  4. Customs duty

    It is one of those indirect taxes that are applicable for bringing imported goods into the country. In certain instance, this duty may also be levied on exported goods. The Customs Act, 1962 provides regulations on the levy and collection of this duty, import and export procedures, penalties, prohibitions, and offence.
  5. Securities Transaction Tax (STT)

    This indirect tax is imposed when stocks are sold or purchased through any Indian stock exchange. STT was introduced in 2004 and is applicable to shares, mutual funds, and future and options transactions. STT was imposed to reduce the short-term capital gains tax and eliminate long-term capital gains tax.
  6. Stamp duty

    This is an indirect tax charged by state governments on the transfer of immovable property within their jurisdiction. In addition, stamp duty is mandatory on all types of legal documents. Its rates vary from one state to another.
  7. Entertainment tax

    The state governments charge such tax on every transaction related to entertainment. Some examples are movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.

What Are The Benefits Of InDirect Taxes?

  • Four benefits of indirect taxes as opposed to direct taxes are:
  1. Contribution by the poor

    The poor people are exempt from indirect taxes and this is the only way of reaching this section of the society. This meets the basic principle of making every person pay towards the growth of the country through the state governments.
  2. Convenient

    Taxpayers are not burdened with the indirect taxes because these are paid only while making purchases. Furthermore, it is convenient for the state authorities because the taxes are directly collected at the factories or the ports, which saves time as well as effort.
  3. Easy collection

    The collection of all these taxes is automatically performed during the selling and purchasing goods and services. This helps the authorities collect taxes easily while reducing the possibility of tax evasion.
  4. Equitable

    Indirect tax is directly related to the prices of the goods and services. Therefore, rich people purchasing luxury items pay higher taxes and vice versa.

What Are The Disadvantages Of InDirect Taxes?

  • Three disadvantages of direct taxes are:
  1. Regressive

    Not all taxes are equitable. Certain taxes, like that imposed on salt, are regressive because the same amount of tax is levied irrespective of the economic status of the buyer.
  2. Uncertain

    Only taxes imposed on necessary goods and services have some certainty. Taxes levied on goods and services having an elastic demand are not predictable and may not earn huge revenues for the authorities.
  3. Not industry-friendly

    When tax is imposed on raw materials, it acts as a detriment to manufacturers using the same, thereby making it unfriendly. Furthermore, it increases the cost of production, which results in higher prices of the goods.
  • Because there are numerous indirect taxes in India, the buyers pay higher prices for goods and services. The Government is proposing combining various taxes under a single tax known as Goods and Service Tax (GST). Merging different taxes is expected to improve governance and reduce the complexities of complying with multiple rules and regulations.

FAQs on Indirect tax in India

Q: Is GST a direct or indirect tax?

A. GST or Goods and Services Tax is an indirect tax. GST is a type of indirect tax as it is applied on the consumption of goods and services and the tax can be shifted from one tax-paying individual to another.

Q: What are Indirect taxes in India?

A. Indirect taxes are applicable on the goods and services and not on the income or profit of an individual. VAT, GST, service tax, central excise and custom duty etc are few types of indirect taxes in India.

Q: Is TDS an indirect tax (GST)?

A. Yes, TDS on GST is a type of indirect tax that the government authorities collect while making payment to the supplier. TDS is deducted by the government while making the payment when a taxpayer provides any services to the government of which total value of supply exceeds Rs. 2.5 lacs,. TDS on GST is deducted at the rate 1% each in CGST and SGST and 2% in IGST.

Q: What are the types of indirect taxes ?

A. Some of the key examples or types of indirect taxes are Goods and Services Tax (GST), Value Added Tax (VAT), Service Tax, Excise Tax, Custom Duty, Stamp Duty, etc.

Q: Is excise duty an indirect tax?

A. Excise duty is a type of indirect tax, which is levied on the goods manufactured in India. It is collected from a customer by a retailer or an intermediary.

Q: What are the 7 indirect taxes?

A. Following are the top 7 types of indirect taxes in India:

  • Goods and Services Tax (GST)
  • Service Tax
  • Central Excise and Custom Duty
  • Value Added Tax (VAT)
  • Entertainment Tax
  • Securities Transaction Tax (STT)
  • Stamp Duty

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ARN-  INT/ED/05/24/11499

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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#Tax applicability & exemptions are subject to conditions of the GST Law and its provisions.

#Tax Laws are subject to change from time to time.

#Customer is requested to seek tax advice from his Chartered Accountant or advisor with respect to his liabilities under the GST law.