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Indirect Tax: Meaning, Features, Types & Examples

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Created on
May 2, 2023


What’s Inside

Direct taxes like income or corporate tax are paid once a year. However, indirect taxes are much more common. Every time you visit a restaurant or book a cab, you also pay a certain amount of indirect tax.

Different types of indirect taxes are added to different categories of goods and services. Knowing the subtypes is essential to assess your tax liabilities accurately. We cover the same with various types of indirect tax examples below.

What is Indirect Tax?

Indirect taxes are applicable on goods and services. They are collected and paid to the government by one entity in the supply chain, like the manufacturer or retailer. However, the tax burden is shifted to the customer as a part of the item’s cost.

Features of Indirect Taxes

Now that we’ve covered what is an indirect tax, here’s a guide to the features of indirect taxes that’ll help you understand them better:

  • Indirect taxes are not levied on your annual income/profit, but on goods and services, you purchase.
  • While sellers of goods and services must pay indirect tax to the government, the burden is shifted to the customer. Thus, the tax is charged at the point of sale.
  • Indirect taxes tend to be regressive as the burden of taxation is a flat rate. However, the introduction of GST has helped change this in India.
  • Evading indirect taxes is impossible as they are included in the prices of various goods and services.
  • People with incomes crossing a certain threshold must pay direct taxes. However, indirect taxes have broader social coverage since they apply to all goods and services people purchase.
  • A high indirect tax means a higher price for the commodity or service. This generally incentivises spending in consumers, motivating them to save and invest.
Do you want to read about the difference between Direct Tax and Indirect Tax? This blog shows a tabular difference between the two in detail. Read on!

Debunking Indirect Taxes: Types and Examples

Service Tax

Every paid service comes with a service tax. For instance, when you avail of various services like booking a hotel or cab services, you are liable to pay an indirect service tax on the value of the service.

Excise Duty

Also known as the Central Value Added Tax, Excise Duty applies to all goods produced within the country's borders. For instance, if your company manufactures laptops in India, you must pay excise duty. This tax amount is later recovered from customers.

Customs Duty

This type of indirect tax is charged on goods imported into India. For instance, a customs duty will apply to gold or diamond jewellery you bring back from a foreign trip.

Value-Added Tax

VAT is the indirect tax levied on the value added at every stage of the supply chain. For instance, you purchase gold jewellery for ₹3 Lakhs. If the applicable VAT rate is 1%, the VAT payable on the amount will be ₹3,000.

Stamp Duty

Stamp Duty serves as legal proof of ownership. It is levied on the sale of immovable property in India. For instance, if you buy a property, the stamp duty must be paid in full per the state government’s taxation rates.

Entertainment Tax

Transactions related to entertainment are subject to entertainment taxes. For instance, if you purchase movie or concert tickets online, you must pay the entertainment tax according to the state government's applicable rates.


In 2017, GST, or the Goods and Service Tax, was introduced in India to subsume 17 indirect taxes at the central and state levels. Eliminating the cascading effect of indirect taxes, GST has absorbed the following major types of indirect taxes:

At the Central level:

  • Sales tax
  • Entertainment tax
  • Purchase tax
  • Octroi and Entry tax
  • Luxury Tax

At the State level:

  • Service tax
  • Excise duty
  • Additional custom duty
  • Countervailing duty

So, for instance, you’re dining at a restaurant, and the total bill comes to ₹3,000, and the GST applied is 5%. Then, the total payable will be ₹3,150, where ₹150 is the indirect tax. Understand GST calculation in detail with an example here.

Saving on Indirect Taxes

Now that we’ve covered the different types of indirect taxes, you can see how evading indirect taxes is impossible. While evading these taxes is difficult, you can assess and curb your spending to maximise indirect tax savings.

With Ask.Fi, you can review your spending patterns and see your money grow. With the 360-degree view of your expenses, you can filter your spending by category and time. Moreover, through the Fi app, you can invest the money you save in Smart Deposits and commission-free mutual funds.

Frequently Asked Questions

1. Why does the government collect indirect taxes?

The government collects indirect taxes to generate revenue for the country's development. The money collected is used to construct roads, bridges, highways, hospitals, and other socio-economic welfare projects in the country.

2. What is an indirect tax with an example?

Indirect taxes are taxes payable by the manufacturer that are passed on to the customer. The excise duty on the manufacture of cigarettes is a typical example of an indirect tax.

3. What are the seven indirect taxes?

The seven types of indirect taxes include:

  • Service tax
  • VAT
  • Excise duty
  • Customs duty
  • Stamp duty
  • Entertainment tax
  • GST

4. Is GST a direct or indirect tax?

GST is an indirect tax that subsumes several indirect taxes. It was introduced to remove the burden of double taxation.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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