Indirect Tax

What are the types of Indirect Tax?

1) Service Tax:

Service tax is imposed on entities or businesses when consumers use their services. This tax is collected by the government and is applied when services are availed from restaurants, hotels, travel agents, cab services, cable providers, and other similar service providers.

2) Value Added Tax:

Value Added Tax (VAT) is imposed on the sale of movable goods and services sold to consumers. The VAT rate is set and collected by the government.

3) Excise Duty:

Excise duty is applicable to manufacturers who produce goods. This tax is levied on manufacturers but is ultimately passed on to customers. The government imposes different excise duties for various goods, such as hazardous chemicals, alcohol, cigarettes, sugary drinks, and gambling.

4) Custom Duty:

Customs duty is applicable to imported goods brought into the country. It plays a vital role in the economy and regulatory framework of the country.

5) Stamp Duty:

Stamp duty is a tax levied on the transfer of immovable property within the country. It applies to all legal documents.

6) Entertainment Tax:

Entertainment tax is imposed on all entertainment-related sources, such as films, video games, sports activities, amusement parks, arcades, and more.

What is the nature of Indirect Tax?

1) Tax liability

Consumers bear the tax that is passed on by manufacturers or sellers. This tax is collected from the consumer by the manufacturer or seller.

2) Payment of Tax

Sellers of goods collect tax from consumers through sales and then remit this tax to the government.

3) Savings and investment

Indirect tax is not directly charged to consumers but is instead included in the cost of the goods and services they consume. This, in turn, directly impacts consumers’ savings and investments.

4) Tax Evasion

Tax evasion is challenging because consumers indirectly consume goods and services, making it harder to avoid paying taxes.

6 advantages of Indirect Tax

1)Broader Tax Base

Indirect taxes are applied to goods and services, meaning they are paid by a larger segment of the population, including those who may not be liable for direct taxes due to low income.

2) Simplicity of Collection

The tax is collected from goods and services by businesses, so there is no additional administrative burden on tax authorities.

3)Consumption-Based

Unlike income taxes, indirect taxes are based on consumption. The fact that taxes are imposed on expenditures rather than income makes this seem more equitable. It also implies that indirect tax payments will be lower for those who save more and consume less.

4) Encourages Savings and Investment

People may be encouraged to save and invest a larger portion of their income since indirect taxes do not immediately affect personal savings and investments.

5) Less Evasion

Since indirect taxes are collected at the moment of sale, they are typically more difficult to avoid. Compared to income taxes, where underreporting of income can be more common, this lowers the possibility of tax evasion.

6) Discourages Harmful Consumption

Governments can employ indirect taxes, such as higher charges on tobacco, alcohol, and sugary drinks, to deter people from using these dangerous products. Moreover, this can aid in financing public health programs.

4 Disadvantages of Indirect Tax

1) Regressive Nature

Because indirect taxes take a bigger portion of low-income earners’ income than they do from high-income earners, they are sometimes viewed as regressive. This is thus because, regardless of income level, everyone pays the same tax rate on products and services.

2) Lack of Transparency

Indirect taxes are often included in product and service prices, making them less noticeable to customers. This can lead to a lack of awareness about the amount of taxes paid, reducing accountability and transparency.

3) Inflationary Effects

Prices for products and services may rise as a result of indirect taxes, which will promote inflation. This may lower consumers’ purchasing power and hinder economic expansion.

4) Evasion and Inefficiency

Compared to direct taxes, indirect taxes are easier to avoid. For instance, the government may lose a lot of money if sales are underreported or if illicit actions are carried out.

Pros and Cons of Value Added Tax (VAT): Evaluating its Impact

Value-added tax, or VAT, is a consumption tax that is applied to the value that is added to products and services at every point of manufacturing or distribution. It is frequently imposed as a percentage of the sale price and is widespread around the world.

What are the advantages of VAT?

1.Revenue Generation

Governments receive a sizable portion of their income from the VAT. The scope of taxation is greater since the government imposes the VAT on a range of goods and services.

2. Transparency and Neutrality

Compared to other forms of taxation, it is thought to be more transparent and impartial because it is imposed at every stage of production.

3. Reduce the Discretion

The Value Added Tax (VAT) policy ensures equitable treatment for all, addressing non-compliance issues such as law violations, late filings, failure to file accounts, insolvency, and tax evasion, to prevent harassment and disputes.

What are the disadvantages of VAT?

1. Regressively

Because they spend a greater percentage of their income on products and services subject to VAT, people with lower incomes are disproportionately affected by regressive VAT laws.

2. Administrative Costs

Both governments and corporations may incur significant costs in the administration and enforcement of VAT.

Understanding the Tax System in Nepal: Structure and Key Considerations

With the emergence of democracy, the tax system gained momentum, and the first consolidated budget was put into place in 1951.

Up to the late 1950s, foreign trade tariffs and land tax were the main income sources. After 1959, small levies, property, and sales taxes were added. Sales and business taxes, including import-export tax, became primary sources. Before 1960, land tax was significant but later declined. Less than 7% of revenue came from individual income tax, while most other levies had a progressive structure.

Indirect Tax over GDP in Nepal

Note: The figures are measured in crore rupees. Taken from Economic Survey 2002/03,2010/11, 2012/13, 2017/18, 2019/20 and Revenue Advisory Committee Report 2015, by Ministry of Finance, Kathmandu, Nepal: Government of Nepal.

What is Custom Duty Tax?

Governments put charges on products and services that are transported over international boundaries. These taxes are called customs duties or import tariffs. The percentage of the items’ value—which includes cost, insurance, and freight (CIF)—that is subject to these duties is determined. These responsibilities are assigned by local governments to special authorities and committees in order to safeguard local enterprises, industries, and economies. The kind of product and the nation of origin can have an impact on the customs duty rate.

What are the types of custom duty?

Basic Customs Duty (BCD)

The main type of import tax is a regular tax imposed on imported items, calculated as a percentage of the item’s assessable value, providing the government with income.

Additional Customs Duty (ACD)

Imposed to balance the excise duty paid by domestic producers, this tax ensures imported goods compete fairly with domestically produced items.

Protective Duty

Imposed to protect home businesses from overseas competition by raising the cost of imported goods.

Anti-dumping Duty

Used to prevent dumping of goods at prices below market value from overseas, ensuring fair competition and protecting domestic businesses.

Education Cess

Extra fees are applied to the total amount of customs duties in order to support educational initiatives.

Understanding Progressive and Regressive Taxes

Progressive Tax System

A progressive tax system is intended to tax people or organizations at higher rates according to their income.

Example

A common example of a progressive tax system is the personal income tax system seen in many nations, where tax rates rise in proportion to income. Some nations also impose inheritance and corporation taxes using the progressive tax model.

Regressive Tax System

A tax in which the tax rate falls as the amount subject to taxation rises is known as a regressive tax. Put another way, people with lower incomes pay a larger proportion of their income in taxes than people with higher incomes.

Example

Sales taxes, excise taxes on products like cigarettes and fuel, and payroll taxes up to a specific income level are typical instances of regressive taxes (for example, Social Security taxes in the United States are regressive because they only apply up to a certain income limit).