Features of Indirect Tax Explained
CA Meet Dhrangadhariya 
January 9, 2025
CA Meet Dhrangadhariya January 9, 2025
Table of Contents
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Last updated: 10 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
Indirect taxes are taxes on spending rather than on earning. They are built into the price of goods and services, collected by businesses and paid to the government, while the final burden falls on the consumer. Direct taxes, such as income tax, are charged on income. This note explains what indirect tax is, which taxes fall under it in India today, and its main features.
An indirect tax is charged on the supply of goods and services and not on the profit of the person who pays it to the government. It is collected by intermediaries in the supply chain, such as manufacturers, wholesalers and retailers, and the consumer who finally uses the product bears the burden.
Service tax, the earlier central VAT, state VAT on most goods, central sales tax and octroi have been subsumed in GST.
1. The burden can be shifted
The person who pays the tax to the government can recover it from the next person in the chain, until it reaches the final consumer.
2. A tax on consumption
The tax depends on what is bought and not on the buyer’s income, so it affects the price of goods and services.
3. A broad tax base
Because almost everyone buys goods and services, indirect taxes reach a very wide base and give the government a steady flow of revenue.
4. Possible inflationary effect
A higher tax rate raises the selling price, which can add to inflation.
5. Easy to collect
The tax is collected in small amounts at the point of sale by registered businesses, so the government collects it from far fewer people than the number who finally bear it.
6. Cascading effect, removed in GST
Under the old regime, tax was often charged on a price that already contained tax, and the effect repeated at every stage. GST avoids this through input tax credit, so tax paid on purchases can be set off against tax on sales.
7. Regressive nature
Everyone pays the same rate on the same item, so the tax takes a larger share of the income of low-income households than of high-income ones. GST softens this with lower rates on essentials.
Indirect taxes change prices and spending patterns, and so affect the cost of living and the purchasing power of consumers. For businesses, they influence pricing, competition and cash flow, especially through the timing of input tax credit. For the government, they are a major source of revenue that funds public services and infrastructure.
Indirect taxes are paid by everyone who buys goods and services. Knowing how they are charged helps consumers read the tax on their bills and helps businesses price correctly and claim the credit they are entitled to.
An indirect tax is a tax on the supply of goods and services. It is collected by sellers and paid to the government, while the final burden falls on the consumer.
GST, customs duty, a limited central excise duty mainly on petroleum products, and state VAT on petrol, diesel and alcohol for human consumption.
Everyone pays the same rate on the same item, so the tax takes a larger share of income from low-income households than from high-income households.
It is tax charged on a price that already includes tax, repeated at every stage of the supply chain. GST avoids it through input tax credit.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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