Direct and Indirect Taxation · Concept of Indirect Taxes

Classification and Types of Indirect Taxes in India

Updated 10 October 2026 · Fact-checked

Indirect taxes are levied on goods and services, collected by a seller or importer, and borne by the final consumer. Before GST, the main ones were excise, service tax, VAT, central sales tax and customs duty. GST subsumed most of these, but customs duty continues. To solve questions, classify each tax by who levies it and what it taxes.

Understand Classification and Types of Indirect Taxes

A direct tax is paid by the person on whom it is levied, for example income-tax on your income. An indirect tax is levied on a transaction, such as a sale, a service or an import. The seller or importer deposits it with the government, but the burden is passed on to the buyer through the price.

Before 1 July 2017, India had many separate indirect taxes. The Centre levied central excise duty (on manufacture of goods), service tax (on services) and central sales tax (on inter-state sale of goods). It also levied customs duty (on import and export of goods). States levied VAT (on sale of goods within the state), entry tax, octroi, luxury tax, entertainment tax and purchase tax.

These taxes caused a cascading effect: tax on tax. Excise was charged on manufacture, and VAT was then charged on a value that already included excise. Credit for excise and service tax was not freely available against VAT, and the reverse was also true. So tax was paid on tax, and the final price rose more than the real value added.

GST fixed this. It is a destination-based tax on supply of goods or services, with credit available all along the chain. The framework has CGST and SGST/UTGST on intra-state supplies, and IGST on inter-state supplies and imports. GST also covers many earlier Central and State levies, such as central excise duty (other than on some specified products), service tax, VAT, central sales tax, entry tax, octroi, luxury tax and entertainment tax (other than those levied by local bodies).

Customs duty was not subsumed. It remains under the Customs Act, 1962. On imports, IGST is charged in addition to basic customs duty. Remember that GST is levied on supply within India, whereas customs duty is levied on goods crossing the border.

Key rules to remember

Classification by burden: Direct tax: impact and incidence on the same person. Indirect tax: impact on seller, incidence on consumer; Impact is where the tax is first levied. Incidence is who finally bears it.
Pre-GST Centre taxes: Central excise (manufacture), service tax (services), CST (inter-state sale of goods), customs duty (import/export); Learn each tax with its taxable event.
Pre-GST State taxes: VAT (intra-state sale of goods), entry tax, octroi, luxury tax, entertainment tax, purchase tax; Most were subsumed in GST.
GST structure: Intra-state supply: CGST + SGST/UTGST. Inter-state supply and imports: IGST; GST is destination-based and has credit across the chain.
Cascading effect: Tax at a later stage = rate × (value including earlier tax); Under GST with credit: net tax at each stage = rate × value added.

How to solve Classification and Types of Indirect Taxes questions

Use this method for classification, listing and cascading questions.

1Read what the question asks: list, classify, compare or compute.
2Identify the taxable event for each tax: manufacture, sale, service, import or export.
3Note who levies it: Centre or State.
4Decide whether it was subsumed in GST or continues, such as customs duty.
5For cascading questions, build a stage-wise table of purchase value, tax rate, tax and selling price.
6Compare without credit (tax on tax) and with credit (tax only on value added).
7Write a one-line conclusion on who bears the final burden.

Quickest way: Three-column memory table

When to use it: For MCQs and short notes on classification and subsumed taxes.

Draw three columns: tax, taxable event, status after GST.
Fill Centre taxes first: excise, service tax, CST, customs.
Fill State taxes next: VAT, entry tax, octroi, luxury tax, entertainment tax.
Mark customs duty as continuing; mark the others as subsumed in GST, subject to the stated exceptions.
For cascading numbers, compute tax on each stage's full selling price, then repeat with credit.

Common mistakes in Classification and Types of Indirect Taxes

Saying customs duty was subsumed in GST.
Students assume GST replaced every indirect tax.
Fix: Customs duty continues. IGST is charged on imports along with it.
Treating service tax and VAT as direct taxes or as the same tax.
Both are collected from the customer, which blurs the difference.
Fix: Service tax was on services (Centre). VAT was on sale of goods (State). Both are indirect.
Confusing impact with incidence.
Both words seem to mean who pays.
Fix: Impact: who first pays to the government. Incidence: who finally bears the burden.
Computing the cascading effect by applying tax only on the original cost.
Students forget that later tax applies to a value already including earlier tax.
Fix: At every stage, apply the rate to the full price including tax already charged.
Claiming GST has no cascading effect anywhere.
Overstating the benefit of credit.
Fix: Cascading is largely removed through credit. Some items stay outside GST or have blocked credit, so say cascading is reduced, not totally ended.

Worked examples

Example 1

A manufacturer buys raw material for ₹1,000 and sells the product to a wholesaler after adding ₹500 of value. Assume a 10% tax at each stage, in a system with no credit. The wholesaler adds ₹200 and sells to a retailer, who adds ₹100 and sells to the consumer. Find the total tax paid and show the cascading effect.

Show the solution

Stage 1, manufacturer: cost ₹1,000 plus value added ₹500 gives ₹1,500. Tax at 10% = ₹150. Price = ₹1,650.
Stage 2, wholesaler: cost ₹1,650 plus ₹200 gives ₹1,850. Tax at 10% = ₹185. Price = ₹2,035.
Stage 3, retailer: cost ₹2,035 plus ₹100 gives ₹2,135. Tax at 10% = ₹213.50. Price = ₹2,348.50.
Total tax = ₹150 + ₹185 + ₹213.50 = ₹548.50.
Correct tax on the value added: the total of ₹500 + ₹200 + ₹100 = ₹800 added at 10% is ₹80, plus the tax on ₹1,000 raw material of ₹100, so ₹180 in all.
Excess burden due to tax on tax = ₹548.50 − ₹180 = ₹368.50.

Answer: Total tax paid without credit is ₹548.50. The tax on tax is ₹368.50 more than ₹180, which would arise if tax applied only to value added.

Example 2

Classify these as continuing or subsumed in GST: (a) customs duty, (b) central excise on manufacture of goods (other than specified products), (c) VAT, (d) service tax, (e) central sales tax. State who levied each before GST.

Show the solution

Customs duty: levied by the Centre on import or export. It continues.
Central excise: levied by the Centre on manufacture. It is subsumed, other than on some specified products.
VAT: levied by the State on intra-state sale of goods. It is subsumed.
Service tax: levied by the Centre on services. It is subsumed.
Central sales tax: levied by the Centre on inter-state sale of goods, collected by the origin State. It is subsumed.

Answer: Only customs duty continues. Excise (on most goods), VAT, service tax and CST were subsumed in GST. Centre levied customs, excise, service tax and CST; the State levied VAT.

Exam tips

Learn the list of pre-GST taxes in two groups, Centre and State, and write the taxable event next to each.
In a customs duty versus GST comparison, cover taxable event, levying authority, law, credit and border versus supply.
For cascading questions, show a stage-wise table. It earns step marks even if the final figure slips.
In MCQs, watch for options claiming customs duty was subsumed; that option is wrong.
State clearly that GST is destination-based and credit-driven when asked how it removes cascading.

Practice questions from Concept of Indirect Taxes

Classification and Types of Indirect Taxes: frequently asked questions

What are the main types of indirect taxes in India?

Today they are GST (CGST, SGST/UTGST, IGST) and customs duty, with some State and Central levies outside GST. Before GST, they included excise, service tax, VAT, CST, entry tax and octroi.

Which indirect taxes were subsumed in GST?

Central excise duty (other than on some specified products), service tax, VAT, central sales tax, entry tax, octroi, luxury tax and entertainment tax (other than those levied by local bodies) were among them. Customs duty was not subsumed.

What is the cascading effect of taxes?

It is tax charged on tax. When tax paid at an earlier stage becomes part of the value on which the next tax is charged, the final price rises more than the real value added. GST reduces this through input tax credit.

What is the difference between customs duty and GST?

Customs duty is charged on goods crossing India's border, under the Customs Act, 1962. GST is charged on supply of goods or services within India and also on imports as IGST. GST allows input tax credit across the chain.