Indirect taxes affect you too

Indirect tax is passed on to the consumer by loading it on the cost of product or service sold.

Shekhar, who plans his household budget at the beginning of the fiscal year, is restless. With just four days to go for the Union Budget, he thinks income tax rates may be cut, increasing his take-home pay.

But most people skip the Finance Minister's proposals on indirect taxes. Can taxes that aren't apparent impact you? Indeed they can.

Indirect taxes

Indirect tax is charged on the sale of goods and services, levied on the seller. Sales tax (otherwise called VAT- value added tax), central excise duty, customs duty and service tax are a few types of indirect taxes. Usually in these cases, the seller pays tax, but passes it on to the consumer by loading it on the cost of product/service that is being sold.

Next time when you buy groceries at the supermarket; look into the bill. The shopkeeper would have charged you a VAT on the gross amount of the bill. This is VAT. VAT is levied at each stage of production or distribution where there is value addition. But as this tax falls under the State government, changes with respect to VAT would be announced only during the State budgets.

In the Union Budget, one can look for changes to CENVAT or central excise duty. This tax is levied by the Central Government on all goods manufactured within the country. Central excise duty is administered by the Central Board of Excise and Customs which functions under the Union Finance Ministry.

Excise duty rates are expected to head up this budget. In 2012, the FM kept the standard rate of excise duty unchanged at 10 per cent.

Customs or import duty, the tax levied on goods imported from overseas, too can affect your pocket. A hike in import duty can peg up the local prices of sugar or cooking oil, which are imported. Or it can affect the prices of the California almonds or olive oil that you consume. Hikes in import duty can also make raw materials costlier, thus pegging up prices of manufactured goods.

With not just goods but services also in the tax net, the budget will also announce new service tax rates or new services that may be taxed. You will find service tax affecting everything from your eating-out at restaurants to the cost of an airline ticket.

Impact of changes

When there is a hike in the indirect taxes, manufacturers across sectors usually pass it on to consumers.

In February 2010 when there was an across-the-board hike in central excise duty to 10 per cent from 8 per cent, auto makers, cement manufacturers and consumer durable players increased product prices. In 2011 budget when excise duty on cement was hiked, manufacturers passed it on to consumers.

Now, what is in store for 2012-13?

An across-the-board increase in the standard rate of central excise may see cost of several products going up. With most industries under pressure from rising input costs it is only likely that they pass on the increase in excise duty. There is also a buzz that the government may levy a lump sum charge as excise duty on diesel cars this year to curtail the increasing demand for diesel. Experts also see a widening of services tax net this year and a possible increase in the service tax rate.

The increase in indirect taxes can make a hole in your pocket too. So in the FM's budget speech give heed to announcements on indirect taxes.

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