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Indirect taxes are those whose economic burden can be passed on by the payer to another entity. The responsibility of paying direct taxes, such as income tax, falls on the person who earns the income. The responsibility of bearing the financial cost of such taxes cannot be passed on to someone else, in the case of direct taxes.

Please note that passing the burden of tax can be possible in one situation in case of income tax (which is a type of direct tax). Certain contracts (called ‘tax protected contracts’), allow for increasing the gross amount of payment by to the extent of the tax payable by the recipient. For example, assume that under a contract A is required to pay B INR 100 and the rate of tax on a particular payment is 20%. A can pay INR 125, so that B eventually receives INR 100.

However, in case of indirect taxes, for example, service tax, although the amount of service tax chargeable must be paid by the service provider, he can charge the recipient of services or the customer for the same and collect the tax payable by him to the government from the recipient of the service. Similarly, the burden of paying excise duty, VAT, central sales tax and octroi can also be passed on to someone else.

For an entrepreneur, it is important to know the following general aspects in relation to all tax statutes:


  1. Chargeable event – Chargeable event refers to the specific aspect of an activity that attracts tax. For example, in case of excise duty, the chargeable event is ‘manufacture’, in case of VAT it is sale to the consumer or the next guy in the distribution network.
  2. Minimum thresholds for applicability- Every tax statute specifies certain thresholds (based on the income in case of Income tax, or transaction volume in case of indirect taxes) below which tax liability, registration or filing requirements are not applicable.
  3. Rate of tax – An entrepreneur must know how to find the applicable rate of tax for the transactions carried out by the business
  4. Registration requirements - Tax laws require a business to obtain certain registrations from authorities from time to time. An entrepreneur should know which authority he must register with, where its nearest office is situated, procedure for registration, and the criteria on which registration is granted.
  5. Periodic and annual compliance requirements – An entrepreneur should know where he can find the formats for reporting under relevant tax laws, the timelines for compliance, whether online submission is possible, etc.                                                                                                                                                                                    
  • In this module, we are covering excise duty, VAT, Central Sales Tax and Service Tax. Note that other state and municipal taxes may also be applicable to a business in your state. For example, starting a consultancy business may require you to register for a ‘Professional Tax’ in your state. For example, in Karnataka, the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976 is applicable in respect of professionals and employees. Similarly, starting a cybercafé or video game parlour would require an ‘Entertainment Tax’ registration.  Coverage of these registrations is outside the scope of this module. Interested readers are encouraged to find out more about other tax related registrations applicable to businesses in their state on through self-study 

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