Question

Service tax is a

• A. direct tax
• B. indirect tax
• C. regressive tax
• D. progressive tax

Hint:

Since the service provider collects the tax from the customer and deposits it separately, service tax is classified as indirect.

Answer 1

The Correct Option is B

This question asks us to classify service tax correctly. Let's go through each option.

1. Direct tax: A direct tax is paid by the same person on whom it is imposed, like income tax paid directly by the earner. Service tax does not work this way, since the provider collects it from the customer, so this option does not fit.
2. Indirect tax: Service tax is charged on services rendered, and the service provider collects it from the customer and passes it on to the government. Since the person paying, the customer, is different from the one legally depositing it, this is the textbook definition of an indirect tax. This fits.
3. Regressive tax: A regressive tax takes a larger share of income from poorer taxpayers, but this describes an effect of a flat rate tax, not the basic classification the question is testing.
4. Progressive tax: A progressive tax rises with income, like income tax slabs. Service tax is charged at a flat rate on the value of the service, not the taxpayer's income, so this label is incorrect.

So the standard classification of service tax is that of an indirect tax.

Let's summarize:

• Service tax is collected by the service provider from the customer and deposited with the government.
• Because payer and depositor are different, it is classified as an indirect tax.

The correct option is (2), indirect tax.