What is Net Indirect Tax (NIT)?

Net Indirect Tax (NIT) refers to the difference between indirect taxes and subsidies. Indirect Taxes are the taxes imposed on the production and sale of goods and services by the Government of a country, for example, GST (Goods and Services Tax). An indirect tax imposed on a good or service results in an increase in its price in the market. For example, if the cost of production of a good is ₹1,000 and the government levies 10% GST on it, then the good will be sold as ₹1,100 in the market. However, Subsidies are the economic assistance given to firms and households by the government with the aim of the general welfare. It is also known as financial assistance. For example, LPG cylinder in India is sold at a less rate or subsidized rate. The government usually grants subsidies to promote exports or to encourage organisations to set up industries in backward regions. Subsidies are not like indirect taxes, they reduce the market price of a good or service. For example, if the Government grants a ₹20 subsidy on the above-mentioned good, then it will be sold at ₹1,080 in the market. 

Net Indirect Tax = Indirect Taxes – Subsidies

Factor Cost Vs Market Price

Factor cost is the amount paid to the factors of production for the factor services provided by them in the production process. In the above-given example, ₹1,000 is the Factor Cost. However, Market Price is the price at which the product is actually sold in the market to the consumers. The Market Price of a good or service includes indirect taxes and excludes subsidies. In the given example, the Market Price of the good is ₹1,080. 

Market Price = Factor Cost + Net Indirect Taxes

OR

= Factor Cost + Indirect Taxes – Subsidies

Net Indirect is an important concept to differentiate between Factor Cost and Market Price of a good or service. The Market Price of a good or service includes Net Indirect Taxes; however, the Factor Cost of a good excludes NIT. Another important fact about indirect taxes and subsidies is that they only arise in the three-sector economy and four-sector economy, and not in the two-sector economy (households and firms). 

Practice Question 1

Calculate Net Indirect Tax (NIT) when Subsidies provided by the Government are ₹200, and Indirect Taxes are ₹0.

Answer

Net Indirect Tax (NIT) = Indirect Taxes – Subsidies

                                   = 0 – 200

                                   = -₹200

Practice Question 2

Calculate Net Indirect Tax (NIT) when Subsidies provided by the Government are ₹0, and Indirect Taxes are ₹500.

Answer

Net Indirect Tax (NIT) = Indirect Taxes – Subsidies

                                   = 500 – 0

                                   = ₹500

Practice Question 3

Calculate Net Indirect Tax (NIT) when Subsidies provided by the Government are ₹250, and Indirect Taxes are ₹170.

Answer

Net Indirect Tax (NIT) = Indirect Taxes – Subsidies

                                   = 250 – 170

                                   = ₹80