Indirect Taxes

Indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return.An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.

Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed on.

All Indirect Taxes are regressive in nature. The poor will feel the pinch more than the rich.

Types of Indirect Taxes

Value added Tax

Value added tax (VAT), or goods and services tax (GST), is a consumption tax levied on value added. In contrast to sales tax, VAT is neutral with respect to the number of passages that there are between the producer and the final consumer; where sales tax is levied on total value at each stage, the result is a cascade (downstream taxes levied on upstream taxes).

Exports are consumed abroad and are usually not subject to VAT; VAT charged under such circumstances is usually refundable. This avoids downward pressure on exports and ultimately export derived revenue.

A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the tax.

Excise duties

Excise duty is a type of indirect tax charged on goods produced within the country. Lists of such goods are readily provided by governments.