Indirect Tax: Definition, Meaning, and Common Examples

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Indirect Tax: Definition, Meaning, and Common Examples

What Is an Indirect Tax?

An indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government; nevertheless, the tax is passed on to the consumer as part of the purchase price of an item or service by the manufacturer or retailer. The tax is eventually paid by the customer, who pays extra for the goods.

Understanding an Indirect Tax

By comparing them with direct taxes, indirect taxes are defined. Indirect taxes are those levied on an individual or corporation that are eventually paid for by another person. The tax will subsequently be remitted to the government by the entity that collects it. However, in the case of direct taxes, the person who instantly pays the tax is the person that the government wishes to tax.

Fuel, liquor, and cigarette excise levies are all instances of indirect taxes. Money tax, on the other hand, is the most obvious example of a direct tax since the individual receiving the income is the one who directly pays the tax. Another prominent example of direct taxation is admission fees to a national park.

Some indirect taxes, such as a value-added tax, are also known as consumption taxes (VAT).

Regressive Nature of an Indirect Tax

In order to produce money, the government often employs and imposes indirect taxes. They are basically levies placed equally on taxpayers regardless of wealth, thus rich or poor, everyone must pay them.

Many people consider them regressive taxes since they impose a large burden on persons with lower earnings who end up paying the same amount of tax as those with higher incomes.

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For example, regardless of the consumer’s income, the import tax on a television from Japan will be the same amount. And since this tax has nothing to do with a person’s income, someone earning $25,000 a year will have to pay the same duty on the same television as someone earning $150,000; plainly, the former would bear a greater burden.

There are also fears that indirect taxes might be used to further a certain government objective by taxing some sectors but not others. As a result, some economists claim that indirect taxes create an inefficient market and shift market prices away from their equilibrium price.

Common Indirect Taxes

Import tariffs are the most prominent example of an indirect tax. The importer of an item pays the tariff when it enters the nation. If the importer then resells the item to a customer, the cost of the tax is effectively buried in the price paid by the consumer. Although the customer is unlikely to be aware of this, they will be indirectly paying the import duty.

Any taxes or levies imposed by the government at the manufacturing or production level are, in essence, indirect taxes. Many nations have placed carbon emissions taxes on industries in recent years. These are indirect taxes since the expenses are passed on to the customer.

Direct and indirect sales taxes are both possible. They are direct if they are imposed exclusively on the final supply to a customer. They are indirect if they are levied as value-added taxes (VATs) throughout the manufacturing process.

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