Indirect Tax
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| Indirect tax |
What Is an Indirect Tax? An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product. Understanding an Indirect Tax, Indirect taxes are defined by contrasting them with direct taxes. Indirect taxes can be defined as taxation on an individual or entity, which is ultimately paid for by another person. The body that collects the tax will then remit it to the government. But in the case of direct taxes, the person immediately paying the tax is the person that the government is seeking to tax.1 Excise duties on fuel, liquor, and cigarettes are all considered examples of indirect taxes.2 By contrast, income tax is the clearest example of direct tax, since the person earning the income is the one immediately paying the tax. Admission fees to a national park are another clear example of direct taxation. Some indirect taxes are also referred to as consumption taxes, such as a value-added tax (VAT). Common Indirect Taxes The most common example of an indirect tax is import duties. The duty was paid by the importer of a good at the time it enters the country. If the importer goes on to resell the goods to a consumer, the cost of the duty, in effect, is hidden in the price that the consumer pays. The consumer is likely to be unaware of this, but they will nonetheless be indirectly paying the import duty. Essentially, any taxes or fees imposed by the government at the manufacturing or production level is indirect tax. In recent years, many countries have imposed fees on carbon emissions to manufacturers. These are indirect taxes since their costs are passed along to consumers. Sales taxes can be direct or indirect. If they are imposed only on the final supply to a consumer, they are direct. If they are imposed as value-added taxes (VATs) along the production process, then they are indirect.
