13 Facts About Indirect tax

An indirect tax is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased.

Alternatively, if the entity who pays taxes to the tax collecting authority does not suffer a corresponding reduction in income, i e, impact and tax incidence are not on the same entity meaning that tax can be shifted or passed on, then the tax is indirect.

An indirect tax is collected by an intermediary from the person who pays the tax included in the price of a purchased good.

For instance, an excise Indirect tax imposed on a pack of cigarettes increases the price of cigarettes, which leads to decreased consumption of cigarettes, which leads to the reduction of health conditions caused by smoking and second-hand smoking.

Concept of Value Added Tax as an indirect tax was the brainchild of a German industrialist, Dr Wilhelm von Siemens in 1918.

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The incidence of indirect tax imposed on a good or service depends on price elasticity of demand and price elasticity of supply of a concerned good or service.

In case the good has an elastic demand and inelastic supply, the Indirect tax burden falls mainly on the producer of the good, whereas the burden of the good with an inelastic demand and elastic supply falls mainly on consumers.

The only case when the burden of indirect tax falls totally on consumers, i e, statutory and economic incidence are the same, is when the supply of a good is perfectly elastic and its demand is perfectly inelastic, which is a very rare case.

In practice, the effective indirect tax rate is higher for individuals with lower income, meaning that an individual with lower income spends on a good or service higher proportion of their income than an individual with higher income.

Examples are petrol Indirect tax, argued to be user fees for the government provided roads, and tobacco Indirect tax, imposed on smokers who through smoking create a negative externality of consumption.

Term indirect tax has a different meaning in the context of American Constitutional law: see direct tax and excise tax in the United States.

Some international studies have shown that value-added Indirect tax has the least impact on economic growth, while corporate income Indirect tax has a negative impact on economic growth.

Increase in higher indirect tax revenue is due to the truly global trend of increased consumption taxes.