An Indirect tax is a tax that is not paid directly by a person to the government .It is collected by an intermediary and passed on to the government. It is a type of tax where incidence and impact of taxation does not fall on the same entity. In indirect tax, the burden of taxes can be shifted by the taxpayer to someone else. It has the effect to increasing the price of the products on which they are imposed. Indirect taxes are usually imposed on goods and services on the basis of production, supply, sale and purchase of products or provision of services.
Examples of Indirect Taxes- Custom duty, Central excise, Service tax, Goods and service tax and Value added tax are some examples of indirect taxes.
Features of Indirect Taxes
The key features of Indirect Taxes are as follows:-
- Nature– Indirect taxes used to have a regressive nature initially but after the implementation Goods and Services tax (GST), they are now quite progressive.
- Tax liability– The seller or service provider pays indirect taxes to the government and transferred the liability to the final consumer.
- Investment and saving– Indirect taxes are largely growth-oriented .Considering the fact that they encourage all the consumers to save and invest.
- Evasion– Evasion of Indirect taxes are very difficult because they are now directly implemented through Goods and Services.
- Social Coverage– The charge of indirect taxes falls upon each individual buying products and services. Because of this indirect taxes have a larger social coverage
Advantages of Indirect taxes
Indirect taxes sound like an added burden on the consumers, but they are not always just a negative thinking. It has also some advantages which are given below:-
- Easy collection– Collection of tax is easy in Indirect taxes because indirect taxes are paid at the moment when a consumer buys a product. Tax is collected by the supplier and paid that tax to the government.
- Poor can do their share- As we know that direct taxes usually exempt the poor but indirect taxes allow the poor to contribute their part in collection of funds for a state or country.
- Indirect taxes are not Obvious– Indirect taxes are not very obvious because they are incorporated in the sale price of a product or an item. The tax comes in small values so people don’t feel like they are being taxed. They can only be seen on the purchase receipt, not indicated in the price tag. So these taxes can be avoided by not purchasing the goods.
- Discourages Consumption of harmful products- Indirect taxes discourages the consumption of harmful products. For example- cigarettes and alcohol are heavily taxed. By taxing these types of products, people are discouraged by their price, thereby saving the people from consuming harmful items.
- Equitable Contributions– These taxes are directly related to the costs of services and products which mean the basic necessities attract the lower rate of taxes and luxury items are charged at higher tax rate, ensuring equitable contributions.