Taxation is mandatory for all state residents, as stipulated in the US constitution. The primary purpose of tax collection in a state is to aid the government financially to provide some of the most basic amenities to its citizens.
Typically, most people only know about direct tax, an income-based tax on a person or a piece of property. This is a popular strategy that state governments use to ensure that residents pay their fair share of taxes from their earnings.
However, the government imposes a separate tax on all transactions that take place within the state. This is known as indirect tax. But why is it called indirect tax?
What is Indirect Tax?
Indirect tax is basically a non-income-based tax that falls on the end-consumer. Indirect or consumer-based taxes are levied on suppliers or manufacturers, who then pass the cost to the end-buyer.
Indirect tax is collected through an intermediary and passed on to the government rather than paid directly to the government. It is a sort of tax paid on goods and services.
In other words, indirect tax is incorporated into the price of goods and services, which consumers ultimately pay at the time of purchase.
Some of the most common indirect taxes include customs duty, Goods & Services Tax (GST), excise duties, value-added tax (VAT), and sales tax.
If you’re a producer, retailer, or consumer, you should know that any transaction you make is subject to taxes. Indirect taxes apply to anything you buy or sell.
Types Of Indirect Tax
Value Added Tax: VAT is also known as a tax charged on any moveable products supplied directly to customers. A Central Sales Tax is collected by the manufacturer and sent to the government in this form of taxation.
Customs Tax: It is a tax placed on goods and products brought into a country from another one. This tax is paid at a country’s entry port.
Excise Tax: The tax levied on the goods and products produced by a company. The manufacturer pays this tax on purchasing the raw material used in the production of goods and is recovered from their customers.
Entertainment Tax: This tax is imposed by the state government on any entertainment-related products or transactions. Entertainment taxes apply to the purchase of video games, sports activities, and movie shows.
Service Tax: It is a tax imposed on a company’s services paid by the people who receive the services.
Security Transaction Tax: The charges of this tax are during the trading of securities listed on recognized stock exchanges. It is also a method by which the government ensures that the tax on financial market transactions is collected transparently.
Who has to Pay Indirect Taxes?
Commodities from imports, petrol, liquor, and other regular items consumed by the end customers, for example, are subject to indirect taxes. Indirect taxes are meant to be paid by participants in a transaction within a state.
But from how indirect tax charges are retrieved, the final customer who utilizes the goods or services pays the indirect tax. The government receives it from the intermediary (which turns out to be a retailer or a manufacturer in the scenario).
Advantages and Disadvantages of Indirect Tax
There are several advantages and disadvantages of indirect taxes. The government and manufacturers benefit more from indirect taxes, while the end consumer suffers.
Advantages the Government Gets From Indirect Taxes
The government has a broader reach: Indirect taxes impact everyone since the government has access to all parts of society. Because indirect taxes are imposed directly on products and services, they cannot be avoided.
Less hassle for the government to collect: The seller is responsible for indirect taxes, which they pass on to the end customers. The government can easily collect these taxes when the seller files a tax return. So instead of dealing with buyers and sellers, the government only deals with the sellers.
Promote Growth: The funds derived from the collection of indirect taxes help the government provide and maintain basic amenities that stimulate growth. The government retains roads, improves public facilities, and much more.
Disadvantages of Indirect Tax for the consumer
Expensive Goods and Services: Indirect taxes make goods and services very expensive for the consumer since they pay the tax. Particularly for goods, the price quickly adds up from the manufacturers, distributors, wholesalers, retailers, and lastly to the end consumer.
Consumers have no say: Unlike direct tax which the payer has a certain influence on how much they pay, consumers don’t have that influence with indirect tax. The retailer sets their price based on the profit they want to make, influenced by the previous tax they paid to the wholesaler or distributor.
Consumers pay multiple taxes with every purchase: Although it might not be noticeable to the end consumers, they actually pay the taxes from the point the manufacturer adds sales tax on every sale to the distributor or wholesaler, right to the retailers.
Is Indirect Tax Regressive?
It is sometimes regarded as a regressive tax because it is collected in equal amounts from everyone, regardless of their income. It is considered a regressive tax since it affects low-income taxpayers more than high-income ones.
Indirect taxes impose more burdens on individuals with low incomes as they may not be able to manage what they earn to some extent.
To raise funds, the government frequently employs and imposes indirect taxes. Although indirect taxes help provide the public with some basic amenities, the end consumer is really paying the price.