Indirect Tax

Indirect Tax

An indirect tax (such as sales tax, per unit tax, value-added tax (VAT), or goods and services tax (GST), excise, tariff) 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 the market price of the good or service purchased.

An indirect tax is collected by an intermediary from the person who pays the tax included in the price of a purchased good. The intermediary later files a tax return and forwards the tax proceeds to the government with the return. In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by the government from the persons on whom it is imposed.

Indirect taxes form a significant part of revenue for countries across the globe. 

A study conducted by OECD around 32% of revenue generated by its member countries is from Indirect taxes. Apart from this, Indirect taxes are also used as a measure to reduce the consumption of goods and services that create a negative impact on the societies (eg: Excise taxes levied on Cigarettes and Energy drinks).

The main criterion to distinguish between direct tax and indirect tax is whether the tax burden can be passed on. Indirect taxes are levied on goods and services. They only indirectly target the public. With the circulation of goods, most of the turnover tax will be passed on to the subsequent user in the chain, unlike direct taxes which is levied directly on the person.