An indirect tax, or goods and services tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by government from the persons on whom it is imposed. Some commentators have argued that "a direct tax is one that cannot be charged by the taxpayer to someone else, whereas an indirect tax can be." An indirect tax may be used to raise the price of products for consumers. Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately, the manufacturer transfers the burden of this duty to the buyer of the car in the form of a higher price. Thus, an indirect tax is one that can be shifted or passed on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect. The concept of Value Added Tax as an indirect tax was the brainchild of a German industrialist, Dr. Wilhelm von Siemens in 1918 – a hundred years later, the tax which was devised to be efficient and relatively simple to collect and enforce is together with Goods and Services Tax, now in place in over 140 countries globally. , from indirect taxes. For this data, the variance of GDP per capita with purchasing power parity is explained in 0 % by tax revenue.
Features
Indirect taxation is policy commonly used to generate tax revenue. The burden of an indirect tax falls on the final consumer of goods and services while paying for purchase of goods or for enjoying services. An indirect tax is applied to everyone in the society whether rich or poor. Indirect taxation can be viewed as having the effect of a regressive tax. An indirect tax imposes a greater burden on the poor than it does on the rich, as both rich and poor pay the same tax amount for consumption of a certain quantity of a specific good. In the case of a regressive tax, persons with relatively low incomes pay a tax that is a relatively high percentage of the amount of income, when the percentage is compared to the percentage paid by persons with relatively high incomes. For example, where a tax on an item worth $25,000 is paid by a person with a salary of $100,000 will constitute a lesser percentage as compared to the percentage of income paid by a person with salary $50,000, as the tax amount will depend on the item and not the income. Similarly, if person A who has $10,000 salary buys an item with a sales tax of $50, which is only 0.5 percent of his salary. If the similar product is bought by a person with $1000 salary, then he will be paying 5 percent of his salary as tax, which reflects the concept of regressive tax. For indirect tax, the taxpayer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. In the case of a direct tax, the taxpayer has to bear the burden of tax personally; in case of indirect tax the taxpayer and the taxbearer are not the same person. The side effect of this is observed as a widening of the gap between the rich and poor, in Washington state the poor had to pay 17 percent of their salary as Sales Tax as compared to the rich who paid 2.4 percent. When a person has a larger family and few people to earn, he or she would be paying a greater amount of indirect tax on life necessities as compared to that paid by smaller families.
The term indirect tax has a different meaning in the context of American Constitutional law: see direct tax and excise tax in the United States. In the United States, the federal income tax has been, since its inception on July 1, 1862, an indirect tax even though during the 1940s, its application grew from a historical average of about 8% of the population paying it to around 90% of the population paying it as a measure to support the war effort.
Excise duty
An excise duty is a tax meant for producers and manufacturers on certain goods. Manufacturers are considered to be:
Entities who manufacture goods themselves.
Entities who outsource manufacturing, but manufacturing takes place from their name
To cover these costs, manufacturer adds them to COGS, where the buyer ends up paying for these costs. Thus, it is considered to be an indirect tax.
