Indirect tax
Indirect tax is a type of tax that is collected by an intermediary, such as a retailer, from the person who bears the ultimate economic burden of the tax, such as the consumer. This type of tax is generally imposed on goods and services and is typically collected when the item is purchased.
Examples of indirect taxes include:
- Value Added Tax (VAT): This is a tax imposed on the value added to a product or service at each stage of production or distribution.
- Sales Tax: This is a tax imposed on the sale of goods and services and is usually a percentage of the sale price.
- Excise Tax: This is a tax imposed on the production or sale of certain goods and services, such as alcohol, tobacco, and gasoline.
- Customs Duty: This is a tax imposed on the import or export of goods.
Examples(Types) of Indirect tax
Examples of Indirect tax include Value Added Tax (VAT), Sales Tax, Excise Tax, and Customs Duty.
Formula of Indirect tax
The formula for calculating the indirect tax is as follows:
Indirect Tax = (Price of Product or Service x Tax Rate) - Input Tax Credit
In summary, the indirect tax is calculated by multiplying the price of the product or service by the tax rate and then subtracting the input tax credit.
When to use Indirect tax
Indirect taxes are often used when the government wants to raise revenue, but does not have the ability to directly tax people. This type of tax is also used when the government wants to control or discourage certain activities, such as consumption of alcohol or tobacco. Additionally, indirect taxes can be used to reduce economic inequality, as they shift the burden of taxation away from lower-income households to those with higher incomes.
Steps of Indirect tax
The process of indirect tax involves four steps:
- Assessment: This step involves determining the taxable person and assessing the amount of tax payable.
- Collection: This step involves collecting the tax from the taxable person.
- Payment: This step involves the payment of the tax by the taxable person to the government.
- Compliance: This step involves the taxable person complying with the rules and regulations of the indirect tax system.
In conclusion, the process of indirect tax involves four steps, including assessment, collection, payment and compliance.
Advantages of Indirect tax
Indirect taxes have a number of advantages which include:
- Ability To Generate Revenue: One of the primary benefits of indirect taxes is their ability to generate revenue for a government.
- Regulate Consumption: Indirect taxes can also be used to control consumption of certain goods and services by making them more expensive.
- Easier To Collect: Since indirect taxes are typically collected by intermediaries such as retailers, they are easier to collect than direct taxes, which have to be collected directly from individuals or businesses.
- Broad Base: Indirect taxes often have a broad base, which means that they can be applied to a large number of goods and services, making them more efficient than direct taxes.
Limitations of Indirect tax
- Limited Reach: Since indirect taxes are levied on goods and services, their reach is limited to people who are able to purchase these goods and services. This means that those who are unable to purchase them, such as the very poor, are not impacted by these taxes.
- Inefficient: Indirect taxes are not always efficient as the burden of the tax is usually passed on to the consumer.
- Inequitable: Indirect taxes are often seen as regressive as they tend to hit the poor harder as they spend a larger portion of their income on goods and services than the wealthy.
- Tax Invoice: This is an invoice issued by a taxable person to the recipient of the goods or services showing the applicable taxes.
- Tax Credit: This is a credit given to a taxpayer for certain taxes paid, such as income taxes and sales taxes.
- Tax Deduction: This is a reduction in the amount of taxable income that is allowed by the government in order to reduce the tax liability of the taxpayer.
- Tax Exemption: This is an exemption from certain taxes, such as income taxes, sales taxes, or property taxes.
In conclusion, there are several approaches related to indirect tax, such as tax invoices, tax credits, tax deductions, and tax exemptions. These approaches can be used to reduce the amount of tax liability for the taxpayer.
| Indirect tax — recommended articles |
| Cash rebate — Factory price — Price controls — Imported inflation — Horizontal equity — Diminishing marginal utility — Output tax — Monopolistic competition — Reflation |
References
- Emran, M. S., & Stiglitz, J. E. (2005). On selective indirect tax reform in developing countries. Journal of public Economics, 89(4), 599-623.
