Indirect Tax

Published Jan 3, 2023

Definition of Indirect Tax

An indirect tax is a tax that is imposed on goods and services rather than on individuals or businesses. That means it is paid by the consumer when they purchase a good or service, but the tax is collected by the seller. Common examples of indirect taxes include sales taxes, value added taxes (VAT), and excise taxes.

Example

To illustrate this, let’s say you are buying a new laptop. The laptop costs USD 1,000, but you also have to pay a 10% sales tax. That means you have to pay an additional USD 100 in taxes. The USD 100 is the indirect tax that is collected by the seller. The seller then pays the tax to the government.

Similarly, if you buy a pack of cigarettes in the United States, you’ll have to pay an excise tax ranging between USD 1.01 to USD 4.35 per pack, depending on the state you’re in. For more information, check out the STATE System Excise Tax Fact Sheet provided by the CDC.

Why Indirect Taxes Matter

Indirect taxes are an important source of revenue for governments. They are also relatively easy to collect, since the seller is responsible for collecting the tax and paying it to the government. Furthermore, indirect taxes are considered to be more equitable than direct taxes since they are paid by everyone who purchases a good or service, regardless of their income level (i.e., they are an example of a degressive tax).

Finally, indirect taxes can also be used to influence consumer behavior. For example, governments may impose higher taxes on certain goods or services in order to discourage their consumption. That’s what excise taxes on products like tobacco, alcohol, or fuel are generally used for.