Indirect taxes are basically taxes that can be passed on to another entity or individual. It is usually imposed on a manufacturer or supplier who then passes on the tax to the consumer. The most common example of indirect tax is the excise tax on cigarettes and alcohol. Value Added Tax (VAT) is also an example of an indirect tax.
Advantages of Indirect Taxes
Taxes may sound like an added burden for consumers, but indirect taxes are not always just a negative thing. Here are some of its advantages:
- The poor can do their share
Unlike direct taxes that usually exempt the poor, indirect taxes allows them to actually contribute their part in collecting funds for a country or state.
- They aren’t very obvious
Indirect taxes, as they are incorporated in the sale price of an item, are not very obvious. People don’t feel they are being taxed simply because the tax comes in small values. Plus, add the fact that they are not indicated in the price tag, but can only be seen on the purchase receipt. Also, they can be avoided by not buying the goods.
- Collection is easy
Unlike direct taxes where documents need to be accomplished and filing is required, indirect taxes are paid the moment a consumer buys a product. The tax is collected by the supplier and is paid to the government.
- Discourages consumption of harmful products
Alcohol and cigarettes are being taxed, that’s why their prices go up. By taxing such products, people are turned off by their price, thereby saving them from consuming harmful items.
Types of Indirect Taxes
What many people are not aware of is that practically everyone pays taxes, especially indirect taxes. It is because it is imposed on almost all the products that we consume. Here are some of the types of indirect taxes.
- Sales tax
Whenever people go to the malls or department stores to shop, they are already about to pay indirect taxes. Goods such as household items, clothing, and other basic commodities are subject to such types of taxes. Upon payment at the counter, the final sale price is padded with a sales tax that the store collects and pays to the government.
- Excise tax
Excise tax is also very common. When a manufacturer buys the raw materials for the company’s products, for example, tobacco for cigarette companies, they already need to pay indirect taxes on the items. Through a part of the normal course of business, the manufacturer can pass on the burden to the consumers by selling the cigarettes at a higher price.
- Customs tax
Ever wonder why imported products are expensive? It is because of customs tax. When a container filled with bananas from another country enters the US, the importer pays indirect tax (customs tax), which is then passed on to the consumers.
Unless indirect taxes are imposed on necessaries, we cannot be sure of the revenue yield. In the case of goods, with an elastic demand, the tax might not bring in much revenue. The tax will raise the price and contract the demand. When the thing is not purchased, the question of the tax payment does not arise.
Indirect taxes are not equitable. For instance, salt tax in India fell more heavily on the poor than on the rich, as it had to be paid at the same rate by all. Whether a rich man buys a commodity or a poor man, the price in the market is the same for all. The tax is wrapped in the price. Hence, rich and poor pay the same amount, which is obviously unfair. They are thus; regressive.
(iii) Raising Prices Unduly:
They cause the price of an article to rise b; more than the tax. A fraction of the money unit cannot be calculated, so ever middleman tends to charge more than the tax. This process is cumulative.
The cost of collection is quite heavy. Every source o production has to be guarded. Large administrative staff is required to administer such taxes. This turns out to be a costly affair.
(v) No Civic Consciousness:
These taxes do not develop civic consciousness, because many times the tax-payer does not even know that he is paying tax. The tax is concealed in the price.
(vi) Harmful to Industries:
They discourage industries if raw materials are taxed. This will raise the cost of production and impair their competitive capacity.