Indirect Tax Affects Income Level From Behind the Curtain
Indirect tax can be referred as a sales tax or value-added tax that is imposed on goods and services rather than individuals. But it is ultimately paid by consumers in the form of higher prices. This type of tax is shifted to another person partly or entity, for example sales taxes are levied on the sellers but paid by the buyers. An indirect tax is different from a direct tax that is taxed on income or assets of a person or organization. There are some disagreements whether corporate tax is direct tax or indirect tax.
The purview of such tax includes taxes levied by the State on consumption, privilege, expenditure, or right but not on income or property. On the other hand custom duties levied on import, sales tax or value added tax (VAT), excise duties on production at some stage in production-distribution process, are some of the key examples of indirect taxes because they are not imposed directly on the income of the consumers. Because of its fuzzy character on some events, politicians are persuaded to increase them to generate more revenue. Sometimes, it is also referred as consumption taxes and they are regressive in character because they are not based on the ability to pay theory.
Generally, the indirect tax or goods and services tax is collected by the retail stores from the person who bears the ultimate economic burden of the tax. And later on intermediary forwards the tax to proceeds to government. In this way indirect tax is constructed with a direct tax which is collected directly by the State form the people on which it is levied. A direct tax cannot be shifted by the taxpayer to someone else, whereas in case of indirect tax it can be done.
The imposition of the indirect tax can increase the price of goods that are consumed by the people, for example prices of liquor and cigarette are much higher than manufacturing cost and it is much due to the imposition of indirect tax. Furthermore, an excise duty on vehicle is paid by the manufacturer but it is ultimately paid by the consumers.