What Are Indirect Taxes?
Indirect taxes are not paid directly by the person or entity ultimately accountable for them. They are instead passed on to the consumer as part of the cost of a commodity or service. As a result, indirect taxes are disguised within the prices of goods and services, making them less noticeable to customers.
Definition 2
Indirect taxes are taxes charged on goods produced, imported, or exported: Excise and Customs duties.
More Thorough Understanding of the Term
Businesses typically collect indirect taxes on behalf of the government. The indirect tax is included in the price when a company offers a product or service. The company then pays the tax to the government monthly or quarterly.
Indirect taxes can have a variety of effects on consumers and enterprises. Indirect taxes can raise the price of products and services, lowering customers' purchasing power. This is because the tax expense is passed on to the consumer, increasing the cost of the goods.
Indirect taxes can have an impact on a company's earnings and competitiveness. Enterprises operating in countries with high indirect tax rates may need help competing with those with lower tax rates. This could result in decreased revenues and firm closures.
Indirect taxes can also affect the broader economy. Governments collect revenue through indirect taxes, which they can then use to fund public services and infrastructure projects. High indirect tax rates, on the other hand, can discourage spending, resulting in slower economic growth.
Examples
Example 1
Sales taxes, value-added taxes (VATs), excise taxes, and customs charges are indirect taxes. These taxes are often levied on the sale or use of products and services rather than individuals' or corporations' income or wealth.
Example 2
Assume a company sells a product for $100; the sales tax is 10%. The customer will pay $110 for the merchandise, with $10 going to the government as sales tax.
In Sentences
- Consumers pay indirect taxes as part of the cost of products and services.
- Governments rely on indirect taxes to fund public services and infrastructure projects.