Indirect tax

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An indirect tax (such as sales tax, a specific tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."[1]

An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.[2] Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect.

The term indirect tax has a different meaning for U.S. constitutional law purposes: see direct tax and excise tax in the United States.


Indirect taxation is policy often used to generate tax revenue. Indirect tax is so called as it is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for enjoying services. It is broadly based since it is applied to everyone in the society whether rich or poor. Since the cost of the tax does not vary according to income, indirect taxation is a regressive tax, or in other words it imposes a greater burden (relative to resources) on the poor than on the rich. The taxpayer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. In the case of a direct tax, the taxpayer has to bear the burden of tax personally; in case of indirect tax the taxpayer and the taxbearer are not the same person.

Excise duty[edit]

Excise duty is a governmental tax meant for producers and manufacturers on certain goods.[3]

Manufacturers are considered to be:

  1. Entities who manufacture goods themselves
  2. Entities who pay a fixed salary for others to manufacture these goods
  3. Entities who outsource manufacturing, but manufacturing takes place from their name

To cover these costs, manufacturer adds them to COGS (cost of goods sold), where the buyer ends up paying for these costs. Thus, it is considered to be an indirect tax.


  1. ^ Britannica Online, Article on Taxation. See also Financial Dictionary Online, Article on Direct taxes.
  2. ^ Financial Dictionary Online, Article on Indirect taxes.
  3. ^ Indirect Taxes, Article on [1].

See also[edit]