Do economics and finance-related terms and concepts like the residential status for income tax or derivatives confuse you? Well, don’t worry! However, before you go into the deeper concepts it’d be better if you took the time to understand the basic fundamentals. This is where we run into one of the most important macroeconomic concepts the indirect tax. An indirect tax is a tax that is imposed on goods and services, rather than on individuals. Indirect taxes are typically imposed by the government on businesses, and the cost of the tax is passed on to consumers in the form of higher prices. There are both advantages and disadvantages to indirect taxes. So let’s find out about them in detail:
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Advantages of indirect tax:
- Convenience
Indirect taxes are generally easier to collect than direct taxes, as there are fewer checks and balances in the system. This is because indirect taxes are levied at the point of consumption, thus eliminating the need for a taxpayer to declare his or her income and pay tax on it. While direct taxes may be easier to collect from taxpayers, indirect taxes are less complicated since they do not require any reporting or documentation from the taxpayer.
- Ease of collection
As there is no documentation required during the collection of indirect taxes, it becomes easier for the government to collect its dues as compared to direct taxes. Indirect taxes are also easier to enforce since they do not require any documentation from taxpayers to prove their incomes or assets.
- Difficult to evade indirect tax
Indirect taxes are more difficult for individuals to evade than direct taxes. Direct taxes are levied on a specific person or entity and this makes it easier for the individual to avoid paying taxes. But indirect taxes are levied on transactions and this makes it harder for the individual to avoid paying taxes.
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- Equitable contributions
Indirect taxes have been used by most countries in the world to raise revenue from individuals, companies and institutions. These include value-added tax (VAT), excise duty and customs duties. In most countries, there is no ceiling on the amount of tax that can be imposed on these entities, which means that they have to pay whatever amount they can afford to pay without receiving any benefit in return. This means that individuals and institutions contributing their fair share of indirect taxes will benefit even if they do not use the services provided by government agencies directly.
Disadvantages of indirect tax
- Regressive
This is perhaps one of the most well-known indirect tax features. Because indirect taxation is a tax on consumption, it tends to be regressive. Poor people spend a larger percentage of their income on goods and services than rich people do. As a result, they pay more indirect taxes than they receive indirect benefits.
- Cumulative
In addition to being regressive, indirect taxes can also be cumulative because they compound over time with other taxes and fees. For example, if you pay both state and federal taxes on your income, then tax policy will tend to push up your effective tax rate over time as your income increases.
The cumulative effect of indirect taxes is even worse because the rich will have more money left over after paying their tax, while the poor still have to pay more than they should be paying.
- Not industry-friendly
In recent years, there has been an increased focus on indirect taxes, such as the goods and services tax (GST). While indirect taxes can be beneficial for the government, they often put a strain on businesses, particularly small businesses. This is because businesses have to bear the brunt of the tax, often having to pass on the cost to consumers in the form of higher prices. Indirect taxes are often seen as unfair because they disproportionately impact businesses, especially small businesses. This is one of the main reasons why many businesses are opposed to indirect taxes. While there are some benefits to indirect taxes, they are not typically seen as being industry-friendly. This is something that the government should keep in mind when designing tax policies.
