July 2, 2020

What are Indirect Taxes? | David Gene Neugart

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Indirect taxes essentially taxes that can be forwarded to other entities or individuals. They are normally imposed on the manufacturer or supplier who then passed on the tax to consumers. Common examples largely indirect taxes are excise taxes on cigarettes and alcohol. Value Added Tax (VAT) is also an example of indirect taxes.

Types of Indirect Taxes

What many people are not aware of is that practically everyone pays taxes, especially indirect taxes. This is because taxes are imposed on almost all the products that we consume. Here are some of the types of indirect taxes.

1. Sales tax

Whenever people go to the mall or department store to store, they already will pay indirect taxes. Items such as household goods, clothing, and other basic commodities subject to such types of taxes. After payment at the counter, the final sale price padded with collecting sales tax and paying to the government store.

2. 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.

3. Customs tax

Ever wonder why the expensive imported products? This is because of the customs tax. When containers filled with bananas from other countries to enter the US, importers pay taxes (customs taxes), which is then passed on to consumers.

Example of Indirect Taxes

Let's use an example to illustrate how VAT indirect tax levied. Say, for example, John went to the store to buy a refrigerator outlet priced at $ 500. When he asked for a sales representative, he would declare the selling price, which is $ 500, and it is the right answer.

The real value of this refrigerator is actually less than it was, but because of VAT has been added (typically 10% to 20%), the selling price is now $ 500. If John looks for a receipt, he will see the actual price of the refrigerator before tax is added. It is the manufacturer of the unit or items that collect taxes from the sale price and paid to the government.