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Indirect Tax Definition

September 28, 2023
Bill Kimball

No country has adopted a tax with the base of the flat tax, although many have income taxes with only one rate. In general, a direct tax is one imposed upon an individual person or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes such as a sales tax or a value added tax are imposed only if and when a taxable transaction occurs. 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.” Examples of indirect taxes are excise tax, VAT, and service tax. Examples of direct taxes are income tax, personal property tax, real property tax, and corporate tax.

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  • Many tax analysts regard stamp taxes as nuisance taxes; they are most often found in less-developed countries and frequently bog down the transactions to which they are applied.
  • One of the sharpest criticisms of indirect taxes is that they are not equitable.
  • However, the direct tax doesn’t cover all sections of society.
  • In its first case considering the issue, Hylton v. United States , the justices who wrote opinions included only capitation and land taxes within the category of direct taxes.
  • Examples of direct taxes are income tax, personal property tax, real property tax, and corporate tax.

For example, the import duty on a television from Japan will be the same amount, no matter the income of the consumer purchasing the television. And because this levy has nothing to do with a person’s income, that means someone who earns $25,000 a year will have to pay the same duty on the same television as someone who earns $150,000; clearly, a bigger burden on the former. But many consider them to be regressive taxes as they can bear a heavy burden on people with lower incomes who end up paying the same amount of tax as those who make a higher income.

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For example, the minimum coverage provision in the Patient Protection and Affordable Care Act requires most individuals to either obtain health insurance or make a payment to the Internal Revenue Service. The required payment for going without health insurance in the ACA is a tax on those who choose to remain uninsured, not a head tax on those who simply exist, or a tax on land ownership, or a tax on personal property. From the beginning, the Supreme Court has understood only very few taxes to be subject to the apportionment requirement.

Can I claim USC back?

You may refund tax and USC to an employee under certain circumstances. You must record any refunds made in the employee’s payroll record. Advice about refunding Pay Related Social Insurance (PRSI) can be found in the Department of Social Protection (DSP).

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Other Types Of Direct Taxes

There are several objectives in accounting for income taxes and optimizing a company’s valuation. A sales tax is a consumption tax imposed by the government on the sale of goods and services. By contrast, income tax is the clearest example of a direct tax, since the person earning the income is the one immediately paying the tax. Admission fees to a national park are another clear example of direct taxation. The gist of the distribution of Direct tax vs Indirect tax lies in the shifting.

  • In this sense, indirect taxes such as a sales tax or a value added tax are imposed only if and when a taxable transaction occurs.
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  • Besides, the government charges excise duty on goods and services produced within India for domestic consumption.
  • The good thing is that the tax rate is high for harmful products to dissuade people from using them.
  • Indirect taxes like excise taxes are not neutral because they target specific industries and activities, like cigarettes and alcohol.
  • It is in this sense that direct taxation is opposed to indirect taxation.
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Estate tax, where the object is the total estate left by the deceased. Inheritance taxes sometimes take into account the personal circumstances of the taxpayer, such as the taxpayer’s relationship to the donor and his net worth before receiving the bequest. Estate taxes, however, are generally graduated according to the size of the estate, and in some countries they provide tax-exempt transfers to the spouse and make an allowance for the number of heirs involved. In order to prevent the death duties from being circumvented through an exchange of property prior to death, tax systems may include a tax on gifts above a certain threshold made between living persons . Taxes on transfers do not ordinarily yield much revenue, if only because large tax payments can be easily avoided through estate planning. Until 1913, a tax on either personal or real property income was effectively forbidden because such taxes were considered direct and not easily apportioned.

Direct Taxation In Other Countries

There are also concerns that indirect taxes can be used to further a particular government policy by taxing certain industries and not others. For this reason, some economists argue that indirect taxes lead to an inefficient marketplace and alter market prices from their equilibrium price.

  • Inheritance taxes sometimes take into account the personal circumstances of the taxpayer, such as the taxpayer’s relationship to the donor and his net worth before receiving the bequest.
  • If the importer goes on to resell the good to a consumer, the cost of the duty, in effect, is hidden in the price that the consumer pays.
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  • Some excises and customs duties are specific—i.e., they are levied on the basis of number, weight, length, volume, or other specific characteristics of the good or service being taxed.

The Court held a tax on “carriages” to be indirect because it applied to the use of the carriage rather than to the property itself, an arguably nuanced distinction. Unlike direct taxes where documents need to be accomplished and filing is required, indirect taxes are paid the moment a consumer buys a product. The tax is collected by the supplier and paid to the government. An indirect tax is collected by one entity in the supply chain and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product.

Classes Of Taxes

Yet, tax collection can be expensive depending on the efficiency of the fiscal administration. Running the tax collection office have some administrative costs , in particular when different tax rates are applied. Moreover, direct taxes can be evaded whereas indirect taxes cannot be evaded . Unlike direct taxes such as income tax or corporate tax that taxpayers pay directly to the government, consumers pay indirect taxes when they buy goods and services. Intermediaries such as retailers collect indirect taxes from consumers, who bear the tax’s ultimate economic burden. Sales tax, excise tax, value-added tax , and goods and services tax are examples of indirect taxes that are applied to the sale of goods and services. For instance, customs duty is a tax imposed on imported and exported goods to and from the country.

Indirect taxes are placed on goods and services such as imports, fuel, liquor, and cigarettes. Taxes like this are considered indirect because they are paid indirectly by the final consumer who enjoys the use of the goods or services, and are collected by an intermediary, like a retailer or a manufacturer. Direct tax and indirect tax differences are equitable because they are levied on individuals, according to their ability to pay. However, the direct tax doesn’t cover all sections of society. In the context of income taxes on wages, salaries and other forms of compensation for personal services, see, e.g., United States v. Connor, 898 F.2d 942, 90-1 U.S. Indirect taxes are basically taxes that can be passed on to another entity or individual.

Tax Data

Some indirect taxes are also referred to as consumption taxes, such as a value-added tax . There is no consensus among the academic literature to designate if direct taxation is more efficient or not. Earlier works based on static models favour direct taxation whereas the recent literature, based on neoclassical growth models, shows that indirect taxation is more efficient. The conclusions of these debates are that the answers are mostly conjectural, depending on the economic structure. See Article I, Section 8, Clause 1.As “indirect” taxes, they do not apply directly to humans. Although the ultimate purchaser suffers the tax, the incidence is thought to fall primarily on the importer, and therefore it is considered to be indirect. Excises commonly apply to tires, telephone charges, gambling, employment, and corporate income.

What are the 12 types of taxes?

Learn about 12 specific taxes, four within each main category—earn: individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes; buy: sales taxes, gross receipts taxes, value-added taxes, and excise taxes; and own: property taxes, tangible personal property taxes, estate and inheritance …

Apportionment means that citizens of relatively wealthy states must pay at lower rates than citizens of relatively poor states in order to make the total payment for states of equal population come out the same. Such a tax regime is difficult to defend morally, particularly in an America in which the income distribution is increasingly skewed in favor of a very small number of extraordinarily wealthy Americans. A direct tax applies to land or directly to humans “without regard to property, profession, or any other circumstance.” Hylton v. United States ; see also NFIB v. Sebelius . The apportionment requirement, which also governs representation in the House of Representatives, became the compromise. An indirect tax is passed off to the consumer as part of the purchase price of a good or service. A state with a population that is 75% of the size of another state’s, for example, would only be required to pay direct taxes equal to 75% of the larger state’s tax bill. Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting.

In earlier centuries, taxes on consumer durables were applied to luxury commodities such as pianos, saddle horses, carriages, and billiard tables. Today a main luxury tax object is the automobile, largely because registration requirements facilitate administration of the tax.

Taxes may vary by an object’s value or the taxpayer’s income so long as the rates are uniform. They may even apply to objects or transactions found only in some states, such as snow tires in the north or beach umbrellas in coastal states. The refrigerator’s real value is actually less than that, but because a VAT has been added (usually 10% to 20%), the sale price is now $500. If John looks at his receipt, he will see the actual price of the refrigerator before the tax was added. It is the manufacturer of the unit or item who collects the tax from the sale price and pays it to the government.

Direct Tax vs Indirect Tax

Few Supreme Court decisions have applied uniformity and none has invalidated a tax because of it. Essentially, the geographic element of uniformity applies in a laxer manner if the natural geographic variations among states justify a lack of uniformity or if a particular state’s behavior causes it. For example, the Court upheld a charge on immigration through sea ports though it had no impact on land-locked states, finding that there was substantial uniformity. In 1927, the Court upheld the estate tax although it ultimately applied differently to Florida. The difference, however, resulted from a particular Florida statute which created the lack of uniformity.

Regressive, Proportional, And Progressive Taxes: What’s The Difference?

Taxes, direct or indirect, are assessed on expenditure incurred or income earned. Indirect tax increase the total amount you have to pay for some products or services. Sometimes, it could be shown separately from the price of the product or could be included in the price. For instance, the service tax paid on food bills is shown separately, while the tax paid on petrol is included in the price of the product. While it is clear how apportionment works, it was less clear at the time of the Founding which kinds of taxes qualified as “direct,” and so were subject to apportionment. According to Madison’s notes of the proceedings of the Constitutional Convention in 1787, Massachusetts delegate Rufus King at one point “asked what was the precise meaning of direct taxation?

Some extent of economic and social justice is achieved because the direct tax is based on the ability to pay. Net worth are levied on the total net worth of a person—that is, the value of his assets minus his liabilities. As with the income tax, the personal circumstances of the taxpayer can be taken into consideration. Direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be. Excepting Pollock, the Court has been right all these years to define the category of direct taxes very narrowly.

Direct Tax vs Indirect Tax

The good thing is that the tax rate is high for harmful products to dissuade people from using them. Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically based on the taxpayer’s ability to pay as measured by income, consumption, or net wealth. What follows is a description of the main types of direct taxes. Contrary to indirect taxes such as value-added taxes, direct taxes can be adjusted to the ability to pay of the taxpayer according to his status (income, age…). So, direct taxes can be progressive , proportional or regressive according to their structure.

What Is A Direct Tax?

According to the Income Tax Act, “individuals” also include HUFs, trusts, cooperative societies, and all artificial judicial persons. Taxable income means the total earned income minus all applicable exemptions and deductions. Income tax is payable when the net income crosses the minimum taxable limit and is paid according to the differing rates announced in the Union Budget for every slab in a financial year. Several economic experts, however, distinguish between the indirect and direct tax and indirect tax difference on the basis of assessment, instead of the point of assessment.