1. What is meant by indirect taxes?
An indirect tax is a tax levied on goods and services rather than on a person's income. While consumers ultimately pay the cost, the tax is collected and given to the government by an intermediary, such as a shopkeeper or business. [1, 2]
Here is how indirect taxes work:
- The Flow: You do not pay the government directly. Instead, you pay the tax to the seller when you buy a product. The seller then pays the government.
- Examples: Common indirect taxes include the Goods and Services Tax (GST) and customs duties (fees charged on items brought across borders).
- Real-World Analogy: Think of a movie ticket. If the ticket costs $10 and there is a 10% tax, you pay $11 to the theater. The theater keeps $10 and passes the extra $1 to the government.
- Impact: Indirect taxes are considered regressive. This means the tax rate is the same for everyone. A $1 tax takes a much bigger percentage of a poor person's money than a rich person's money. [2, 7]
You can read more about how these are applied in your area by checking the Investopedia Indirect Tax Guide.
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