Indirect Tax

Indirect Tax Definition

Indirect tax, also known as consumption tax, is the type of tax which are not directly borne by the person, whereas the incidence of such taxes is passed on to the end consumer of goods or services by adding such taxes in the value of those goods or services, like Excise duty, Service tax, VAT, etc.

In simple words, it is a type of tax that can be transferred to another entity or individual and begins with taxes imposed on the manufacturer, who then passes it over to the customers. It is part of the supply chain. The consumers pay for the taxes indirectly by paying more for the product.
The US charges Indirect taxes at a subnational level. State also has the authority to impose its taxes. Apart from state, local jurisdictions also have the authority to impose sales taxesSales TaxesThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more.

Indirect Tax

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Types of Indirect Taxes

Below are the types of indirect taxes.

Indirect Taxes Types

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  1. Service Tax – This tax is collected from the individual or entities providing services like consultancy, legal, and other such services. This tax is payable as soon as the service is offered.
  2. Excise Duty – Excise duty is a tax on manufacturing; manufacturer have to pay it, but often pass on to the customers. It applies to those goods manufactured within the country. This tax is liable as soon as goods are manufactured.
  3. VAT (Value Added Tax) – The VATVATValue-added tax (VAT) refers to the charges imposed whenever there is an accretion to a product's usefulness or value throughout its supply chain, i.e., from its manufacturing to its final selling point. It is an indirect tax levied on the product more applies to the sale of movable goods within the country. As the name implies Value-added services, the cost of goods is increased at every stage where the value is added. The VAT is the tax levied on final consumption and is borne by the customer at the final consumption stage.
  4. Customs Duty – This tax applies to the goods imported into the country. In some cases, it may also apply to the goods exported out of the country.
  5. Securities Transaction Tax – It is commonly known as STT. It is also a form of indirect tax and levied when securities are sold/purchased from the exchange. Securities can be defined as stocks, bonds, mutual funds.
  6. Stamp Duty – This tax is mainly applied while buying and selling of immovable properties
  7. Entertainment tax – This type of tax applies to every transaction that is related to entertainment. For example – movies, sports, stage shows, exhibitions


Let us now take examples of indirect taxes to understand this concept.

Example #1

To understand indirect tax let us consider an example of excise duty, a form of indirect tax

Consider that the government of the USA taxes 10% of any indoor spa services. So if an individual goes to take this service and is charged $100 for each sitting, then they will have to pay $10 as excise for each sitting they take (100 X 10%). If they charge $300 for each sitting, then the tax that would have to be paid is $30

Example #2

Assume you wish to buy a pack of cigarettes. In the USA, the state charges $4 on each pack in addition to taxes already included or irrespective of the original retail price. Apart from this the New York already has excise tax. So now the total of the total tax is $5.

So assume that there are different types of cigarettes and the price of one pack is $2 and the price of the second one is $4 then the total price including the total taxes will now be $6 and $8

It is a classic example of taxes applied to specific products. Here the main purpose is to reduce or stop citizens from buying or using harmful products. The motive is to increase taxes and reduce consumption.



  • Constant taxes for all – Even though taxes are high on luxury products but the primary products, the amount of taxes is the same. And no comparison is made even if it is purchased by a wealthy individual or a needy individual. For example taxes on basic goods like salt, sugar
  • Steady flows – Taxes that are charged on elastic goods and services are uncertain and may not generate a lot of revenues for the government.
  • Non-friendly – When the government charges taxes on raw materials, it indirectly curbs manufacturing and makes it unfriendly. It, in turn, increases the cost of production and increases the cost of the products.


Indirect taxes have large numbers of pros and cons. It is, however, necessary to understand it from the perspective of the business. These taxes are present in all forms of the company’s business. They have a severe impact on the raw material, costs, total cash flowTotal Cash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, profitability, production, volume, and ultimately on the total shareholder’s value to stay ahead in the competition.

Most of the countries are now moving towards convergence and adopting one tax system for all these forms of indirect taxes. Countries like India have already adopted these changes and are reaping its benefits.

This article has been a guide to Indirect Tax and its meaning. Here we discuss the 7 types of indirect taxes along its advantages & disadvantages. You can learn more about accounting from the following articles –

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