Now that you’re gradually venturing into the world of business, you’re most probably concerned about the indirect taxes you have to pay and impose on your products. You’re not the only one bothered by them. Even large businesses are affected by it, and of course, the consumers who will purchase the products.
Unfortunately, indirect tax grows in importance, leading to a complex and frequently changing taxation system. But why is it becoming essential in society? It is because the revenue collected by the government from indirect tax is increasing.
Indirect tax can be found on every product you purchase. Depending on your country, indirect tax is often referred to as value-added tax (VAT) or goods and services tax (GST). However, these two are just a part of it. If you want to learn more about these taxes, you need to continue reading this guide.
Moreover, if you want to compute the tax on any product, you may visit apps or websites that offer their calculator for tax computation for free.
What Is Indirect Tax?
Indirect tax is a type of tax collected by a business entity from the supply chain. It is imposed on a manufacturer but is passed on to consumers as part of the price of goods and services purchased. So basically, the consumer is paying the taxes by buying the product, not the business that produces it.
How Is Indirect Tax Different From Direct Tax?
As mentioned above, indirect taxes are paid from the purchases made by the consumer. It will be collected by the businesses that sell the products. Then, they will be forwarded to the government as a tax payment. That’s how indirect taxes work.
On the other hand, direct taxes, as the name suggests, are paid by consumers directly to the government. It could be in corporate tax, income tax, wealth tax, and more.
With this said, the main difference between the two is how the taxes are paid.
What Are The Different Types Of Indirect Taxes?
Indirect taxes come in many forms, depending on what products you want to purchase. For example, the tax imposed on alcoholic beverages is different from what is on basic consumption necessities. Here are the types of indirect taxes you might need to know:
Value-Added Tax (VAT)
Value-added tax is placed at every step of production, starting from purchasing raw materials to their final purchase. It means that the government receives revenue from every manufacturing process that adds value to the product. To further elaborate the confusing taxation process, here is how VAT implementation works, assuming that the VAT rate is 10%:
- A small business manufacturer purchases a raw material costing USD$1. It will become USD$1.1 with added VAT.
- Then, the product produced with the raw material is sold to a retailer for USD$3. It will become USD$3.3 with added VAT. Only two cents will be forwarded to the government minus the previous one cent incurred during the product’s initial production. Note that the two cents are only 10% of the gross margin of USD$2.
- Lastly, the retailer will sell the product to consumers, following the above principle.
However, VAT may vary, depending on where you live. Different state or country means different VAT rate. For example, Louisiana has a different tax rate from Maine, Massachusetts, and others.
Because of its nature, VAT is full of controversy. According to experts, it only increases government revenue by placing additional costs on consumer goods instead of charging wealthy taxpayers who can afford it more.
Sales Tax
Sales tax is imposed on all goods and services you can see in the market and is only levied at the point of sale compared to VAT. So, when you plan to buy your favorite products in the department store or visit one of the best spas in town, remember that you are about to pay indirect tax in the form of sales tax.
Also, do not worry if your product will be double-taxed because it will not. As the name suggests, sales tax will only function after the sale of the product. On the other hand, VAT is added not on the sale of the product but every step of its production. Therefore, rest assured that your product won’t be double-taxed because of their difference in application.
Excise Tax
Excise tax is a special tax required on specific products, including tobacco, alcohol, and fuel. If you’re a manufacturer of these products, you are already paying this tax to purchase the necessary raw materials. Unfortunately, the excise tax will only make the product more expensive and burden consumers.
For example, the manufacturer buys a living substrate to produce alcoholic beverages. Because they need to pay indirect taxes as soon as they purchase the raw materials, they need to raise the product price, transferring the burden to their consumers.
Customs Tax
Have you noticed that the products you purchased abroad are slightly cheaper than buying the same in your country? It is because of an indirect tax called customs tax.
Customs tax is also known as tariffs. It is the tax imposed on all imported goods and is also the reason why your favorite brands abroad are way too expensive once they reach your country. Tariffs may differ, depending on which country you live in. Some countries offer higher tax rates, especially if the government sees a fast movement in the line of imported goods.
If you’re planning to sell your products overseas someday, you will need to determine the tax rate on imported goods imposed on your products.
What Are The Advantages Of Indirect Tax?
Even with many negative implications to consumers, indirect taxes can still benefit society. Here are some advantages you might want to know:
- The low-income household can still participate by purchasing even low-cost products in the market.
- Indirect taxes are not noticeable, so consumers won’t feel that the government has taxed them. However, they can still see the tax breakdown on their receipt for transparency.
- Indirect taxes are easier to collect than direct taxes.
- These taxes discourage everyone from purchasing harmful products, such as alcoholic beverages and tobacco.
Final Words
Starting a small business is not easy, even more so when governments impose indirect taxes on your products, making them more expensive than their actual value. Also, as an owner, you must apply these taxes properly on your goods and services. To do this, you will need to know the type of taxes applicable to your business, such as sales tax, VAT, or excise tax.
Also, remember that tax rates vary from state to state or country to country. So, make sure to do your little homework to avoid having errors in imposing taxes.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.
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