Legal Definitions - indirect tax

Indirect Tax

An indirect tax is a type of tax where the person or entity legally responsible for sending the tax money to the government is different from the person who ultimately bears the economic cost of that tax. In simpler terms, a business or intermediary collects the tax from a consumer at the point of sale or transaction and then remits it to the government. The burden of the tax is "indirectly" passed on to the end-user, meaning the consumer pays it as part of the price of goods or services, but the seller is the one who actually sends the money to the tax authorities.

Here are some examples:

• Sales Tax on a New Laptop: Imagine you purchase a new laptop from an electronics store. When you pay for the laptop, the store adds a percentage of the price as sales tax to your total bill. You, the customer, pay this sales tax as part of your purchase. The electronics store then collects this money from you and is responsible for sending it to the state government. You bear the cost of the tax, but the store is the one directly remitting it to the tax authorities.

• Value Added Tax (VAT) on a Hotel Stay: In many countries, when you book a hotel room, a Value Added Tax (VAT) is included in the price of your stay. The hotel calculates the VAT on the room rate and any additional services and includes it in your final bill. You, the guest, pay the full amount, including the VAT. The hotel then collects this VAT from all its guests and periodically remits the total collected VAT to the government. The hotel acts as the collector, while you are the ultimate payer of the tax.

• Excise Tax on Gasoline: When a consumer fills their car with gasoline, a portion of the price they pay at the pump includes an excise tax levied by the government. The gas station incorporates this tax into the per-gallon price of the fuel. The consumer pays this higher price, effectively paying the excise tax. The gas station, having collected the money from the consumer, then remits the excise tax to the government. The tax is built into the product's cost, making it an indirect payment by the consumer.