The term indirect tax has more than one meaning.

In the colloquial sense, an indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. 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."^[1]

An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.^[2] Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed on.

In addition, the U.S. Government deems VAT to be a direct tax for purposes of the Vienna Convention on Diplomatic Relations, as it does the London Congestion Charge so diplomats are exempt. The U.S. Department of State's Office of Foreign Missions operates a reciprocity policy in the matter of sales tax exemption. Another important definitional conflict has simmered at the World Trade Organization in the context of the granting of export tax rebates by the United States (FSC and DISC corporations).

In the early years of the United States, there was strong opposition to the federal government levying direct taxes. As a result, the government resorted to tariffs, an indirect tax.

The term indirect tax has a different meaning for U.S. constitutional law purposes. See Direct tax; see also Excise.

Notes

See also

• Direct tax
• United Kingdom Corporation Tax
• Income tax in the United States

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