Indirect tax

The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax (such as sales tax, a specific 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 consumer). 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 [1] taxpayer to someone else, whereas an indirect tax can be." An indirect tax may increase the price of a good so that consumers are actually paying the tax by [2] paying more for the products. 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. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect. The term indirect tax has a different meaning for U.S. constitutional law purposes: see direct tax and excise tax in the United States.

Features
1. Indirect taxation is policy often used to generate tax revenue. Indirect tax is so called as it is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for enjoying services. 2. Indirect tax is broadly based since it is applied to everyone in the society whether rich or poor. 3. The tax payer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. 4. In the case of a direct tax, the taxpayer has to bear the burden of tax personally; in case of indirect tax the taxpayer and the taxbearer are not the same person. [edit]Excise

duty
[3]

Excise duty is a governmental tax meant for producers and manufacturers on certain goods. Manufacturers are considered to be: 1. Entities who manufacture goods themselves 2. Entities who pay a fixed salary for other to manufacture these goods

3. Entities who outsource manufacturing, but manufacturing takes place from their name To cover these costs, manufacturer adds them to COGS (costs of goods sold), where the buyer ends up paying for these costs. Thus, it is considered to be an indirect tax. [edit]Notes

Direct tax

The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. However, there are other definitions as well, under which taxes paid directly from individuals to the government are not legally classified as direct taxes, as described below.
Contents
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1 General meaning 2 U.S. constitutional law sense 3 Direct taxation in other countries 4 References

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4.1 Sources 4.2 Notes

5 See also

[edit]General

meaning

A direct tax is one imposed upon an individual person (juristic or natural) or on property, as distinct from a tax imposed upon a transaction. Indirect taxes such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable transaction occurs; people have the freedom to engage in or refrain from such transactions; whereas a direct tax is imposed upon a person, typically in an unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the person's very life or existence, or a property tax which is imposed upon the owner by virtue of ownership, rather than commercial use. Some commentators have argued that "a direct tax is one that cannot be [1] shifted by the taxpayer to someone else, whereas an indirect tax can be." The unconditional, inexorable aspect of the direct tax was a paramount concern of people in the 18th century seeking to escape tyrannical forms of government and to safeguard individual liberty. An 18th century writing about this kind of taxation explained:

The power of direct taxation applies to every individual ... it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments. ... The power of direct taxation will further apply to every individual ... however oppressive, the people will have but this alternative, either to pay the tax, or let their property be taken for all resistance will be vain.
[2]

[edit]U.S.

constitutional law sense

In the United States, the term "direct tax" has acquired specific meaning under constitutional law: a [3] direct tax is a tax on property "by reason of its ownership" (such as an ordinary real estateproperty tax imposed on the person owning the property as of January 1 of each year) as well as a capitation [4][5] (a "tax per head"). Income taxes on income from personal services such as wages are indirect [6] taxes in this sense. The United States Court of Appeals for the District of Columbia Circuit has

stated: "Only three taxes are definitely known to be direct: (1) a capitation [ . . . ], (2) a tax upon real [7] property, and (3) a tax upon personal property." In National Federation of Independent Business v. Sebelius, the Supreme Court held that a penalty directly imposed upon individuals for failure to [8] possess health insurance, though a tax for constitutional purposes, is not a direct tax. The Court reasoned that the tax is not a capitation because not everyone will be required to pay it, nor is it a tax [9] on property. Rather "it is triggered by specific circumstances." In the United States, Article I, Section 2, Clause 3 of the Constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population. After the 1895 Pollock ruling (essentially, that taxes on income from property should be treated as direct taxes), this provision made it difficult for Congress to impose a national income tax that applied to all forms of income until the 16th Amendment was ratified in 1913. After the Sixteenth Amendment, no Federal income taxes are required to be apportioned, regardless of whether they are direct taxes [10] (taxes on income from property) or indirect taxes (all other income taxes). [edit]Direct

taxation in other countries

Tax policy in the European Union (EU) consists of two components: direct taxation, which remains the sole responsibility of Member States, and indirect taxation, which affects free movement of goods and the freedom to provide services. With regard to European Union direct taxes, Member States have taken measures to prevent tax avoidance and double taxation. EU direct taxation covers, regarding companies, the following policies: common Consolidated Corporate Tax Base, common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (to avoid withholding tax when the dividend qualifies for application of the EC Parent-Subsidiary [11] Directive, Financial transaction tax, interest and royalty payments made between associated companies and elimination of double taxation if the payment qualifies for application of the EC Interest [12] and Royalties Directive. Regarding direct taxation for individuals, the policies cover taxation of savings income, dividend taxation of individuals and tackling tax obstacles to the cross-border provision of occupational pensions.

DYK: Difference between direct and indirect tax

Direct tax This kind of levy is payable directly by the individual or company, whose obligation it is to pay. It cant be transferred to anyone else. The most common form of direct tax is income-tax, which has to be paid by individuals, hindu undivided families (HUFs), cooperative societies and trusts on the total income they earn. This can include income from salary, income from house property, business and professional income, capital gains and income from other sources such as interest. The tax liability depends on the residential status and gender of the person being taxed. Companies are also taxed on the income they earn. For Indian companies, tax is obligatory on income earned in India and overseas, whereas in case of non-resident companies tax has to be paid on money earned in India.

A house owner has to pay property tax, which is applied as per state rules. Lastly, if you receive a gift in excess of Rs.50,000 per year, you will have to pay gift tax. The onus of declaring income for the purpose of calculating direct tax liability is on you. Nonpayment or tax evasion can incur heavy penalty. Indirect tax Indirect tax is levied by the government and collected by an intermediary from the person who bears the ultimate economic burden of the tax. What this means is that if you are purchasing goods or services from anywhere and you are the final consumer, then the tax levied on the manufacturer will ultimately get passed on to you. This kind of tax increases the total amount you pay for something. Sometimes it may be represented separately from the price of the item or may be shown together with the cost of the product itself. For example, the service tax paid on a food bill is shown separately, but tax paid on fuel is included in the product price. There are many forms of indirect taxes. Customs duty is a tax levied on items imported (and exported out of) into India. The central government also charges an excise duty or a tax payable on goods manufactured in India for domestic consumption. Service tax is a charge applied on services such as food and beverage, travel and recreation by the provider, while value-added tax is applied at each stage of sale of a product and the final tax is borne by the last consumer. Lastly, there is securities transaction tax levied on all transactions done on a stock exchange. The reason why these are called indirect taxes is because unlike direct taxes, the person paying the tax to the government can pass it on to another person. They are charged first at the manufacturers level, but ultimately get passed on to the consumer, which is you.