Impact of increase in indirect taxation:

Individuals (consumers and workers)

• Higher prices - Producers may pass the cost of an indirect tax on to consumers in
the form of higher prices. The extent to which they are able to do this will depend on
the price elasticity of demand for the product. The more inelastic the demand for the
product, the more the burden of the tax falls on consumers.

• Reduced consumption - Higher prices may result in some consumers, particularly

those on low incomes, reducing their consumption of goods and services.

•Reduced consumption of demerit goods - Consumption of demerit goods, such - as

cigarettes, may fall as a result of higher indirect taxes which cause them to become
more expensive.

Producers

• An increase in costs of production - It is the responsibility of the producer to pay the

indirect tax to the government. The money paid to the government is therefore an
expense to the producer. A rise in indirect taxes will therefore have the effect of
increasing the costs of production of producers.

• An increase in the price of the product - Businesses are likely to raise their prices in
order to cover the cost of an indirect tax. As a result, they may suffer a fall in sales.

Government

• An increase in tax revenue - Higher indirect taxation should generate more tax
revenue for the government, which it can use to finance public expenditure on areas
including education and the development of infrastructure.

• An increase in government expenditure - Revenue raised from the imposition of

indirect taxes can be used to improve public services such as healthcare, leading to
higher living standards for the population.

Economy

• Higher inflation - Higher indirect taxes are likely to raise the general price level in
the economy. This is because higher indirect taxes will increase firms' production
costs, some of which will be passed on to consumers in the form of higher prices.

• A fall in the living standards of poor households - As indirect taxes are regressive in
nature, they tend to fall more heavily on the poor. Some very poor households may
not be able to afford the higher prices brought about by higher indirect taxes. They
may therefore be forced to reduce their consumption of certain goods and services,
lowering their living standards and worsening poverty.
• An increase in tax evasion - Some individuals may try to evade taxes by bringing
goods into the country illegally and selling them to consumers at lower prices on the
black market in the informal economy. This will result in lost tax revenue for the
government and may also lead to increased costs if the government is forced to
spend more money on policing the country's borders.