Indirect Tax

Business, Legal & Accounting Glossary

Definition: Indirect Tax

Quick Summary of Indirect Tax

Indirect tax consists of taxes like sales tax and value-added tax. Unlike a direct tax, in case of indirect taxes taxpayer can transfer own tax burden to another person. Retailers pass on indirect taxes to customers in the form of augmented prices. Tax money collected is then forwarded to the government, while filing tax returns. Indirect taxes can be levied on items to name a few like fuel, cigarettes and liquor. Indirect taxes are often considered to be regressive in nature. If put in simple words, indirect taxes make poor people poorer by imposing a greater tax burden in proportion to their income. It is however argued that regressive taxation sometimes helps to override market failure.

Full Definition of Indirect Tax

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.

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

Another definition of an indirect tax is a tax that is initially paid by one individual but the burden of which is passed over to some other individual who ultimately bears that burden. For example: 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.


It may be noted that tax itself refers to a monetary charge that is levied on individuals or legal entities by a country’s government. Taxes may be either direct taxes or indirect taxes. Taxes are levied for increasing government revenue, bringing in an equitable distribution of income, repricing (to address externality issues) and proper representation.

Taxes can also be classified into the following types depending upon the proportion of tax burden in relation to one’s income.

  • Progressive
  • Proportional
  • Regressive

Under Progressive taxation, as income rises the proportion of taxes also increases. Under regressive taxation, the situation is just opposite to that under progressive taxation. It is observed that with a hike in income rate, rate of taxes declines. A proportional tax imposes same relative tax burden for all taxpayers. In other words under proportional taxation, tax and income increase in the same proportion.

Value Added Tax

Value Added Tax (VAT) is referred to as a consumption tax. It is imposed on a product whenever there occurs a value addition at any production stage and also at the point of the final sale. VAT paid by a consumer equals the cost of product minus cost of inputs used in production, that has already been taxed. VAT falls in the category of special kind of indirect tax.

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Indirect Tax. Payroll & Accounting Heaven Ltd. September 21, 2021
Chicago Manual of Style (CMS):
Indirect Tax. Payroll & Accounting Heaven Ltd. (accessed: September 21, 2021).
American Psychological Association (APA):
Indirect Tax. Retrieved September 21, 2021, from website:

Definition Sources

Definitions for Indirect Tax are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 24th April, 2020 | 2 Views.