Indirect Taxes: Types, Advantages and Disadvantages

Last updated on August 3rd, 2023 at 12:13 am

Indirect Taxes are taxes levied on locally made, imported and exported goods and services.

These taxes imposed on goods and services are layer on transferred to consumers in form of high prices, and this is why they are called indirect. The payers of these taxes do not bear their final brunt.

Types of Indirect Tax

1. Excise Duties

These are levied on locally made goods.

2. Import Duties

Also known as tariffs, they are imposed on foreign made goods coming into a country.

3. Export Duties

They are levied on locally made goods taken to other countries.

4. Purchases and Sales Taxes

These are levied on certain durable goods and are paid by those who purchase and sell these goods.

Advantages of Indirect Taxes

1. They Are Used To Correct Deficit Balance of Payments

This is done by raising import duties and lowering both export and excise duties.

2. Their Collection is Less Difficult

This is in comparison with direct taxes; because the real tax payers of these forms of tax do not realise that they are paying taxes when they buy goods and services on which these taxes are imposed.

3. They Cause Less Squabbles

They are not collected with force and therefore, cause no or less friction.

4. They March be Used to Combat Inflation

This can be done by raising export duties and lowering both import and excise duties thereby making more goods available.

5. They Are Used To Protect Infant Industries

This can be done by raising the import duties thereby curtailing the rate at which foreign made goods come into the country to compete with locally-made ones.

6. Indirect Taxes Yield More Revenue

The money collected from these sources constitute a substantial portion in a country’s budget in a particular period of time.

7. They Are Not Easy to Evade

This is because the real payers of these taxes do not know that they are doing so when they buy goods upon which these taxes are imposed.

8. Checking The Production And Consumption of Harmful Goods

This is done by imposing heavy taxes on their production and importation to discourage their producers and importers.

9. They Have Less Effects

Their burden is shared among all sections of the society.

10. There is No Exemption

Payment of indirect taxes has no exemption so long as everybody buys the goods on which taxes are imposed; therefore, no favouritism in their payment.

Disadvantages of Indirect Taxes

1. They Increase Prices of Goods

This is because the amount paid as taxes is shifted to the consumers in form of high prices of goods.

2. They March Cause Scarcity of Goods

This is because high tariffs may discourage people from important goods while the excise duties may also lead to stoppage of further production of certain goods.

3. Inflation

This may be the aftermath of increase in prices and scarcity of goods.

4. Indirect Taxes Are Regressive in Nature

This is in comparison with direct taxes.

5. Indirect Taxes Are Regressive in Nature

This is because both the poor and the rich buy goods on which these taxes are imposed from the same source and at the same price.

6. They Curtail Investments

High excise, import and export duties reduce the profits of businessmen thereby reducing their investment propensities.

7. They Lower People’s Standard of Living

This is because they increase the price of goods.

8. They Restrict Free Trade

Import and export duties do not allow free trade to take place.