Answer Posted / yasmeen khan
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
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