When you buy a loaf of bread, sugar, a new phone, fuel, Netflix, or a bottle of beer you may not notice it, but you have just paid a tax. Not a direct one like income tax, where you know exactly how much is deducted from your salary, but an indirect tax.
Indirect taxes are those whose burden does not rest on the person who initially pays them. Instead, the tax is passed on to another party usually the consumer. For example, a business pays import duty on goods it brings into the country, but that cost is ultimately transferred to you through higher prices.
Common forms of indirect taxes include Value Added Tax (VAT), import duties, and excise duties on goods such as alcohol and cigarettes.
So why do governments love them, and why do economists sometimes criticize them? Let’s break down their merits and demerits.
MERITS OF INDIRECT TAXES
- Wide coverage – Since they are based on expenditure, they cover all classes of people since everyone must spend.
- Elastic – The government can easily vary the tax rates from time to time as per the needs of the economy.
- Economical – Those making returns are charged with the responsibility of paying the money to the government hence the governments cost of collection is minimal.
- Diversity – These taxes can be levied on a wide variety of goods and services. This diversity increases the revenue collected by the government.
- Less Evasion – The person charging the tax acts like an agent of the government he/she collects money from buyers hence such taxes are not a cost to him since the burden falls on the buyer. And because the taxes are included in the prices collect ability is high.
- Economic Policy Tool – Indirect taxes can be used to promote exports and discourage imports by taxing imports and making exports tax free, hence building the domestic market.
- Social welfare – Indirect taxes are levied heavily on harmful commodities like Beer and Cigarettes, which reduce their consumption.
DEMERITS OF INDIRECT TAXES
- Uncertainty – Since they are based on expenditure government revenue is uncertain because it is not easy to tell how much people will spend in any period.
- Regressive – The rich and the poor pay tax at equal rates in so doing the poor pay a bigger proportion of their wealth than the rich hence the burden is more on the poor than the rich.
- Uneconomical – They can be uneconomical to collect especially for the customs duty.The government must employ officers at all points of entry into Kenya.
- Inflation – Indirect taxes are included in the prices leading to high costs of production and high selling prices to consumers hence inflation.
- Lack of Civic Consciousness – They are paid in commodity prices therefore the public is not usually aware that they are paying taxes They will not therefore be much concerned with allocation of such funds.
For citizens, the lesson is clear while indirect taxes may feel invisible, they influence the cost of living every day. For policymakers, the challenge lies in striking a balance using these taxes to fund development and regulate consumption without widening inequality.
In the end, every purchase you make is more than just a transaction. It’s also a contribution to the state. Thank you for reading this article have a fruitful day, won’t you!!!