What Is Indirect Tax?

GST, HST, and VAT (in some countries) are the types of Indirect taxes.

Read more about GST/HST: Click Here

An Indirect Tax is imposed on goods or services instead of directly on an individual or company.

For instance, when making a purchase at Walmart, a 13% tax (in Ontario) is added to the total bill. This tax is not paid directly to the government but to Walmart, hence its classification as an indirect tax.

How does an Indirect Tax work?

The store levies an indirect tax on each customer, manifesting as an additional cost on their purchases. The percentage imposed varies across provinces, comprising a fixed 5% federal portion applicable nationwide. Additionally, each province adds its own percentage, resulting in different rates (e.g., 8% in Ontario, totaling 5% + 8% = 13%).

Subsequently, the store completes a tax return, remitting the collected tax funds to the government after taking ITC (Read more about ITC: Click Here).

Indirect taxes offer the taxpayer the ability to transfer the responsibility of payment to someone else, in contrast to direct taxes. A prime example of a direct tax is the Federal Income Tax, wherein there is no intermediary between the taxpayer and the government.

Regressive Nature of an Indirect Taxes

Governments commonly employ indirect taxes as a means of generating revenue. These taxes function as uniform fees imposed on taxpayers without regard to their income levels, resulting in a scenario where individuals of varying financial statuses are obligated to pay the same amount. However, many view these taxes as regressive, as they disproportionately burden individuals with lower incomes.

For instance, 13% HST in Ontario applies to all regardless of the consumer’s income. Consequently, someone earning $25,000 annually would bear the same tax burden as someone with a $150,000 income, highlighting the perceived inequity of such taxes.