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Indirect taxes

In case of indirect tax, the incidence and impact fall on different persons. For example, sales taxes, customs duty, excise duty etc.



The owner of the Sweet bread bakery Mr. Ravi manufactures bread and sells at  15 per pack. Out of which 1 rupee 60 paisa is towards tax. Though Mr. Ravi will have to pay the tax which means the incident of paying the tax is on Mr. Ravi, but the real impact will be on the buyers. Now, let’s say Mr. Narayan Rao earned in the year 2012  10 Lacs annually and Mr. Nadim Ahemad earned only  50,000 per annum. Both buy bread at price  15 which probably includes some part of the payment towards tax. Here, the same amount of tax is levied on both the people irrespective of their income. So, in this example is the incident of tax is on Mr. Ravi and impact on rent is on the buyers Narayan and Nadim.



  • Difficult to evade tax: Since indirect taxes are assessed at flat rates and realized at appropriate points, such as at the factory site in case of an excise duty or at a point of entry in case of imports, it is difficult to evade tax.
  • Convenience: There is convenience in assessment as indirect taxes are at a fixed rate on the prices of commodities.
  • Not a burden: As it is a part of the price, consumers may not even realize the amount or fact of his payment of tax. And as the amount of tax is often small, it will not be a burden to the consumers.
  • Promotes equality: Commodity taxes are levied on ad valorem basis (on the basis of value). The tax is higher on high priced luxury goods and lower on low priced commodities and for necessaries. This reduces inequalities of income.
  • Social welfare: Indirect taxes on drinks, narcotics and tobacco discourage their consumption and thus, serve a social purpose.


  • Regressive: The rich and the poor are taxed equally. That is, the poor are taxed on necessaries and the rich regressively on luxuries.
  • Lack of social consciousness: Since the tax payers do not feel the burden of tax, they do not create social awareness.
  • Uncertain: There is always a degree of uncertainty attached to the proceeds of indirect taxes.
  • Uneconomical: The Government has to incur huge expenditure on the collection of these taxes.
  • Illegal evasion: Indirect taxes can be evaded by smuggling, falsifying accounts etc.

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