Unlike direct taxes, which you pay directly to the government — such as income tax or property tax — indirect taxes are collected by an intermediary, such as a business, and then passed onto the government.
Some common examples of indirect taxes include sales tax, excise duties on alcohol and tobacco, and value-added tax (also known as VAT in English, TVA in French or MWST in German).
When you purchase a product at a store, pay for a hotel room, or even buy a plane ticket, you’re almost always paying an indirect tax.
The business collects this tax as part of the transaction and then sends it to the government.
Governments often favour indirect taxes for a few reasons.
First, they’re relatively easy to collect.
Businesses handle the administrative side, bundling the tax in with the price of goods and services.
This makes the process efficient and less noticeable to consumers, who often don't even realise they're paying a tax.
Another advantage for governments is that indirect taxes can be adjusted to increase revenue without directly raising income taxes.
For example, by increasing the sales tax rate or levies on items like tobacco or alcohol, governments can boost their revenues without changing the more visible direct tax rates to which people might be more sensitive.
However, indirect taxes aren't without their critics.
Because everyone pays the same rate regardless of their income, these taxes can be regressive — meaning they can hit lower-income individuals harder than higher-income earners.
This is because lower-income households tend to spend a larger proportion of their income on taxed goods and services.
Overall, indirect taxation is a useful tool for governments to use for generating revenue.
It’s built into the everyday transactions we all make, from buying groceries to booking a flight.
Whilst it offers benefits to governments in terms of ease of collection and flexibility, it also raises important questions about fairness and economic impact.