Indirect tax is the levying of tax on goods rather than the person selling the goods. A prime example of this is the tax of fuel, liquor and cigarettes. Even what is commonly known as ‘road tax’ in the UK, is simply an indirect taxation on the amount of Co2 produced by a vehicle.
These kind of taxes are sometimes justified by the potential damage that they could do, and by increasing their price governments are effectively stopping people using them so much. Although the merits of this are questionable in all situations, they are still having an effect on how companies are having to deal with the difference. They could also be import duties and custom duties on good entering a country.
This is not simply to stop people doing certain things either, it also acts as an enabler in many situations.
For instance in Nigeria they have increased the customs taxation on imported refined sugar to 80% from 35%, whilst taking all custom duties off the equipment used to make it. The thinking behind this is to increase the amount of refined sugar being created in Nigeria. This may be a noble cause for the Nigerian farmers, but in reality hits external sugar importers hard, which then ratchets up the price that consumers need to pay to offset this tax increase.
The importance of this for countries is huge, even more so than the much discussed corporate income tax that many multinationals have been maligned for not paying. This is because we have seen that there is actually significantly more gained by countries from their indirect taxes in this sense, than in their regular corporate tax collection. In fact this is so important that they can often make up 30% of total tax in countries.
This could come from VAT or GST added value that is collected by the government or even simply the use of custom duties like we have seen in Nigeria.
The knock-on effect of this is simply that consumers are often forced to bare the majority of these costs and therefore buy less of a particular product due to the increased pricing. We have seen this with aggressive increases in the price of fuel duty in the UK, which has not only increased the cost of filling up a car, but also the transportation costs for almost every single product that needs to be moved.
It is not always negative though, with many countries allowing companies to bypass or gain favourable rates on these taxes in return for relocation to certain areas. This has been at least part of the reason for the recent increase in the amount of Tax Inversions, especially to countries like Ireland and the UK. Here the amount of indirect and direct tax is lower, meaning that countries can take advantage of this.
With the increase in connectivity and unilateral trade agreements, by moving operations to another country which has better custom rates, companies have the opportunity to maximize their profits without being levied by excessive indirect taxation.