Accounting technology / Glossary / Indirect tax

What is indirect tax?

Definition

Indirect tax is tax on the sale or consumption of goods and services rather than on income or profit. The seller adds it to the price, collects it and pays it to the tax authority, so the final consumer bears it. The main forms are VAT, GST and US sales tax; excise and customs duties are indirect taxes too.

Also calledconsumption taxtransaction tax

Compare the softwareBest indirect tax software →All 9 tax and compliance vendors →

Main types: VAT, GST, sales tax
EU minimum VAT rate: 15% standard rate
US: 45 states plus DC

How indirect taxes differ

VAT and GST are charged at every stage of the supply chain: each registered business charges tax on its sales and deducts the tax paid on its purchases, so only the value added is taxed at each step. The EU's VAT Directive sets a minimum standard rate of 15%, and each member state sets its own rates above that; the UK charges 20%. US sales tax works differently: it is charged once, on the sale to the final customer, by states and local jurisdictions, so business buyers usually give an exemption certificate instead of paying and reclaiming it. Forty-five states and the District of Columbia have a statewide sales tax, and since the Wayfair decision in 2018 remote sellers can owe it in states where they have no presence. Software works out the rate for each transaction, files returns and handles e-invoicing: Avalara, Fonoa, Anrok, Kintsugi and Zamp.

Common questions

What is the difference between direct and indirect tax?+

Direct taxes, such as income tax and corporation tax, are charged on the person or company that earns the income. Indirect taxes are charged on transactions and collected by sellers, with the cost passed on to customers.

Is VAT the same as sales tax?+

No. VAT is charged at each stage with credits for tax paid on business purchases; sales tax is charged once on the final retail sale. Both end up borne by the consumer.

Who is responsible for indirect tax, the seller or the buyer?+

Usually the seller, who must charge, collect and pay it. Under reverse charge rules, common for cross-border business supplies in the EU, the business buyer accounts for the tax instead.