What is Indirect Tax and Why Should You Care?

April, 2018 No Comments News

Indirect taxes are placed on goods and services which raise the price so that the consumer pays more for the item. You might want to think of indirect taxes as hidden taxes, as the indirect tax is collected by one entity in the supply chain and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product.

  • Indirect tax is a transactional tax and is levied on a transaction by transaction basis. Direct tax is tax levied on the income or profits of companies or individuals.
  • It is a way of generating income for the government, and is a consequence of doing business within a country.
  • It is a tax that is collected by an organisation, on behalf of revenue authorities, from the consumer who is the one who ultimately bears the economic burden of the tax.
  • Indirect tax has a far wider reach than direct tax, as it impacts everyone, rich or poor.
  • VAT, Customs Duty and sugar taxes are examples of indirect taxes
  • Income tax, Capital Gains Tax and Transfer Duties are examples of direct taxes.
  • As per SARS statistics, Net VAT collected has amounted to just over 25% of the total tax revenue.

Why should you care?

  • Obligation to register as a vendor if you generate revenue that falls within the applicable thresholds.
  • Not paying your tax can result in interest and penalties.
  • Cash flow implications:
    • Paying the incorrect tax– organisations do not focus on how much indirect tax they pay as a result of classifying items incorrectly.
    • Missing out on potential VAT recoveries – in the form of input VAT claims
  • Paying your VAT helps generate revenue for the government, which then allows it to execute on its mandate

“The only things certain in life is death and taxes”