Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is meant by indirect tax?

1. Tax paid directly by individuals

2. Tax collected from an intermediary

3. Tax on capital gains

4. Tax imposed on corporate profits

The correct answer is: Tax collected from an intermediary

Indirect tax refers to a type of tax that is not directly paid by the individual or entity that ultimately bears the burden of the tax. Instead, it is collected by an intermediary, such as a retailer or service provider, who then remits the tax to the government. When consumers purchase goods or services, they might pay sales tax, which is an example of an indirect tax. The retailer collects this tax at the point of sale on behalf of the government. This system allows for the government to collect taxes more efficiently, as businesses are usually better positioned to handle the administrative aspects of tax collection. In contrast, direct taxes are those paid directly by individuals or entities to the government, such as income tax or property tax, where the responsibility for payment lies solely with the taxpayer. Capital gains tax and corporate profit tax are also classified as direct taxes, as they are paid directly by individuals or corporations on their respective gains or earnings.