Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which tax is typically categorized as an indirect tax?

1. Capital gains tax

2. Income tax

3. VAT (Value Added Tax)

4. Corporation tax

The correct answer is: VAT (Value Added Tax)

Value Added Tax (VAT) is categorized as an indirect tax because it is collected by businesses on behalf of the government from consumers at each stage of the supply chain. This means that the burden of the tax is ultimately passed on to the final consumer, making it indirect. The tax is charged on the value added to goods and services at each stage of production and distribution. In contrast, capital gains tax, income tax, and corporation tax are considered direct taxes. Direct taxes are levied on the income or profit of an individual or entity, meaning the taxpayer is responsible for paying the tax directly to the government based on their income or gains. These taxes are not passed on to consumers, as is the case with VAT.