Which of the following is an indirect tax?

1. Analyze the question The question asks which option is an indirect tax. To answer it, you need to know the difference between direct and indirect taxes.

2. Explain the concept

• Direct tax: Levied directly on a person's or organisation's income or wealth. The person who is legally responsible for paying it also bears the burden, and the burden cannot easily be shifted to someone else. Examples: personal income tax, company income tax, poll tax, capital gains tax, and property tax.
• Indirect tax: Levied on goods and services (spending) rather than on income. The burden can be shifted, usually to the final consumer through higher prices. Examples: excise duties, import (customs) duties, Value Added Tax (VAT), and sales tax.

3. Step-by-step solution

• A. Poll tax is a fixed amount charged per person (a head tax). It is paid directly by the individual, so it is a direct tax.
• B. Personal income tax is paid directly from an individual's earnings, so it is a direct tax.
• C. Company tax is charged on a company's profits and paid by the company, so it is a direct tax.
• D. Excise duties are charged on certain goods produced within the country, such as alcohol and tobacco. The producer pays the tax but passes it on to consumers in the price, so it is an indirect tax.

4. Answer The correct option is D. Excise duties.

5. Exam tip Ask yourself, "Is the tax on what I earn or on what I buy?"

• Tax on earnings or wealth is direct.
• Tax on goods and services is indirect (excise, customs, VAT).

Whenever you see "duty" or "VAT" in the options, think indirect tax.