What Is Indirect Tax? Characteristics And Common Types

Key Takeaways

• Indirect tax is a tax that businesses collect on behalf of the government from their customers, with the end consumer being the ultimate party who bears the tax burden through the sales price.
• The main types of indirect tax in Vietnam include Value Added Tax (VAT), Special Consumption Tax, Export and Import Duties, Environmental Protection Tax, and Natural Resources Tax.
• Indirect tax directly impacts a product’s pricing structure and competitive positioning, requiring CEOs to understand it thoroughly to optimize their business strategy.
• Effective management of indirect tax helps businesses minimize compliance risks and creates a strategic advantage in product pricing.

Indirect tax is a type of tax where the taxpayer (the business) is not the ultimate tax bearer. This tax is collected indirectly through businesses or intermediaries and is added directly to the sales price of goods and services. The end consumer is the one who ultimately bears the tax cost when they purchase a product or use a service. This article will clarify the mechanism of indirect tax, its most common forms, and why mastering it is a strategic management capability.

1. Core characteristics of indirect tax

Indirect tax differs fundamentally from direct tax in three basic ways, which define its unique nature and influence how businesses operate.

1.1 The taxpayer and the tax bearer are two different parties

This is the most fundamental characteristic of indirect tax. The business, as the seller of goods or services, is obligated to declare and remit the tax to the tax authority, but it does not actually bear this cost. The end consumer is the one who truly bears the tax by paying a higher price for the product. This creates an intermediary mechanism in the tax system where the business acts as a “tax collector” on behalf of the state. Understanding this role is particularly important when companies must prepare tax-related documents to prove accuracy in their collection and payment processes.

1.2 It is added to the sales price of goods and services

Indirect tax is an inseparable component of a product’s final sales price. Unlike direct tax, which only affects a company’s after-tax profit, indirect tax directly impacts market prices and the purchasing decisions of consumers. This means that any change in an indirect tax rate will immediately affect a product’s price competitiveness in the market.

1.3 It has a regressive nature

Indirect tax is applied at a fixed rate on the value of goods, regardless of the buyer’s income level. Consequently, this tax has a proportionally larger impact on individuals with lower incomes compared to those with higher incomes when they purchase the same product. This characteristic makes indirect tax an important macroeconomic regulation tool for the state.

2. How does indirect tax work?

Indirect tax is levied on the consumption of goods and services, where the tax burden can be shifted from the taxpayer to the end consumer. Classic examples include Value Added Tax (VAT) and Special Consumption Tax.

In contrast, a direct tax is levied directly on the income or assets of the taxpayer, where the taxpayer is also the tax bearer and cannot shift this burden. Typical examples of direct tax are Corporate Income Tax (CIT) and Personal Income Tax (PIT).

To illustrate how indirect tax works, consider this example of a 10% VAT in a manufacturing and retail supply chain:

1. Production Stage: A company manufactures a shirt with raw material and production costs of 100,000 VND (4.00 USD). When selling to a retailer, the company must issue an invoice with an additional 10% VAT, which is 10,000 VND (0.40 USD). The selling price to the retailer is 110,000 VND (4.40 USD), and the manufacturer will remit this 10,000 VND (0.40 USD) in tax to the government.
2. Retail Stage: The retailer purchases the shirt for 110,000 VND (4.40 USD) and decides to sell it to consumers for a pre-tax price of 150,000 VND (6.00 USD). When selling, they must also add 10% VAT on their selling price, which is 15,000 VND (0.60 USD). The final price the consumer pays is 165,000 VND (6.60 USD).
3. Final Result: The retailer collected 15,000 VND (0.60 USD) in tax from the customer. However, since they already paid 10,000 VND (0.40 USD) in input tax to the manufacturer, they only need to remit the difference of 5,000 VND (0.20 USD) to the government. Ultimately, the consumer bears the full 15,000 VND (0.60 USD) tax burden, while the businesses in the supply chain merely act as “collection agents.”

3. Common types of indirect tax in Vietnam

Vietnam’s indirect tax system is designed to achieve various macroeconomic objectives, from generating budget revenue to regulating consumption and protecting the environment.

3.1 Value Added Tax (VAT)

VAT is the most common indirect tax, levied on the value added to goods and services at each stage of production and distribution. VAT has three main tax rates: 0%, 5%, and 10%, depending on the type of goods and services. This tax is the largest source of revenue for the state budget and affects nearly all commercial transactions.

3.2 Special Consumption Tax

Special Consumption Tax is applied to certain goods and services for which consumption needs to be regulated, including alcohol, beer, tobacco, automobiles, and services like karaoke and nightclubs. The tax rates range from 10% to 70%, depending on the level of regulation desired by the state. It is a key tool for managing the consumption of products that may be harmful to health or the environment.

3.3 Export and Import Duties

Export and import duties are levied on goods that cross Vietnam’s borders. The standard tax rate is typically 150% of the preferential rate for each item, except where preferential tariff agreements exist within trade treaties. This tax not only generates revenue but also protects domestic industries and helps regulate the trade balance.

3.4 Environmental Protection Tax

The Environmental Protection Tax is applied to products that harm the environment when used, including gasoline, oil, coal, plastic bags, and certain toxic chemicals. This tax reflects the state’s commitment to environmental protection through tax mechanisms, encouraging the use of environmentally friendly products.

3.5 Natural Resources Tax

The Natural Resources Tax applies to the exploitation of natural resources, including metallic and non-metallic minerals, crude oil, natural gas, and biological resources. This tax aims to ensure that the nation’s resources are exploited rationally and preserved for future generations.

Indirect taxes like VAT, Special Consumption Tax, or import duties are added directly to the sales price, determining the final amount a customer has to pay. A clear understanding of this tax structure helps businesses develop a reasonable pricing strategy that balances profitability with market competitiveness.

Indirect tax is not just an accounting task; it is a strategic element of business. Leaders must view indirect tax as an inseparable part of their pricing strategy, risk management, and financial planning. With continuous changes in tax regulations, mastering the mechanisms of indirect tax helps businesses optimize cash flow, avoid compliance risks, and create a competitive advantage. The first step is to direct the relevant departments to review the entire pricing structure and declaration processes, ensuring the company is compliant and also leveraging its understanding of tax to succeed.