Essentially, all taxes or fees levied by the government at the production or production level are indirect taxes. In recent years, many countries have imposed fees on manufacturers for carbon emissions. These are indirect taxes because their costs are passed on to consumers. Indirect taxes can be used to correct for negative externalities of production and consumption. The cigarette tax in the United Kingdom is an example of this. Cigarettes have negative externalities of consumption: when someone smokes, it has a harmful effect on those around them and on themselves. When a tax is collected, the price of cigarettes increases, as does the opportunity cost of buying them. This means that a smaller amount of cigarettes is purchased and, as a result, the associated negative externalities decrease. Excise duties on fuel, alcohol and cigarettes are considered examples of indirect taxes. In contrast, income tax is the clearest example of direct taxation because the person who earns the income is the one who pays the tax immediately. National park entrance fees are another clear example of direct taxes. The most common example of an indirect tax is import duties. Customs duties are paid by the importer of a good at the time of entry into the country.
If the importer resells the goods to a consumer, the cost of customs duties is effectively hidden in the price paid by the consumer. The consumer will probably not know, but he will always pay the import duties indirectly. When the government imposes import duties on goods such as whisky imports. The supermarket that imports the whisky is responsible for paying import duties on arrival in the country. This import duty affects the price that the supermarket charges the consumer. Sales taxes can be direct or indirect. If they are only imposed on final delivery to a consumer, they are direct. If they are levied in the form of value added tax (VAT) throughout the production process, they are indirect. Indirect taxes account for a significant share of the State`s total tax revenue.
Data published by the OECD show that the average share of indirect taxes in total tax revenue for all Member States in 2018 was 32.7%, with a standard deviation of 7.9%. The member country with the highest share was Chile with 53.2% and at the other end the United States with 17.6%.  The general evolution of the ratio of direct and indirect taxes to total tax revenues in recent decades in developed countries shows an increase in the share of direct taxes in total tax revenues. Although this trend can also be observed in developing countries, it is less pronounced than in developed countries.  In addition, indirect taxes tend to incur relatively lower administrative costs than direct taxes. In addition, different types of indirect taxes differ in terms of administrative costs. VAT, where the vast majority of revenue is generated by large companies responsible for much of the economy`s added value, has lower administrative costs than VAT, where tax is only levied at the bottom level in countless retail shops of different sizes.  In addition, VAT entails relatively low administrative costs, as enforcement and collection costs are lower since VAT is collected throughout the production chain, allowing the tax administration to compare sales declared at each stage of the vertical production chain.  When the state imposes an indirect tax on a good, the effect on the final price depends on the elasticity of demand. If demand is inelastic in relation to price, the company can pass on most of the tax to the consumer (consumer charge).
When demand is price elastic, the producer absorbs most of the tax in the form of a reduced profit margin (called producer charge). The market equilibrium is quantity Q2 and price P1, where demand D crosses supply S. As soon as an indirect tax of size P2-P3 (also represented by the orange line) is introduced, the supply curve changes from S to S + tax. Supply increases and demand decreases until a new equilibrium is reached at quantity Q1 and price P2. An indirect tax is levied by a company in the supply chain (usually a producer or retailer) and remitted to the government, but is passed on to the consumer as part of the purchase price of a good or service. The consumer ultimately pays the tax by paying more for the product. An indirect tax is levied on producers of goods and services and paid indirectly by the consumer. Examples of indirect taxes are VAT, excise duties (taxes on cigarettes and alcohol) and import duties. Indirect taxes are often used and collected by the government to generate revenue. These are essentially fees that are charged equally by taxpayers, regardless of income, so rich or poor that everyone has to pay them. One of the characteristics of indirect taxes is that they are very closely linked to economic conditions. Indirect taxes are usually subject to economic transactions, such as the sale of goods or the provision of labour services.
As soon as the nature of these transactions or the nature of the transactions changes, indirect taxes will quickly be seriously affected. This theoretical review is at the origin of one of the many reasons why indirect taxes are controversial today. Critics of the taxes argue that the public should not be so limited when it comes to what they can or should buy on the open market. The debate on whether indirect taxes restrict consumers` freedom to make their own purchasing decisions continues. Similarly, economists argue that indirect taxes create an unstable market and cause prices to fluctuate unnecessarily. The ability for people to freely purchase goods and services helps to strengthen the economy and keep it stable. If additional taxes are added to the things people want or need to buy, they can stop buying those items altogether. If people stop buying, the economy can suffer, consumer goods prices can rise, and companies can start laying off workers. Therefore, critics argue that indirect taxes have no place in the market today and should be abolished altogether.
People understand that they have to pay income taxes directly to the government every year. However, they may not know that they are indirectly paying other taxes when they purchase fuel, cigarettes or imported products. Nevertheless, indirect taxes are still common in today`s market. All tax revenues are subject to business cycles and changes in taxpayer behaviour, but indirect taxes, such as broad-based excise taxes, are more stable than taxes that target a narrow tax base, such as cigarette smokers. Indirect taxes are those levied by a government on goods and services, as opposed to direct taxes such as income tax and corporate income tax, which are levied on household and corporate income.