Indirect taxes include value added tax, a range of excise duties on oil, tobacco and alcohol and fuel duty.
VAT is levied on the sale of goods by registered businesses. Businesses add VAT to the price they charge when they provide goods and services to business customers - and non-business customers. There are different VAT rates, depending on the goods or services that are being provided. At the moment there are three rates: standard rate – 20%, reduced rate - 5 %, zero rate - 0 %. The standard rate of VAT is the rate that's charged on most goods and services in the UK. Some examples of reduced-rate are domestic fuel and power, energy-saving material and children's car seats. The examples of zero-rated items are food, books and newspapers, children’s clothes and shoes, public transport.
Excise duty is paid on alcohol, tobacco and fuel. This is paid on top of VAT and UK is high relative to most EU countries.
These taxes are levied by the government for a number of reasons – among them as part of a strategy to curb pollution and improve the environment.
Some of the reasons for using indirect taxes should be briefly mentioned. Indirect taxes may assist in the redistribution of income, though various unfortunate side-effects were existed.
Also, indirect taxes may be able to correct for market imperfections, such as the effects of monopoly on the supply of particular goods and the existence of externalities ignored by producers.
In addition, where people are thought to under-estimate the dangers or disadvantages of particular products, a paternalistic government may use indirect taxes to guide them. There may also be the advantage that some indirect taxes have only minor disincentive effects on the supply of effort.
From the point of view of government, some indirect taxes, such as VAT, are appealing because they are related to prices and, hence, are buoyant. The tax take increases without the need for action by a government because,