Indirect Taxes Explained with Examples: What Every Business Owner Should Know

Confused about sales tax, GST, and all that middle-of-the-invoice chaos? This guide has indirect taxes explained in under 5 minutes; broken down for busy brains who don’t have time for textbook talk.

There are two kinds of taxes you deal with: direct and indirect taxes. Let’s break that down real quick.

Every month, when you receive your salary, a percentage based on CTC, gets deducted automatically. That amount goes straight to the government. That’s called direct tax. Clean and upfront.

Now, indirect taxes work differently.

For example: Let’s say you buy a latte that costs ₹200, but your bill says ₹236. That extra ₹36? That’s GST. That’s an indirect tax. You pay that amount to the café, and the café is responsible for passing it as a tax to the government.

Sounds simple, right?

But there’s a lot more going on. I once met a baker who almost lost her business over ₹8,000 in unpaid GST she didn’t even know she owed. Eight thousand bucks. That’s like 200 cupcakes down the drain…All because of one missed filing.

If you’re running a business, indirect taxes show up everywhere, on your sales, services, invoices, even return policies. Miss one rule? Your books get messy, filings get delayed, and suddenly you’ve got a tax notice breathing down your neck.

And sometimes, these events can turn really ugly.

In Italy, authorities busted a €520 million VAT fraud scheme where mafia groups like the Camorra and Cosa Nostra set up fake companies to game the tax system and claim bogus refunds. It didn’t end well for them.

(But let’s save the full tax crime story for another time.)

In this guide, we’ll unpack:

• Different types of indirect taxes and how they show up in your everyday purchases

• What indirect taxes mean for your business if you’re selling products or services

• Common compliance challenges most business owners don’t see coming

• And what happens when you miss a filing deadline

Stay with me. Understanding these small things could save you (and your business) a lot of trouble.

What Are Indirect Taxes?

An indirect tax is a tax added on goods and services, and passed on to the end consumer.

You don’t pay it directly to the government like income tax. Instead, when you buy something like coffee, clothes, software, even Netflix,  the tax is included in the final price.

You pay it to the seller, and the seller then remits it to the government.

Common Names for Indirect Taxes:

• GST (Goods and Services Tax)

• VAT (Value-Added Tax)

• Excise Tax (for fuel, liquor, tobacco, etc.)

• Sales Tax (used in the U.S.)

They’re also known as consumption taxes or transaction taxes, basically anything charged when you buy something.

Why Indirect Taxes Matter (and Why They’re Called “Regressive”)

Indirect taxes are the same rate for everyone, regardless of how much they earn.

If GST is 18%, you pay 18% whether you make ₹15,000/month or ₹15 lakh/month.

That’s why they’re called regressive, because they don’t adjust based on income level.

Also, as a consumer: Once you pay an indirect tax, it’s non-refundable. You can’t claim it back.

What This Means for Business Owners

Whether you’re running an online store, a service-based business, or even selling digital products; here’s what indirect taxes mean for you:

✅ You become the tax collector: You’re legally responsible for collecting indirect tax from your customers and remitting it to the government on time.

✅ You must register for GST/VAT: Once your turnover crosses the threshold (in India, for example, ₹20 lakh in many states), you’re required to register under GST.

✅ You need to issue tax-compliant invoices: That means your bills must clearly show tax breakup (like CGST + SGST or IGST), GSTIN number, etc.

✅ You need to file monthly/quarterly returns: The government expects accurate reporting of every rupee of tax you collect. Miss a deadline? Expect late fees or penalties.

✅ You can claim Input Tax Credit (ITC):  If you’re buying raw materials or services for your business (e.g., Facebook ads, packaging material, software), you can offset the GST you paid on those against the GST you collected, but only if you file on time and keep your records clean.

Direct vs. Indirect Taxes: A Clear Comparison

🔖 Related Read: Difference Between VAT and Sales Tax: What You Need to Know

Indirect Taxes Explained With Real-World Examples

There are several examples of indirect tax, which typically fall into one of the following categories:

Let’s elaborate on each of these with examples:

Sales & Services Taxes

These are the most common types of indirect taxes. You pay them when you buy goods or services.

Here are the most common subtypes of sales and services taxes you should know:

1. GST (Goods and Services Tax)

This is the most widely used form of indirect tax globally. It is applied to almost everything you buy or sell.

Example: You buy groceries, order food on Swiggy, or pay for a Canva subscription, GST is added on top of the base price.

📍Used in: India, Canada, Australia, Singapore, New Zealand, etc.

2. VAT (Value-Added Tax)

Similar to GST, but often charged at each stage of production and distribution. Then it is passed on to the final consumer.

Example: A manufacturer pays VAT on raw materials, the wholesaler adds VAT again, and the consumer pays the final VAT-inclusive price.

📍Used in: European Union, UK, UAE, and over 160 countries.

3. Sales Tax (U.S.-style)

Unlike GST/VAT, which is applied throughout the supply chain, sales tax is only collected at the final point of sale to the end consumer.

Example: You buy a TV in California for $1,000. At checkout, 7.25% sales tax is added and you pay $1,072.50.

📍Used in: U.S. (Note: Sales tax is state-level, not federal, so it varies by state and even city.)

4. Service Tax (phased out in some countries like India, but still relevant in others)

This was a tax applied only on services like consulting, marketing, or legal advice. However, this tax was more prevalent before GST unified it in countries like India.

Example: (in countries where it still exists): You hire a freelance designer, and 10–15% service tax is added to their invoice.

📍Used in: Some African and Asian countries still have separate service taxes.

5. Digital Services Tax (DST)

A newer category introduced by many governments to tax digital platforms and tech giants who operate globally but don’t have a local physical presence.

Example: Countries like France, India, and the UK charge DST on revenues earned by Facebook, Google, or Amazon from local users.

📍Used in: India (2% equalization levy), UK, France, Italy, Kenya, and others.

6. Entertainment Tax

Applied on things like movie tickets, concerts, or online games.

 Example: A ₹300 movie ticket might include 18% GST (entertainment tax under GST framework).

📍Used in: India (now under GST), parts of the U.S., Malaysia, Indonesia, etc.

7. Luxury Tax / Sin Tax (On High-End Services or “Unhealthy” Goods)

Charged on services or products seen as non-essential or harmful.

Example: Spa services, alcohol, or cigarettes may carry a luxury or sin tax in addition to regular GST/VAT.

📍Used globally, but tax rates and names vary.

Customs & Excise Tax

Customs and excise taxes are charged on goods — either when they cross borders or when they’re produced and sold within a country. But not all customs/excise taxes are the same.

Here are the key types of customs and excise taxes every business owner or importer/exporter should know:

1. Basic Customs Duty (BCD)

This is the standard import tax levied when goods enter a country.

Example: You order a $500 smartwatch from the U.S. to India. At customs, you’re charged a Basic Customs Duty (say 10%) on the product value.

📍 Used in: Nearly every country including India, U.S., UK, EU nations.

2. Countervailing Duty (CVD) / Additional Customs Duty

This is a special import duty imposed to level the playing field when foreign products are subsidized or priced unfairly low (like “dumping”).

Example: If China exports steel at below-market rates, the Indian government may add a CVD to ensure local manufacturers aren’t undercut.

📍 Used in: India, U.S., EU, often as part of anti-dumping laws.

3. Excise Duty (Domestic Production Tax)

This is charged within the country, on the manufacture or production of specific goods considered harmful or luxury items.

Example: Alcohol, tobacco, and petroleum in India are subject to Central Excise even after GST rollout.

📍 Used in: India (on non-GST goods), U.S. (on gas, tobacco, firearms) and many Southeast Asian countries.

4. Anti-Dumping Duty

This tax is charged on goods imported at below fair market value, often when a country floods another’s market with cheap goods.

 Example: Chinese tires or steel being sold in India at less than their domestic price thus, triggering anti-dumping duty after investigation.

📍 Used in: Most countries, especially U.S., EU and India

5. Safeguard Duty

This is a temporary duty imposed when a sudden surge in imports threatens a domestic industry.

Example: If ceramic tiles from Vietnam suddenly flood the Indian market, harming Indian tile makers, a safeguard duty may be placed for 200 days or more.

📍 Used in: WTO member countries under emergency protection clauses.

Activity-based Taxes

Unlike sales or customs duties (which are based on what you buy or import), activity-based taxes are charged based on what you do. They’re applied to specific actions, transactions, or services like converting currency, booking flights, or gambling online.

Here are a few types of activity-based taxes:

1. Foreign Exchange Conversion Tax

A tax on converting currency, often seen when transferring money abroad or using international cards.

Example:  In India, this comes under GST on foreign exchange services. If you convert ₹1,00,000 to USD for a business payment, the bank charges a small conversion fee + 18% GST on that fee.

📍 Used in: India, Australia, South Africa

2. Online Gaming & Betting Tax

A tax on money deposited, earned, or wagered through online gaming, poker, fantasy leagues, or betting apps.

Example: In India, as of October 2023, 28% GST is charged on the full value of deposits in real-money gaming platforms (not just the winnings).

📍 Used in: India, UK (via Gambling Tax), European countries

💡 Governments are now regulating and taxing online gaming heavily due to its growing market.

3. Environmental Taxes

Taxes on activities that negatively affect the environment. This tax is aimed at reducing pollution and encouraging sustainability.

 Example:

• Carbon tax on companies that emit large amounts of CO₂

• Plastic waste tax on manufacturers using non-recyclable materials

• Landfill tax to discourage dumping waste

📍 Used in: EU (carbon pricing), Sweden, UK and Canada

4. Financial Transaction Tax (FTT)

A tax on financial trades like stocks, bonds, currencies, or derivatives.

Example: If you buy or sell stocks worth $10,000, a 0.1% Financial Transaction Tax (FTT) means you’ll pay $10 in tax. This is automatically added to your trade cost or deducted from your returns.

In India, a similar tax called STT (Securities Transaction Tax) applies to stock market trades.

📍 Used in: India, France, Italy, South Korea. Also abandoned in some countries due to liquidity concerns.

Note: FTT is highly debated. Why? Governments love the revenue, but investors argue it affects trade volumes.

📝 doola’s Tip for the Do’ers

Today, your business might only have to deal with one or two types of indirect taxes,  like GST or sales tax when you sell products.

But as your business grows or changes (for example, if you start exporting products, offering digital services, or importing raw materials), you might trigger new types of indirect taxes like customs duties, digital services tax, or even environmental taxes.  

If you don’t know these taxes exist, you can get caught off-guard later, with penalties, frozen payments, or legal notices, because you didn’t comply in time.

You don’t need to pay or register for every indirect tax today, but you should at least know what types are out there. That awareness will protect your business from nasty surprises as you scale.

🔖 Related Read: 5 Tax Scandals That Shook the World — And How to Make Sure You’re Not Next

Why Indirect Taxes Matter for Your Business

Indirect taxes (like GST, VAT, or customs duties) don’t just affect the economy; they shape how much customers spend, how much you charge, and how your business competes in different markets.

These taxes directly impact inflation, drive price shifts between regions, and even influence consumer habits.

And if you’re running a cross-border or digital business? They matter even more.

1. Cash Flow Gets Tied Up

Indirect taxes contribute to cash flow pressure, especially when you’re paying taxes upfront (like import duty or GST on purchases) and waiting weeks or months for input credits or refunds.

That’s your money locked, not moving.

2. Pricing Isn’t Just About Margins

Indirect taxes contribute to pricing inconsistencies across regions. A product might seem affordable in one location and feel overpriced in another purely because the tax rate changed.

If you don’t factor that in, you’re either killing your margin or losing customers.

3. Record-Keeping Becomes Non-Negotiable

Unlike direct taxes (which are filed once a year), indirect taxes need ongoing tracking.

Miss a form or under-report something? You’re looking at penalties, audits, or even business shutdowns in some countries.

Common Challenges Business Owners Face With Indirect Taxes

Now, there are a few hurdles that almost every business owner faces when it comes to indirect taxes. Let’s take a quick look at them:

1. Rules Change From State to State

The U.S. doesn’t have a one-size-fits-all tax rulebook.

Every state decides for itself how much sales tax to charge, what products or services are taxable, and how often you must file.

So, if you’re selling the same $30 candle in Florida and New York, you might need to collect two different sales tax rates, and file different reports for each state.

Now, if you assume the tax rules are the same everywhere (easy mistake!), you could either overcharge customers and lose sales, or worse, undercharge and owe taxes out of your own pocket later.

Plus, filing errors across states can trigger penalties even if you made an honest mistake.

2. You Might Owe Taxes Even If You’re Nowhere Near That State

You don’t need a storefront or employees in a state to owe taxes there.

Things like storing inventory in a fulfillment center (like Amazon FBA), hiring remote workers, or even running Facebook ads targeted to that state can trigger what’s called “nexus”— a legal connection that creates a tax obligation.

If you’re unaware that you’ve created nexus, you won’t collect the required sales tax from your customers.

When the state audits your business and realizes you should have been collecting sales tax, they’ll hold you liable for the unpaid taxes, not your customers. Plus, interest and penalties.

3. Multi-State Selling Creates a Filing Nightmare

Selling across multiple states sounds exciting, until you realize that every single state could expect:

• Separate tax registrations

• Separate tax returns

• Separate filing schedules

• Different rules for what’s taxable

It’s easy to lose track of which filings are due when. One missed deadline can lead to late fees, suspension of your tax permits, account freezes, and even the inability to legally keep selling in that state.

Managing 5–10 states manually can quickly overwhelm even organized founders and mistakes snowball fast!

4. Manual Tracking Breaks Fast (And It’s Expensive)

When you’re small, managing taxes in spreadsheets feels doable. But once you have dozens of customers, refunds, discount codes, shipping taxes, and returns, human error steps in easily. Plus, it’s an expensive affair. 

One wrong tax rate, one missing invoice, and the IRS will come looking for you.

Who will penalize you:

• The IRS (Internal Revenue Service) can issue federal fines for misreported income or missing forms.

• State tax authorities can charge penalties, revoke your sales licenses, and even take legal action if unpaid taxes add up.

How to Stay Compliant with Indirect Taxes

Here’s how you can stay compliant with indirect taxes:

1. Stay Updated on Changing Laws

Indirect tax rules, like sales tax rates, exemptions, and filing requirements, change often, especially if you’re selling across multiple states or countries.

To avoid surprises, set up alerts from your state tax authorities, subscribe to trusted tax newsletters, or work with a professional from doola who can regularly track these changes for you.

2. Use the Right Tools Early

Don’t wait until you’re knee-deep in transactions to get organized.

Set up proper accounting software from day one; ideally something that can:

• Track your sales by state or country

• Apply the correct local tax rates

• Generate tax-compliant reports and summaries for filing

If you’re selling through e-commerce platforms like Shopify, Stripe, Amazon, or Etsy, make sure you’ve enabled tax collection and connected it to your accounting or tax reporting tool (like doola).

3. Work With Professionals Who Actually Understand Your Business Model

Not all accountants are equipped to handle cross-border sales and multi-jurisdiction tax compliance.

Look for tax advisors who:

• Know how platforms like Amazon FBA, Shopify, and Etsy work

• Understand U.S. and international indirect tax systems

• Are familiar with digital goods, dropshipping, and multiple currencies.

This isn’t basic bookkeeping. It’s compliance across a patchwork of tax rules. You need someone who’s handled e-commerce businesses like yours.

4. Automate Before It Becomes Unmanageable

Manual tracking is fine when you have 10 orders a month. But if you’re processing dozens or hundreds of transactions weekly, automation is the only way to survive.

Here’s what smart tax automation can help you do:

• Automatically apply accurate tax rates across regions

• File taxes on time (or remind you before the deadline hits)

• Avoid costly human errors and audit flags

Tax management platforms like doola help simplify this, from helping you register in the right states, to getting your EIN, to managing IRS filings like Form 5472 and Pro Forma 1120 (for foreign-owned LLCs).

doola is your full-stack launch partner that knows where founders typically slip up.

Why Choose doola for Your Indirect Tax Compliance?

In this guide, you saw how indirect taxes can be a tricky zone and how mistakes can land you in big troubles and fine. And, it’s not easy to manage all these alone.

doola will be your reliable partner in this process as we have helped many businesses owners sort through their bookkeeping and taxes mess.

Here’s what we have got for you:

🎯 Multi-State Complexity? Solved.

Selling across multiple states? doola helps you identify where you have nexus, registers your business for sales tax permits, and handles recurring filings to keep you compliant with every deadline. ​

🎯 Manual Filing Stress? Gone.

Forget juggling spreadsheets and due dates. doola simplifies your tax filings, ensuring accurate calculations and timely submissions. This reduces the risk of human error and helps you avoid costly penalties.

🎯 Uncertainty? Replaced with Peace of Mind.

Whether you’re a U.S. resident or an international entrepreneur, doola offers dedicated support to navigate the complexities of U.S. tax compliance. Their team provides expert guidance tailored to your business needs. 

🎯 Total Compliance Platform

doola’s Total Compliance package includes:​

• Business formation and EIN acquisition

• Registered agent service

• Bookkeeping and analytics software

• Annual state and IRS tax filings

• Dedicated account manager

This comprehensive approach ensures your business remains compliant without the need to coordinate multiple disparate services. 

🎯 Cost-Effective and Tax-Deductible

At $329 plus state fees, doola’s Total Compliance plan is a cost-effective solution for comprehensive tax compliance. 

 Ready to Simplify Your Tax Compliance?

Join thousands of entrepreneurs who trust doola to handle their indirect tax obligations, so they can focus on growing their businesses.​

👉 Sign up for a demo today!