Kuruppuarachchi, Y.D.R.1, Kumara, U.A.2 and Ajward, A.R.3

1Department of Accountancy, Faculty of Business Studies & Finance, Wayamba University of Sri Lanka.

2Department of Business Economics, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura.

3Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura.

1raveendra@wyb.ac.lk, 2uthumange@sjp.ac.lk, 3ajward@sjp.ac.lk


In this article, we reviewed the published Research works on indirect tax incidence, which describes the way of distributing indirect tax burden among households, and the purpose of this review is to identify the distributional impact of the burden of indirect tax on different groups, such as income groups, expenditure groups, commodity groups, and demographic groups, etc. The process of systematic review has been implemented in order to search, select, appraise, synthesize, and report the findings of previous studies. A government’s revenue depends on several sources. Among them, indirect taxes are used as a major form of collecting government revenue, especially in developing countries. We observed major findings that there is a regressive type picture of the overall indirect tax system, which mainly impacts the vulnerable groups in a country. Indirect taxes will be paid by every household irrespective of income level. Even though the incidence theory of taxation describes the burden of indirect tax distributed among producers and consumers as per the elasticity of demand and supply, that would not happen practically. The imposition of indirect taxes leads to an increase in raw materials, then increase the cost of production and ultimately increases the price level of the country, which creates cost-push inflation. The entire portion of the indirect tax will be shifted to the end consumer. The increase in indirect taxes will be led to a rise in the tax burden on households. The burden of indirect taxation highly damages the living standards of the low-income groups in a country, especially due to the consumption tax. Households that are earning low incomes will be paid a relatively higher portion of indirect taxes than the households that have higher incomes. Past researchers have emphasized the importance of eliminating the consumption taxes on essential and most sensitive commodities, which are mostly consumed by the poor income groups.

Keywords: Indirect Taxation, Tax Burden, Households, Income, Expenditure

GEL Classifications: H20, H22, H31, D14, D31

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