Consumption tax refers to the tax we pay for using goods and services. It is deducted on the money spent on consumption. It is a kind of indirect tax like sales tax or value added tax. Consumption tax is also known as cash-flow tax, expenditure tax or even consumed income tax.
Consumption tax can be rather regressive in nature, like other sales taxes. Using methods of exemptions, deductions, graduated rates, tax rebates etc will make this kind of tax less regressive in nature. The tax exemptions and deductions accumulated will in turn reduce the taxpayer’s burden; and also will be a form of saving when it comes to your taxes. This is a tax for the expenses made by you, while income tax is a tax you pay on the income earned by you.
Consumption Tax Features:
Consumption Tax is a western concept, and will be gradually moving it’s way towards the east. Some of the main features of consumption tax are:
- Everyone who pays consumption tax will get certain exemptions and deductions, so that the people with lower consumption power do not have to pay these taxes.
- Any individual who is liable to pay consumption tax will not receive any deductions since they have the ability to save, and these savings are already subject to deduction.
- The consumption tax payee will get tax exemption on all incomes placed in investments made, since it taxes only consumptions made or amount spent, not saved.