Indirect taxation is a tax that, rather than being charged based on earnings, is charged on a service. That is to say, indirect taxation is based on spending, and not income.
Examples of indirect taxes include Value Added Tax (VAT) – where tax is added to the cost of a purchase, and then passed on by retailers to the government -and fuel duty.
Indirect taxes tend to be justified by the idea that a product is 'bad' – either for health or the environment. The level of these so-called 'sin taxes' tends to be increased every year and see the price of tobacco, alcohol and fuel steadily rise.
VAT is the largest indirect tax, raising around 16 per cent of the government's revenue according to Treasury figures. Some products are VAT-exempt, including rent, private education, health services, postal services, finance and insurance, and gambling.