Pack 12

Question 1

Define the term ‘indirect tax’.

Answer 1

Imposed, usually, on the purchase of goods and services. It represents a tax on expenditure. There are 2 types of indirect tax: specific tax and ad valorem tax.

Question 2

Distinguish between an ad valorem and specific tax.

Answer 2

Specific tax = This is charged as a fixed amount per unit of good, such as a litre of wine or cigarettes e.g. 41.5p per pint of beer. This tax doesn’t vary with the price of the product.
Ad valorem tax = This is charged as a percentage of the price of a good e.g. VAT of 20% is added on to restaurant meals.