Taking a Direct Approach to Indirect Tax

  • 21 avril 2022
  • Felix Wu

In 2021, I transitioned from practicing primarily in an income tax controversy role to an indirect tax advisory role. This led to many discoveries about the misconceptions surrounding indirect tax laws, regulations and practice. Having evaluated my own assumptions and discussing with mentors and colleagues, here are a list of some considerations when comparing and contrasting income tax to indirect tax.


Indirect tax is commonly referred to as "the tax that is not income tax". In general, indirect taxes arise as the result of a transaction between buyer and seller, regardless of the profitability (i.e., the income earned) from the transaction. In Canada alone, indirect tax encompasses far more than the goods and services tax/harmonized sales tax ("GST/HST") – it also includes provincial sales tax in the non-harmonized provinces of British Columbia, Saskatchewan, Manitoba (collectively referred to here as "PST"), Quebec Sales Tax ("QST"), as well as fuel charges, carbon tax, environment levies, and other industry or transaction specific taxes.


Globally, jurisdictions may choose to implement indirect taxes in different ways – namely, via the value-added tax system ("VAT") or through a sales-and-use tax system. This is illustrated in the difference between the Canadian federal GST/HST regimes and the PST regimes of the non-harmonized provinces.

Generally, GST/HST is collected by all sellers in each stage of the supply chain. Businesses in the chain are required to track and document the VAT they pay on purchases, and they may be entitled to receive an input tax credit ("ITC") under the Excise Tax Act on GST/HST paid on their tax return. Under a VAT regime, the Canada Revenue Agency ("CRA") and the Canadian government receive tax revenue from all parties transacting in the economy.

By contrast, the PST regimes generally operate via a sales-and-use tax system where sales tax is only collected by the retailer in the final step of the supply chain. Only the end consumer is charged sales tax on goods or services that they purchase. As opposed to an ITC, businesses within the supply chain that purchase goods often qualify for certain types of exemptions, such as a resale exemption or a production/machinery exemption, where no tax is applied on their purchase of goods or services to be passed on in the supply chain.