Shifting an incidence of taxation

Understanding who ultimately bears the burden of a tax is central to the study of tax incidence. For indirect taxes—such as excise duties or GST—the obligation often ends up with consumers, even though firms are the ones who formally remit the tax. When firms raise prices to recover the tax amount, the responsibility effectively moves forward to buyers. If market conditions prevent price increases, producers may absorb some of the tax by accepting lower profit margins, which reflects a backward movement of the burden.

Example: Suppose an excise tax is placed on soft drinks. A company might respond by raising retail prices to offset the tax. But if competition is intense and price hikes are risky, the company may instead absorb part of the tax internally.