Tax incidence and price elasticity of demand and

supplyIncidence of indirect taxes on consumers and firms

differs, depending on the price elasticity of demand and on
the price elasticity of supply. Let’s study individual cases.

Scenario 1: When PED is greater than PESWhere PED is

greater than PES, it implies that consumers are more
sensitive to price changes as compared to suppliers. Thus
the incidence of tax will be more on the suppliers because
if too much burden of tax is passed on to the consumers
then the demand will fall drastically. Therefore, this time
the price paid by buyers barely rises; sellers bear most of
the burden of the tax. If you are a withholding agent, you, in general, are
required to withhold or deduct 1% of income payments for purchases of goods; 2% of
income payments for purchases of services from your local or regular supplier.

Due to the timing differences of recording of expenses and actual remittance of

payments to suppliers, withholding agents often encounter this question “when to
deduct and remit the taxes withheld to BIR?”