Tariff

Key Highlights

• A tariff is a tax or duty enforced by a government on imported or, less usually, exported products.

• Types include ad valorem, specific and compound tariff.

What is Tariff?

A tariff is a tax or duty enforced by a government on imported or, less usually, exported products. It is applied to control trade, safeguard home businesses, and provide government income.

Why Tariffs are Imposed?

• Protect Domestic Industries: Tariffs drive people to purchase locally made items by increasing the cost of imported goods.

• Create Income: The government might find money from tariffs.

• Balance Trade Deficits: Discouragement of too high imports helps a nation balance trade deficits.

• Retaliation: Sometimes enforced as a countermeasure against unfair commercial practices by other nations.

Types of Tariffs

1. Ad Valorem Tariff:

• Charged proportionate to the value of the imported products.
• For instance, a 10% levy on imported gadgets valued ₹1,00,000 would translate to ₹10,000.

2. Specific Tariff:

• Charged regardless of pricing a certain amount per unit of the imported commodity.
• For instance, 500 pesos per ton of imported steel.

3. Compound tariff:

• Blends specific tariffs with ad valorem.
• For instance: 5% of the item's worth plus ₹200 per unit.

Impact of Tariffs

• Prices Rise: imported products start to cost more for consumers.

• Reduces Competition: Foreign businesses could provide less of a challenge for home producers.

• Trade Wars: Too high tariffs may set off foreign nations' retaliatory actions.

• Revenue Generation: Taxes let governments generate large amounts of money.

Example of Tariff

If India imposes a 20% tariff on imported furniture worth ₹2,00,000, the tariff amount would be:

Tariff = ₹ 2,00,000 × 0.20 = ₹ 40,000.

The importer would pay ₹2,00,000 plus ₹40,000 for total cost. ₹2,40,000.