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.