Ad valorem and specific tax
Also called: Ad valorem tax · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT
Meaning
An ad valorem tax is a percentage of the value (price) of a good or service. When the price goes up, the tax goes up with it. A specific tax is a fixed amount for each unit of quantity, such as per litre, per tonne or per machine. It stays the same whatever the price. Most GST rates are ad valorem. Fuel excise and some cesses are specific.
Example
A good sold for ₹1,000 at 18% GST pays ₹180 in tax. If its price rises to ₹2,000, the tax rises to ₹360. The old coal cess was ₹400 per tonne whether coal was cheap or costly. The pan-masala levy is charged per machine, not per packet sold.
Don't confuse with
- Proportional tax: this is about how the tax rate changes with a person's income. Ad valorem and specific describe what the tax is charged on: value or quantity.