Duty VS TariffDifferences You Need to Know Between the Two!

Duty and tariff – both are a form of tax that the government imposes on imports and exports.

It’s no wonder why some often use these two terms interchangeably.

However, that can be dangerous as they’re two very different terms.

One is a form of tax imposed on the product itself and the other is a form of tax imposed on the consumer.

In this article, we will be taking a look at both duty and tariff.

We first expound on each term – what are the characteristics of a duty? Of a tariff?

We will then make a comparison of the two.

By the end of the article, we should be able to distinguish a duty from a tariff and vice versa.

What is a Duty?

A duty is a form of tax that the government imposes on the consumer for the purchase of goods and services.

The goods and services may be domestic or imported.

It is an indirect tax since it is the consumer that pays for it instead of the manufacturer.

The government collects duties for various reasons.

For example, customs duties (those that are levied on the importers and distributors) aim to drive up the price of imported goods.

This encourages consumers to go for domestic goods rather than imported goods, thus, providing domestic goods a market advantage.

Another type of duty, the excise duty, is a form of tax that the government imposes to try and discourage the purchase and consumption of potentially harmful products such as alcohol and tobacco.

Excise duties can also apply to luxury goods and services.

Excise duties aim to discourage consumers from patronizing these products by making them more expensive.

Duties may also apply to exported goods.

Aptly named export duty, the government, at its discretion, may impose it on goods that are exported outside the country.

The government may resort to this if it wants to curb the exportation of certain commodities.

With all that said, the primary purpose of duties is to protect the country’s economy, residents, communities, jobs, etc.

It is also another source of revenue for the government.

What is a Tariff?

A tariff is a form of tax that the government imposes on goods and services that are imported from or exported to a different country.

This means that it can apply to both domestic and imported goods and services.

However, it cannot apply to intrastate transactions. It is a direct tax since it applies to the goods or services themselves.

By imposing tariffs on imported goods, their price on the domestic market increases.

The increase may just be enough to make them more expensive than the country’s local offerings.

This may result in consumers purchasing domestic products instead of imported ones.

Thus, the aim of a tariff is to discourage the importation of certain products.

This in turn protects home-based manufacturers.

Tariffs commonly apply to goods and services that are easily available within the country.

For example, if a country is known for its rice production, it will most likely impose a tariff on rice imports.

By imposing a tariff on such imported goods, the number of imports for such a product will most likely go down.

This encourages consumers to avail of domestic goods instead.

On the other hand, the government may impose tariffs on exported goods simply to raise revenue.

Though the government may impose export tariffs to curb the exportation of certain products.

This is to ensure that there is enough supply of such a product in the domestic market.

The two most commons form of tariffs are the following:

Specific Tariff

This refers to a fixed tariff that is applied to every unit of imported or exported goods.

The rate will depend on the type of goods being imported.

For example, the US government imposes a specific tariff for every wrist watch imported into the United States.

Ad Valorem Tariff

The ad valorem tariff is a variable tax. Its amount will depend on the value of the imported goods.

It’s a percentage of the total value of the imported product.

For example, a 2.5% ad valorem tariff is imposed on the import of automobiles.

Duty vs Tariff

While both duty and tariff are forms of taxes that the government collects, they do have their differences.

Tariffs only apply to the importation or exportation of goods and services.

Meanwhile, duty, on top of applying to imports and exports, may also apply to intrastate transactions.

Here are more of the key differences between the two:

Nature (Direct vs Indirect)

Duties are indirect taxes.

Rather than imposing them on the goods or services themselves, the government imposes them on the consumers instead. This is why duty is also known as consumer tax.

On the other hand, tariffs are direct taxes.

The government directly imposes tariffs on the goods or services themselves.

This means that the manufacturers or providers of the goods or services are responsible for paying tariffs.

Transactions they apply to

Duties can apply to imports, exports, and intrastate transactions.

This means that duties may also apply to locally produced goods or services.

This also means that duty may apply even if the commodity is not subject to importation or exportation. For example, excise duties mostly apply to intrastate transactions.

Tariffs only apply to the importation or exportation of goods or services.

This means that as long a domestic product is not subject to exportation, it won’t be subject to tariffs. This also means that tariffs only apply to international trades.

Purpose

The main purpose of tariffs is to protect domestic production.

Tariffs discourage the importation of goods because they increase the price of imported goods or services.

The increase in price may just be enough to make them more expensive than the country’s local offerings.

Thus, the consumer may be more inclined to purchase domestic products than imported ones.

Tariffs may also have the purpose of restricting trade from a specific country.

For example, in 2018, the Trump administration announced that it would impose $200 billion worth of tariffs on imported Chinese goods.

This effectively restricts trades between the US and China.

Duties, on the other hand, have different purposes depending on how they are applied.

Customs duties (those that apply to imports) discourage consumers from personally importing goods or services.

This in turn encourages them to avail of the local offerings instead.

Excise tax discourages the purchase of certain products, mostly that may cause potentially harmful effects to the consumers.

Both duties and tariffs have the purpose of generating revenue for the government.