How Is Excise Duty Calculated?

Excise Tax: What a Duty

An excise tax, sometimes referred to as an excise duty, is a type of tax charged on goods produced within a country (as opposed to custom duties, which are levies on goods from outside the country). An excise tax is a tax on the production or sale of a good. Examples include taxes on gasoline, tobacco products and products with alcohol. These taxes are sometimes given the derogatory term "sin taxes," and they create disincentives for purchasers.

Calculation of Taxes and Effects

Excise taxes are typically not expressed in terms of a percentage of sale price; rather, excise duties are levied directly on the producer as a fixed amount of tax per unit of measure (a per pack tax on cigarettes, for example). The producer pays the tax to the government, although ultimately it is the consumer who bears the cost--the cost is included in the price of the product when the product finally reaches the market. Sometimes an excise tax can account for more than half of the retail value of certain goods.

When is Excise Imposed?

There is no strict legal definition for excise taxes, and there is no definition or characteristic by which a good can be evaluated as an excise taxed good. Examples of these myriad goods include alcohol, environmental taxes, gambling, hydrocarbon oil, refunds of duty (tax refunds), and visiting forces. Theoretically speaking, the motive for the excise tax should be to curb the use of goods and services which are harmful to our health or society. However, today these excise taxes seem random at times, and primarily serve to punish under the guise of protecting people' or 'raising needed money. In many countries excise duty is applied using revenue stamps, which a producer can buy bulk from the government and attach to every product to which the excise need to be applied.

References

• 'Excise Duty Index'; HM Revenue & Customs;
• Financial Accounting, 2nd Ed.; Dyckman and Pfeiffer; 2009
• Microeconomics, 7th Ed.; Pindyck and Rubinfeld; 2009