Thursday, January 14, 2010

Difference Between Customs Duty, Excise Duty and VAT

What is Customs Duty

types of taxes
If you are bringing goods for personal use into a country, or ordering or sending them abroad, you may need to pay for the Customs Duty (also known as import duty) in that country. What you pay and how much will depend on the type of goods and where they come from. It is a tax levied on imports and exports (sometimes) by the customs authorities of that country to raise state revenue as well as to protect domestic industries from predatory competitors abroad.

Tariffs, or duties, are usually based on either the value of the goods (ad valorem duties), other factors such as quantity or weight (specific duties), or a combination of value and some other factors (compound duties). Commercial goods that are not yet cleared through customs will be held in a customs area (also known as a bonded store) until they are being processed. This area is surrounded by a customs border.

Goods within the customs area are usually treated as being outside the country so that easy transhipment to a third country can be done without customs authorities being involved. This is why customs areas are always fenced and carefully controlled to prevent smuggling.

In the Kingdom of England, this tax was typically part of the customary revenue of the king and did not need parliamentary consent to be levied, unlike land tax, excise duty, or other forms of taxes.

What is Excise Duty

An excise or excise tax (also called as an excise duty or duty of excise special tax) is a type of tax that is charged on goods produced within the country. Excises are sometimes called as inland taxes, while customs duties are called border taxes.

Excise taxes are usually included in the price of the service or product (such as cigarettes, alcohol and motor fuels). These taxes may also be imposed on certain activities like gambling. This duty can be often found along with VAT and sales tax. Excise taxes may be imposed by a state, or by the federal government. Excise duty is valued ad valoreum – meaning that it is calculated taking into account the number or volume of goods.

What is VAT

VAT (or also called as consumption tax) is the value added tax, which is usually not paid by the vendor (who has already paid the excise duty) but the buyer. Also referred to as the “goods and service tax”, this tax is a form of indirect tax that is impossedd at different stages of production on goods and services.

For example: a manufacturer sells a dvd player to a wholesaler for $100 and charges him VAT on that amount at 23% (lets sat the standart rate of VAT is 23%). Therefore the wholesaler pays $123 for the dvd player. The manufacturer then pays the VAT of $23 to the government. The wholesaler then sell this dvd player to a retailer for $200. He adds on VAT at 23% so the retailer has to pay $246 for the dvd player. The wholesaler must pay $46 to the government but he can reclaim the $23 VAT he has already paid to the manufacturer, leaving $23 which he pays to the government. When the retailer goes on to sell the product to a consumer, he also add on VAT to his selling price. He then sells the dvd player for $300 plus VAT at 23%, making a selling price of $369 for the consumer. The retailer then pay the VAT to the government, and again, he can claim back the $46 VAT that he paid to the wholesaler, leaving %23 for the government.

The economic effect of VAT will fall on the final prices of the services and goods while sales tax will rely on the final sale to the consumers.


Taxes are financial levies imposed by a government upon its people or citizens that are compulsory and not voluntary. It is through the duties and taxes that the government is able to run the state. Each country has its own ways, rules and regulations for imposing and collecting customs and excise duty. Customs and excise duties may differ from one country to another.

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