Specific and Advalorem Taxes

Another classification of taxes is done as Specific Taxes and Advalorem Taxes. When any good is taxed on the basis of its measure, size and weight such tax is known as specific tax. For

example, if excise duty is imposed on sugar with respect to its weight; or excise duty is imposed on cloth on the basis of meters or yards, it will be a specific tax. The specific tax is advantageous because it can easily be imposed and charged. When any commodity is taxed on the basis of value of sales, it is known as advalorem tax. In such case, the tax is imposed on the basis of value of the product whatsoever be the weight or size of the product. Advalorem tax is beneficial in the sense that its burden lies with the rich. Hence, it is in accordance with the canon of equity. But the complication with this tax is that it is difficult to find the exact value of goods.

The government has abolished all centre and state level indirect taxes and replaced them with single indirect tax named Goods and Services Tax (GST) effective from 1st July, 2017.

Note: Tobin Tax was put forward in 1972 by the Nobel-prize winning American economist James Tobin. Originally, he suggested a tax on all payments from one currency to another. His aim was to curb massive and destabilising movements of funds between foreign currency exchanges. He proposed that the cash raised should be used as aid for developing countries. The idea has since been extended to cover a tax on all share, bond and currency transactions.

The advantage of the tax is that it could be a huge money-raiser for governments. It is only fair that banks and other financial firms pay an additional tax to help tackle government debt levels that they helped increase, as a result of the bailout schemes, which many of them required during the financial crisis. Those in favour of the tax also argue that it helps to increase stability. They say that in the 1990s, it could have prevented countries such as Russia, Mexico and those in South East Asia having to raise their interest rates to very high levels, as their currencies came under threat from speculators.

Critics argue that the tax will result in fewer financial transactions being made, resulting in job losses in financial centres. Others warn that the tax will mean pension funds and savers get less returns, as banks will simply pass the cost of the tax onto their customers.