What Is Excise Tax? A Complete Guide with Calculations
An excise tax is the duty on manufactured goods that are levied at the moment of manufacture rather than at sale. Excises are often associated with customs duties that are set on pre-existing goods when they cross a designated border in a specific direction.
Customs are applied to goods that come into existence as taxable items at the border. In comparison, excise is applied to goods that came into existence inland.
Though it is referred to as a tax, excise is specifically a duty; tax is technically on an individual, while duty is a charge on particular kinds of goods. An excise is considered an indirect tax. This means that the producer or seller who pays the cost to the government is expected to recover their losses by raising the price paid by the good's eventual buyer. Excises are imposed in addition to an indirect tax such as a sales tax or value-added tax (VAT). Typically, an excise is different from a sales tax or VAT in three ways:
- an excise generally is a per unit tax, costing a specific amount for a quantity or unit of the item purchased, while value-added or sales tax is an ad valorem tax and is directly proportional to the price of goods
- an excise is typically applied to a narrow range of products
- an excise is usually heavier, accounting for a higher fraction of the targeted products' retail price
Examples of excise duties are taxes on petrol, gasoline, oil, and other fuels and taxes on tobacco and alcohol, sometimes referred to as the sin tax.
Hence, Excise Duty is a tax that is designed to discourage the purchase of particular goods. Excise Duty is an indirect tax. This means that the end consumer does not pay for this tax to the government, but they do cover the cost of the tax by paying more for the product. By making these goods and products more expensive, Excise Duty is supposed to dissuade excessive consumption or waste of goods that are harmful to consumers' health or damaging to the environment.
Types of Products with Excise Duty
There are four main types of products that are covered by Excise Duty:
- Alcohol: including beer, wine, cider, and spirits
- Tobacco products: including cigarettes, cigars, rolling tobacco, and chewing tobacco
- Gambling activities: including bingo, the National Lottery, machine games, and online games that involved the betting of money
- Hydrocarbon fuels: including light fuels, heavy fuels, biofuels, and road fuels.
How Excise Tax Works
Income tax is one of the primary revenue generator for the federal and the state governments. Excise tax payment also makes up a small portion of total revenue for the government. Excise taxes are primarily a business tax, different from other taxes a business must pay, like income taxes. Business collectors of excise taxes maintain their obligations for passing on excise taxes to state and local governments as required.
Excise taxes falls into one of two types of categories : ad valorem and specific. Ad valorem excise taxes are percentage rates calculated on a particular goods or services.While, specific taxes are fixed dollar amounts applied to certain purchases.
Ad Valorem Excise Taxes
Ad valorem is a latin term that literally means according to value. An ad valorem tax is charged by a certain percentage (%). This results in the excise tax that is based on the value of the product or service used.
Specific Excise Taxes
Specific excise taxes are a fee added to a certain product on a per unit basis. Some examples of this excise taxes include cigarettes, pipe tobacco, beer, cruise ship passengers and gasoline. Often taxes on goods like beer and alcohol will be taxed at both the federal level and taxed heavily at the state level, making the cost of these items higher.
Excise Taxes on Retirement Accounts
Excise taxes are charged on certain retirement account activities. A percentage of the excise tax is applied to excess individual retirement account (IRA) contributions that are not corrected by the applicable deadline. Many people are usually familiar with these taxes as penalties.
Calculations Of Excise Duty
Examples of the calculation of duties payable are:
1.Intoxicating liquors
a) Calculating for alcoholic products with duty rates based on the per litre of alcohol
Duties payable = Total quantity in litres(L) x Customs or excise duty rate X the Percentage (%) of alcoholic strength
Company Y imports 80 litres of beer with alcoholic strength of 5%. Assuming the customs and excise duties for beer is S$15 and S$50 for per litre of alcohol :
Both customs and the excise duties are levied on the import of beer,
the duties payable = 80 x (S$15 + 50) x 5% = S$260
b) For the alcoholic products with duty rates based on its dutiable content
Duties payable = Total dutiable quantity in kilograms x Customs duty rate
If 1 kilogram of alcoholic composite concentrates contains 0.3 kilograms of powdered alcohol,
the duties payable = 0.3kg x S$113 = S$33.
2.Tobacco Products
a) All tobacco products except cigarettes
Duties payable = Total weight (in kilograms) x Excise duty rate
Company Y imports 100 kilograms (kg) of tobacco stems.
Let us say the excise duty for tobacco stems is S$355 per kilogram:
Duties payable = 100 x S$355 = S$35,500
b) Cigarettes
Duties payable (P) = Total number of sticks x Weight of individual sticks (each gram or part thereof) x Excise duty rate
Company X imports 100 sticks of cigarettes weighing 1.5 grams each. Assuming the excise duty for cigarettes is 50 cents for every gram or part thereof each stick:
Since each cigarette's weight is between 1 and 2 grams, the weight to be taken to calculate the duties payable is 2 grams.
Hence, duties payable = 100 x 2 x $0.5 = S$100
3.Motor Vehicles
Duties payable (P) = Customs Value x Excise duty rate
Company C imports a van that is bought at S$100,000 on Free on Board (FOB) incoterms. The overseas freight, the handling, and insurance charges to ship the car to Singapore cost S$1,000.
Let us assume the excise duty for vans is 20% of the customs value:
Customs value of van = S$101,000
Duties payable (P) = S$101,000 x 20% = S$20,200
4.Petroleum and Biodiesel Blends
a) Petroleum products
Duties payable = Total volume(V) x Excise duty rate
Company X imports 100 litres of the unleaded motor spirit of RON 97.
Let us assume the excise duty for unleaded motor spirit of RON 97 and above is S$6.40 per dal, that is 1 dal = 10 litres
Duties payable (P) = S$6.40 x 10 = S$64
b) Compressed natural gas (Cng)
Duties payable = Total weight (W) x Excise duty rate
Company A imports 60 kilograms of compressed natural gas.
Let us say the excise duty for compressed natural gas is S$0.40 per kg:
Duties payable = S$0.40 x 50 = S$24
c) Biodiesel blend
Duties payable = Volume of diesel (V) x Excise duty rate
Company B imports around 1,000 litres of biodiesel blend, containing 100 litres of diesel. Assuming that the excise duty for diesel is S$3.00 per dal (1 dal = 10 litres):
Duties payable = S$3 x 10 = S$30
Criticism Of Excise Duty
Excise has been interpreted and described as simply being a way for government to levy further and unnecessary taxation on their own population.
This is because, excise sometimes doubles up with other taxes, and in particular with customs duties.
If a product is purchased in one country and later exported to another, excise must be paid when it was manufactured. Customs is then paid when it enters the second country. Hence, in a sense, the product has been taxed twice. Though from the second country's point of view, it only came into existence as a taxable good at their borders.
In some countries, excise has generally been limited to goods which are luxuries or a risk to health or morals, however, this is not the case everywhere.
Taxation on pharmaceuticals, medicines, and medical items and equipments has been an issue of contention.
Especially in developing or third world countries, excise duty can cause the prices of medicines and medical procedures to become inflated. Even though the medicines and equipments are potentially lifesaving, inflation has sometimes forced healthcare providers to limit the number of operations performed.
In some countries, certain items are illegal. However, these illegal items are also subject to excise. On the grounds of tax evasion, criminal gang leaders get prosecuted.
It has been argued that, by taxing certain banned substances, some countries are able to gain additional revenues. In these cases, the legislation creates an incentive for the state to turn a blind eye to certain criminal activity, by allowing dealers to preserve their anonymity. Thus enabling revenue to be collected without leading to the arrest of the perpetrator.
Key Takeaways
- Excise taxes are taxes required on specific substances, goods or services like tobacco, fuel, alcohol, etc
- Excise taxes are taxes that must be paid by businesses and are usually increased in prices for consumers
- Excise taxes can be of two types, ad valorem (paid by certain percentage) or specific (cost charged by unit)
- Certain excise taxes can be required directly from the consumer, like property taxes and excise tax penalties on certain retirement account activities