Duties are indirect taxes levied by the government on goods and services manufactured and sold within their country on imported goods (also known as import or customs duty).
Duties have two purposes. One is to generate income for the local government, and the second is to provide a market advantage to the locally grown and produced goods that are not subject to import duties. The primary purpose of Customs Duty is to protect each country's economy, residents, jobs, environment, etc., by controlling the flow of goods into and out of the country.
Customs duties are generally collected when the border officials are inspecting the items. Here, the officials verify whether the goods match the detailed description of your imports. Customs officials also look for trademark issues or fair market trade practices based on the assessment value of your imports. Another aspect they want to confirm is the country of origin for your imports. The US has specific trade agreements with designated countries that can result in duty-free tariffs.
The various kinds of duties applicable in the US are as under: -
1) Basic Customs Duty (BCD)
2) Countervailing Duty (CVD)
3) Countervailing Duty (CVD)
BCD is considered an indirect tax as it is levied on the importers and distributors and is calculated using the Harmonized Tariff Schedule (HTS). It is then passed on to the consumer to recover the amount the concerned parties have paid as duties.
Countervailing Duty refers to an additional import duty levied on subsidized imports from other countries to compensate for the effect of concessions and subsidies granted by an exporting country to its exporters.
Anti-Dumping occurs when foreign firms sell goods in the US market at a price lower than the fair market value of the same or similar goods in the domestic market. The government then levies the AD on imports citing reasons that the goods are being dumped into the domestic market due to their low pricing.
Import duty is levied at a point where the imported goods first enter the country. In the US, when a shipment reaches the border of the country, the owner, or the purchaser must file the entry documents at the port of entry and pay the estimated duties to customs. Suppose you have engaged the services of a customs broker (or the importer of record), in that case, they will have to comply with the above-mentioned procedures and pay the customs duty on your behalf, as per your authorization.
The first step is to find out the duty percentage rate applicable on the goods you are shipping. This rate varies depending on the country in which the goods are being shipped.
To know more about the duty applicable to a specific product, you can visit the customs or trade tariff page on the destination country’s government website and search for duty rates. This can be done more conveniently using a Harmonized System (HS) code or product description. For example, the duty percentage rate on garden umbrellas from the UK to the US is 6.5%.
The rate applicable to your product can be used to calculate the duty on your shipment. This is done by adding up the value of the goods, insurance costs, freight charges, and any additional expenses incurred. That total is then multiplied by the duty rate to get the duty amount you must pay to the customs for your shipment.
Tariffs are direct taxes imposed on products imported into one country from another. It is levied by the government for many reasons, but an important one is to discourage the import of a specific product into the country. Tariffs add to the cost of a product, which in turn, increases the price of that product in the domestic market.
By imposing tariffs on an item, the government aims to discourage the import of that item and create demand and sales potential for the product in the domestic market. While tariffs are designed to give domestic players the home advantage, it does not always work that way. One such example is the US Steel & Aluminium Tariffs of 2018.
The then US President Trump announced a 25% tariff on steel imports and a 10% tariff on aluminium imports. The aim was to generate more jobs in the country’s steel and aluminium industry and boost its prospects. While this decision did help increase the number of domestic jobs, Trump’s tariffs did not help the U.S. negotiate better trade agreements or significantly improve national security.
The following are some crucial benefits of using tariffs and trade barriers:-
1. Protecting local companies/jobs:- The levying of tariffs is often highly politicized. When goods are imported in large quantities into a country, the possibility of increased competition from these imported products can threaten local industries and products. To cut costs and maintain profits, these domestic companies may reduce their workforce and/or shift their production or manufacturing facilities to a different nation. This can result in a higher unemployment rate and a less happy electorate.
2. Protecting local consumers’ interests:- The government may levy a tariff on a particular product if it finds the specific item to be hazardous to public health. For instance, the government can place restrictions on importing certain types of food items that may cause health issues in the consumers.
3. Protecting infant industries:- Tariffs can be used to protect infant industries, which is evident by the Import Substitution Industrialization strategy employed by many developing nations. The government of a developing economy prefers levying tariffs on imported goods, especially on those industries which are seeing decent growth. Tariffs can result in an increase in the prices of imported goods and create a favorable environment for locally produced goods in the domestic market.
Another advantage is the protection it offers to those industries which are on the verge of dying as they are unable to compete. Tariffs reduce the chances and the rate of unemployment and allow developing countries to shift from agricultural products to finished goods.
4. Ensuring national security:-
Some industries are seen as strategically vital for a nation, especially the ones that support national security measures in one way or the other. The government needs to support such industries and protect their interests. Governments can impose harsh tariffs on those products that are in direct competition to such industries and thus protect them.
5. Retaliation measure:-
Many countries also set tariffs as a retaliation measure. It can be imposed if the government believes that a trading partner is deviating from the accepted norms and business rules to create a dominant position for itself in the market. Retaliation can also be used if a trading partner does not comply with the foreign policy rules and objectives of the government.
A tariff is a tax. It adds to the cost borne by the consumers of imported goods. Tariffs must be deposited with the customs authority of the country imposing them. Tariffs on imports coming into the US are collected by the Customs and Border Protection (CBP), who act on behalf of the Commerce Department.
The government imposes two basic types of tariffs on imported goods. They are as follows:-
First is the ad valorem tax, which is calculated as a percentage of the value of the item.
The second is a specific tariff. It is a tax levied based on a fixed fee calculated per number of items or by weight of the shipment.
These two words are sometimes used interchangeably and possess a thin line of difference, but to sum it up again:-
Duty is a type of indirect tax imposed on the consumer by the government on imported goods as well as locally manufactured products which form a part of the intrastate transaction.
Tariffs are direct taxes imposed by the government on goods imported from a different country. They are used to safeguard the domestic manufacturers and suppliers by reducing the level of competition.