AD VALOREM TARIFF Meaning and
Definition
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An ad valorem tariff refers to a type of tax levied on imported goods based on a percentage of their assessed value. Derived from Latin, "ad valorem" translates to "according to value," which aptly describes the principle behind this tariff. The tariff is calculated by determining the value of the imported item, typically the transaction value or a similar measure, and then applying a predetermined percentage to that value.
The primary purpose of an ad valorem tariff is to generate revenue for the government and protect domestic industries from foreign competition. By applying a tax based on the value of imported goods, governments aim to discourage imports and promote the purchase of domestically produced goods. This policy supports domestic industries, as it increases the price of imported goods and makes them less competitive in the domestic market.
One advantage of an ad valorem tariff is that it is relatively straightforward to administer. It is based on the declared or assessed value of the imported goods, which can often be easily determined. However, this type of tariff can also be prone to manipulation, as importers may undervalue their goods to reduce the tax burden or engage in other fraudulent practices.
Overall, an ad valorem tariff serves as a tool for regulating trade and balancing the domestic and international markets. It is a commonly employed measure for countries seeking to protect their industries and generate revenue from imported goods.
