Excise Tax

What is Excise Tax?

Excise tax is the tax applied to the sale of particular goods and services like tobacco, fuel, and alcohol. It is not directly paid by an individual consumer, instead, the tax department levies the tax on producer or merchant of products, and then they passed it on to the final beneficiary of products by adding it in the product price.

The producer of a product has to pay this tax first then only they can sell it in the market. So in simple words, if any excisable goods manufactured or produced within the country then excise tax is applicable.

Types of Excise Tax

The following are types of excise tax.

Types of Excise Tax

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  • Ad Valorem Tax (Fixed Percentage) – This type of taxes are charged a percentage of the value of the goods or services produced by the company. It is nothing but the per centum applied to the value of the product.
  • Specific Excise Tax (Fixed Currency) – This type of taxes are charged based on physical unit sold i.e., Weight, Volume, quantity, etc. (Example, Litre, Ton, Kg, Gallon).

Excise Tax Formula

Ad Valorem Tax (Fixed Percentage):
Tax Liability = Price of Product × Tax Rate × quantity
 
Specific Tax (Fixed Currency):
Tax Liability = Quantity × Tax per Unit
Excise-Tax

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Examples

The following are examples of excise taxExamples Of Excise TaxExcise tax is a form of indirect tax, in which the tax is levied on all forms of manufacturing goods, sale of goods and services. This tax is not directly levied on individual consumers but applied directly to the producer of goods and services before the sale enters the market.read more.

You can download this Excise Tax Excel Template here – Excise Tax Excel Template

Example #1

Hunt Inc. is the USA Company, which makes beer and sells that into the market. In 24 hrs, the company makes around 1,500 liters of beer while making beer in the company Unit; Company has to pay Excise tax as per the USA Federal tax department and charges a tax as $3 per liter. So how much tax Hunt Inc. to pay on daily quality?

Solution:

Calculation of Tax Liabilities will be –

Example 0.1

Tax Liability = 1,500 × $3

Tax Liability = $4,500

So Hunt Inc. has to pay $4,500 to the federal tax department of the US government for making 1,500 liters of beer in 24 Hrs.

Example #2

Shawn is looking to sell his house property in Washington, DC, and he listed his home for selling price of $750,000. The Washington state legislature charge the excise tax of 1.6% up to and including $500,000 and 1.78% between $500,001-1,500,000. How much tax will the buyer pay?

Solution:

So here the question is how many buyers will pay the excise tax, so the answer for that is zero as a buyer does not pay this type of tax.

This tax has to be paid by the seller of the property. So it is essential to read the question properly. Now we will calculate how much tax will seller pay?

Calculation of Tax Liabilities will be –

Example 2

Tax Liability = $500,000 × 1.60/100

Tax Liability = $8,000

Calculation of Tax Liabilities will be –

Excise Tax Example 2.1

Remaining Selling price that is $750,000 – $500,000 = $250,000 will be taxed at 1.78%

Tax Liability = $250,000 × 1.78/100

Tax Liability = $4,450

Total tax paid by the seller of the property = $8,000 + $4,450 = $12,450

So Shawn has to pay a total tax of $12,450 on his selling price contract.

Advantages

Some of the advantages are as follows:

Disadvantages

Some of the disadvantages are as follows:

  • They increase the price of the goods, which ultimately increase the burden on the final beneficiary of goods, and it also reduces the demands of goods due to higher prices and lesser demands means lower growth of industrialization.
  • Excise tax increases the project cost and cost of modern machinery and technology.
  • Prices of goods and services increase with inflation; the tax revenue remains the same in nominal values.
  • It is termed as regressive tax since it is uniform as it is the same whether it is purchased by a poor man or a rich person.
  • The amount of revenue to be raised by such tax cannot be easily predicted.
  • If it is not paid on time can lead to a heavy financial penalty as decided by the country tax agency.

Conclusion

Excise tax plays an important role for government, and it helps them to generate revenue. It is generally categorized under indirect taxes, and it’s divided into two types, with some pros and cons associated with them. It is easy to administer, so it is imposed to generate revenue.

Recommended Articles

This article has been a guide to what is Excise Tax and its definition. Here we discuss its types, formula to calculate excise tax liabilities along with advantages and disadvantages. You can learn more about accounting from following articles –

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