Ad Valorem Tax

An ad valorem tax is imposed according to the monetary value of the taxed good, service, property, or transaction. Its rate is expressed as a percentage of the tax base, so the tax payable rises or falls with the assessed value.

How the tax is calculated

Tax liability is calculated by multiplying the applicable rate by the assessed value. For example, at a 10 per cent rate, an item valued at Rs 1,000 bears Rs 100 tax, while one valued at Rs 2,000 bears Rs 200 tax.

• At a constant rate, the tax is proportional to value, not to physical quantity.
• It differs from a specific tax, which imposes a fixed amount per unit, such as per kilogram or litre.
• An ad valorem tax is not inherently progressive; progressivity depends on the rate structure and the distribution of the tax burden.

Fiscal and administrative characteristics

Because the base is monetary value, receipts tend to increase when prices or the value of transactions increase. However, the system depends critically on accurate valuation and effective reporting.

• It automatically distinguishes between cheaper and more expensive varieties of the same product by imposing a larger absolute tax on the latter.
• It provides some revenue responsiveness during inflation without requiring frequent revision of fixed per-unit rates.
• Undervaluation, non-disclosure, and disputes over the assessable value can weaken revenue collection.
• Different percentage rates may be used across goods or services to pursue revenue, equity, or policy objectives.

Application under GST

India's Goods and Services Tax is predominantly ad valorem because tax rates are generally applied to the value of taxable supplies. Under Section 15 of the Central Goods and Services Tax Act, 2017, the transaction value is normally used where supplier and recipient are unrelated and price is the sole consideration.

• GST payable is calculated by applying the relevant rate to the taxable value after prescribed inclusions, exclusions, and valuation rules.
• The input tax credit mechanism concerns credit for tax paid on inputs; it does not alter GST's basic ad valorem character.

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