WHAT IS TARIFF?
Countries frequently confront restrictions in terms of natural resources and production capacity, necessitating commerce with other countries to meet the needs and demands of their citizens. However, international trade is not always easy, as policies, geopolitical issues, and market competitiveness can all cause friction between trading partners.
Tariffs are a typical method used by governments to handle conflicts with trading partners. Tariffs are taxes levied on imported products and services to influence trade, create money, or protect domestic industries. Tariffs make imported items less desirable to consumers by raising their prices, encouraging them to buy locally produced alternatives. However, consumers ultimately bear the increased cost burden if they still opt for imported goods despite the tariff.
WHY DO THE GOVERNMENT IMPOSE TARIFFS?
Tariffs are taxes or tariffs levied on imported commodities to achieve various economic, political, and social purposes. Tariffs are implemented by governments for a variety of reasons:
- Protecting Domestic Industries.
One of the key motivations for establishing tariffs is to defend domestic industries against foreign competition. Tariffs encourage consumers to buy domestically produced products by raising the cost of imported goods. This protection assists local businesses in growing, maintaining employment, and developing competitive industries, particularly in areas that are still emerging or vulnerable to external competition.
- Revenue Generation.
Tariffs are a major source of revenue for many governments. Tariffs were a key source of revenue for the government before the implementation of contemporary income taxes. Tariff earnings continue to provide a significant contribution to national budgets in several developing countries, funding infrastructure, public services, and development programs.
- Trade Regulation and Market Stability.
Tariffs are used by governments to limit the quantity and quality of imported commodities, hence regulating commerce. This can help to maintain economic stability by keeping imported products from flooding the market and disrupting local enterprises. Tariffs also allow governments to impose standards on imported goods, ensuring that they meet safety, health, and environmental regulations.
- National security and strategic interests.
Certain tariffs are applied to limit reliance on foreign goods in essential industries including defense, energy, and technology. By boosting domestic manufacturing in these industries, governments hope to secure self-sufficiency during times of crisis, minimizing exposure to supply chain interruptions caused by geopolitical wars or global market swings.
- Retaliation and Trade Negotiations.
Tariffs can also be utilized during international trade discussions. Tariffs may be imposed by governments in reaction to unfair trade practices such as dumping (selling goods below market value) or foreign governments’ excessive subsidies to their sectors. Tariffs serve as a bargaining weapon in trade disputes, encouraging fair trade agreements and protecting national economic interests.[1]
LEGAL FOUNDATION OF TARIFFS:
Tariffs are based on a combination of national legislation and international agreements, representing the relationship between domestic sovereignty and global trade rules. This dual foundation ensures that tariffs are used lawfully to regulate trade while also conforming to international commitments. Tariffs are addressed in depth at both the national and international levels.[2]
Customs Tariff Act of 1975.
The Customs Tariff Act of 1975 is the foundation of India’s tariff policy. It allows for the implementation of a variety of customs duties, including Basic Customs Duty (BCD), Additional Customs Duty, and Protective Tariff. The Act allows the government to classify tariffs as ad valorem, particular, compound, or anti-dumping charges to protect domestic industries from unfair trade practices.The implementation of anti-dumping actions under Sections 9A, 9AA, 9B, and 9C of this Act is very important for defending indigenous industries from the harm caused by dumped imports.[3]
Foreign Trade Development and Regulation Act of 1992
This Act authorizes the Indian government to develop rules for regulating foreign commerce, including tariffs and trade remedies. It is closely related to the Foreign Trade Policy, which specifies the criteria for exports and imports, and plays an important role in defining market access and compliance for enterprises engaged in international trade.
GST and Import Duties
In July 2017, India implemented the Goods and Services Tax (GST), which simplified the taxation structure by combining several indirect taxes. While GST applies to the flow of products within India, it also has an influence on imports. Under the GST structure, imports are subject to the Integrated items and Services Tax (IGST), which is calculated based on the total value of imported items plus any applicable customs charges. This method seeks to streamline commerce while maintaining tariffs as a discrete component of the overall taxation scheme for imports.[4]
Recent developments.
India’s ongoing trade negotiations, such as the proposed Bilateral Trade Agreement (BTA) with the United States, demonstrate the changing character of its tariff policy. The BTA seeks to establish formal dispute resolution processes and improve market access for Indian exporters, contributing to a more stable and predictable trading environment.[5]
TARIFF AND TAX: WHAT’S THE DIFFERENCE?
Tariffs and taxes are both types of financial charges imposed by governments, although they serve distinct purposes. Tariffs are imposed on imported goods with the intent of protecting the native industry by raising the cost of foreign products. Taxes, on the other hand, are levied on income, property, or commodities and services within a country to raise funds for government spending. While both tariffs and taxes can have a financial impact on consumers and businesses, tariffs are more focused on regulating international trade, whereas taxes are more broadly utilized to pay government operations and services.[6]
Tariffs can have a beneficial and negative impact on the economy. Tariffs can safeguard home industries from foreign competition, thereby preserving jobs and promoting economic progress. Tariffs, on the other hand, can raise consumer prices, decrease market alternatives, and prompt retaliation from trading partners. Taxes can have both beneficial and bad effects on the economy. On the plus side, taxes support public services and infrastructure that are necessary for a functional society. Taxes can also help to improve social welfare and economic stability. However, high taxes can deter investment, innovation, and economic progress.[7]
CONCLUSION:
Tariffs are important because they serve two purposes: they are a tool for economic strategy and a way to enforce the law. They are more than just economic measures; they show a country’s overall policy goals, which can include protecting native industries, showing strategic independence, and having an impact on international discussions. National laws, like the Customs Tariff Act of 1975, set tariffs. They also have to follow international trade rules, especially those set by the WTO. They can help the local economy and bring in state money, but they also risk raising prices for consumers, limiting market choice, and starting trade disputes.
In India’s evolving trade and tax structure, particularly in the wake of the GST, tariffs remain distinct from ordinary taxes, but they are intimately related to the importation process. In the dynamic trade and taxation landscape of India, especially after the GST, tariffs are still separate from general taxation; however, they are inextricably linked to the import process through systems like IGST. Tariff policy must carefully balance national interests with international integration as global trade grows more complex. For India to preserve its sovereignty and continue to be a respectable player in global trade, it needs a tariff system that is both economically sound and diplomatically sensitive.
Author: Shreya Bhatnagar
REFERENCES:
[1] https://educationleaves.com/what-is-tariff/
[2] https://thelawtoknow.com/2025/01/23/tariffs/
[3] https://rsmus.com/insights/industries/consumer-goods/the-impact-of-tariffs.html
[4] https://www.lexology.com/library/detail.aspx?g=7d8c15ca-fe08-4484-b56d-f7f158cf412f
[5] https://chambers.com/articles/reciprocal-tariffs-what-can-india-expect
[6] https://smartasset.com/taxes/tariff-vs-tax
[7] https://thisvsthat.io/tariff-vs-tax
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