Home > Income Tax > Help Center > Guide on Tariff Last Updated: Mar 09th 2025
Guide on Tariff — Explained
In recent times, the term "Tariff" has gained significant prominence following the election of Mr. Donald Trump to a second term as President of the United States.
Nevertheless, the term tariff is not a recent addition to our tax terminology; its historical roots extend several centuries into the past.
This document covers
- Background of word "Tariff"
- Meaning of "Tariff"
- Different types of Government Revenue
- Difference between Tax and Tariff
- Can Tariffs replace the Income Tax?
1. Background of word "Tariff"
- The term "Tariff" comes from the Arabic word "Ta'rif," which meaning "notification" or "announcement". This name was adopted as "Tarifa" by Spanish and Portuguese merchants, meaning "price list" or "tax on goods".
- Around the 16th century, the English adopted the term "Tariff" to refer to customs duties placed on imported and exported products.
- Tariffs were employed as both a revenue source and an economic weapon to limit imported goods' impact in domestic markets.
- Tariffs are also referred to as a "geopolitical tax" that can be utilized to influence international trade.
2. Meaning of "Tariff"
- Revenue Generation: A tariff is a levy or duty imposed by the government on the import and export of goods.
- Protectionism: The tariff is imposed to regulate international trade by raising the cost of imported items while making domestic products more competitive in the market.
- Regulation: The tariff can also used to regulate balance of trade against a specific country.
3. Different types of Government Revenue
Tariffs are one of the sources of government revenue. However, the government can earn revenue in a variety of ways. The various ways in which the government can create revenue are as follows:
| Type | Meaning | Example |
|---|---|---|
| Tax | General financial charge imposed by govt. on income, purchase of goods or services etc | Income tax, GST, property tax etc |
| Tariff | Extra tax imposed on import / export of goods | Tariff on electronic goods; India imposes import tariff on smartphones by 15% of the total value to promote local manufacturing. |
| Levy | The act of imposing any tax, penalty, or fee (but not to be confused with the actual tax rate etc.) Example: If the Govt. decides to collect 30% tax on all online software services (who do not have substantial presence in India) to make a way for Indians to build their own personal OS, browser, search engine, app store, etc. like China, it is called levy and the money you pay is called tax. | Income tax, GST, property tax |
| Duty | Tax applied on specific goods / services (imports, alcohol, etc). | Import duty like basic customs duty, Excise duty etc |
| Toll | Fee for using infrastructure like roads, bridges, tunnels. | Highway toll (fast tag) etc. |
| Cess | Cess is an additional tax on certain goods or transactions earmarked for a specific purpose. | Health and education cess to promote health and education. GST Cess for specified goods like cars to build new roads, and the cess on tobacco to campaign to reduce dependency on tobacco products. |
| Fee / Charge | Payment for public services | Passport fees, Driving license fees etc. |
| Fine / Penalty | Imposed when one violates a law, not paying tax or other fee in-time. | Traffic fine, Late tax filing penalty etc. |
4. Difference between Tax and Tariff
The following are the key differences between Tax and Tariff
| Particulars | Tax | Tariff |
|---|---|---|
| Purpose | To collect or generate revenue for the government and fund public services | To regulate international trade and protect domestic industries. Also it is one form of revenue to Government |
| Scope | Applicable on income, property, goods, services etc | Applicable on import of export of goods |
| Who is required to pay | All citizens of country including business | Importers or Exporters |
5. Can Tariffs replace the Income Tax?
- Tariffs can only replace the income tax if a country has a high level of imports and the government imposes extremely high tariffs on foreign items.
- However, this is not practicle for huge economies like India because domestic production vastly outweighs imports and the country relies heavily on income tax and GST for revenue.
- Tariffs are most commonly used as a regulatory tool rather than a significant revenue generator in modern economies.