What Is An Excise Tax?

What Is An Excise Tax?
What Is An Excise Tax?

An excise tax is one of the types of indirect tax. The government levies excise tax on specific goods at the time of manufacturing. It is generally levied on heavy goods like tobacco and alcohol. The business entities are supposed to collect and transfer the excise tax to concerned authorities. 

Though the government collects excise taxes from the producers, consumers also bear the cost of excise tax. The producers charge higher prices to consumers for the product for which they have paid the tax. 

The excise tax is usually charged as a percentage of the price or as per-unit cost. It can differ from country to country and product to product.

How Is It Different From The Sales Tax?

What makes excise tax different from the sales tax is in the way it is charged and the range it covers. The government charges excise tax on some heavy goods that are considered harmful, whereas, the government levies sales tax on a wide variety of goods. 

Although both, excise tax and sales tax, are indirect taxes, the government receives sales tax at the point of sale from consumers and the excise tax at the point of manufacturing from the producers. The producers collect the excise tax from the consumers in the form of higher prices of the goods.

Also, the government mostly collects sales tax as a percentage of cost whereas, the excise tax can be collected both as a percentage of the cost as well as a per-unit basis.

The sale tax and excise tax can vary in different regions based on the product.

How To Calculate And Reverse The Excise Tax From Total Sales?

There are two types of excise taxes, the tax that the government collects on a per unit basis, such as per gallon, liter, etc. is known as the specific excise tax. You can calculate the total liability of this tax by multiplying the total quantity by the tax paid per unit.

Total tax liability  = Total Quantity * tax per unit

Another type of excise tax is the ad valorem tax, which is collected as a percentage of the value of the product. You can calculate the total tax liability by multiplying the tax rate by the quantity and price of the product.

Total tax liability = product price * Quantity * Tax Rate

However, if you are wondering how much you have paid as the excise tax, you can learn about it by reverse calculation of Excise tax from total sales. If you have a receipt and know the Excise tax, you can find out the excise duty. Instead of calculating excise tax on the purchase, you can calculate excise tax reverse and distinguish it from the total sales.

To reverse excise tax from total sales, you need to know the total amount including the tax. Then, you can reverse the tax with the following formula, 

Excise tax paid = total amount / 1 + tax rate * tax rate

For example, if the total amount paid is $1000, and the excise tax rate is 10%, you can divide 1000 with 110 and multiply the outcome by tax rate 10 to get the answer 90.90. It will be the amount you paid as the excise tax out of total sales. You can deduct it from the total amount to get the pre-tax amount.