An ad valorem tax is imposed on_____?

Step 1: Analyze the question The question asks what an ad valorem tax is imposed on. The key is the term itself.

Step 2: Explain the concept "Ad valorem" is Latin for "according to value." An ad valorem tax is charged as a percentage of the value of a good or transaction, not as a fixed amount per unit.

Examples:

• Value Added Tax (VAT) in Nigeria is 7.5% of the value of goods and services.
• An import duty of 20% of the value of the imported goods.
• Property tax based on the assessed value of a building.

This is different from a specific tax, which is a fixed amount per unit (for example, ₦50 per litre or ₦10 per carton), regardless of the price.

Step 3: Work through the options

• A. Exports: An ad valorem tax can be applied to exports, but it is not limited to them.
• B. Imports: An ad valorem tax can be applied to imports, such as customs duties, but it is not limited to them either.
• C. The value of a commodity: This matches the definition. The tax is calculated on the value of the commodity.
• D. Special commodities: This describes excise-type taxes on items like tobacco or alcohol, which may be specific or ad valorem, so it is not the defining feature.

Step 4: Answer Options A and B describe where the tax might be applied, while option C describes the basis on which it is calculated.

Correct answer: C. The Value of a Commodity

Exam tip: When you see a Latin term, translate it. "Ad valorem" means "according to value," so look for the option that mentions value. Remember: ad valorem = percentage of value; specific = fixed amount per unit.