Ad valorem tax

An ad valorem tax (Latin meaning according to value; Hindi: मूल्यानुसार कर) is a levy calculated based on the assessed value of a transaction, asset, or event. Such taxes are typically imposed during specific occasions, such as the sale of goods (e.g., sales tax or value-added tax/VAT) or annually on owned assets (e.g., property taxes on real estate or personal holdings). They may also apply to significant events like inheritance transfers, wealth relocation (expatriation tax), or imports (tariffs). In certain jurisdictions, stamp duties, often levied on legal documents, are also structured as ad valorem taxes. The core principle remains uniform: the tax liability rises proportionally with the declared or market value of the subject in question.

Operations

Ad valorem taxes are levied based on the assessed value of a taxable asset. In India, this principle is most commonly applied to property taxes, where local municipal bodies periodically evaluate the market value of a property to determine its tax liability.

The assessed value serves as the basis for calculating the annual tax burden imposed on property owners by municipal corporations or other civic authorities. Unlike transaction-based taxes (such as sales tax), ad valorem taxes apply to the ownership of real estate and are collected every year, regardless of whether the property is sold or transferred. Transaction taxes, on the other hand, are levied only once, during the sale or transfer of goods or assets.

This system ensures that property owners contribute annually to public services proportionate to their asset's value, while transaction taxes apply only to economic activities like sales or purchases.