Excise Tax in the UAE: Rate, Exemption and Calculation

Excise tax in the UAE is an indirect tax that was introduced to reduce the consumption of harmful products while contributing to public health and revenue diversification. Governed by Federal Decree-Law No. 7 of 2017, it applies to goods like tobacco, energy drinks, and carbonated beverages. 

Businesses must register for excise tax with the Federal Tax Authority (FTA), ensure accurate excise tax UAE calculations, and file timely returns. This guide explores the excise tax rates, practical examples, the excise tax return process, and available exemptions, offering a comprehensive understanding of how excise tax works in the UAE’s evolving tax framework.

What is Excise Tax?

Excise tax is an indirect tax levied on “excise goods” which are specific goods harmful to health or the environment, such as cigarettes and sugary drinks. Excise Tax is charged at the point of import or production, typically at a rate of 50% to 100%, and applied only once, unlike VAT, which is charged at each stage of the supply chain. 

Businesses dealing with excise goods must register, file returns, and pay the tax to the Federal Tax Authority, with non-compliance resulting in penalties.

Goods subject to Excise Tax in UAE

The following goods are included in the definition of “Excise Goods” are subject to Excise tax 

Tobacco and Tobacco Products: Includes items under Schedule 24 of the GCC Common Customs Tariff, such as:

• Cigarettes, cigars, and cigarillos
• Chewing tobacco
• Hand-rolling tobacco
• Herbal smoking products
• Snuff and expanded tobacco
• Reconstituted tobacco sheets

Carbonated Drinks: Covers all aerated beverages and any concentrates, powders, gels, or extracts intended for making such drinks, excluding unflavoured aerated water.

Energy Drinks: Applies to beverages marketed as energy drinks with stimulants like caffeine, taurine, ginseng, and guarana. This also includes similar substances and any concentrates, powders, gels, or extracts for energy drinks.

Electronic Smoking Devices and Liquids: Includes all electronic smoking devices and tools, whether containing nicotine or not. All liquids used in these devices, with or without nicotine, are also taxed.

Sweetened Drinks: This includes any beverage with added sugar or sweeteners, including:

• Ready-to-drink beverages
• Concentrates, powders, gels, or extracts for making sweetened drinks
• Sources of sugar like white, brown, and powdered sugar, glucose syrup
• Sweeteners such as saccharin, aspartame, sorbitol, and neotame

Exemptions from Sweetened Drink Tax:

• Beverages containing at least 75% milk or milk substitutes
• Baby formula and baby food
• Foods for special medical or dietary needs
• Alcoholic beverages

Excise Tax Regulations

Businesses covered by excise tax must ensure compliance with the following obligations:

Excise Tax Registration

Any business engaged in the import, production, stockpiling, or oversight of excise goods within the UAE is required to register with the Federal Tax Authority (FTA). This includes entities involved in:

• Importing excise goods into the UAE.
• Producing excise goods for consumption within the UAE.
• Stockpiling excise goods in the UAE.
• Managing excise goods at warehouses or designated zones.

Tax Calculation and Payment: Once registered, businesses must calculate the excise tax due on their goods based on the applicable rates. The excise tax must be paid to the FTA according to the established guidelines.

Filing Excise Tax Returns: Businesses are required to file excise tax returns regularly. The return must be submitted by the 15th day following the end of each tax period, detailing the amount of excise tax due and ensuring compliance with all relevant regulations.

Rate of Excise Tax

Excise goods are taxed as per the following rates

How to Calculate Excise Tax in the UAE?

Excise tax in the UAE can be calculated using two primary methods: Specific Method and Ad Valorem Method. Here’s how these methods work:

Specific Rate Method

A fixed tax rate is applied to each unit of the product. This approach provides clarity since the tax amount per unit is predefined.

Example (Cigarettes):

• Retail Price: AED 20
• Excise Rate: AED 0.4 per cigarette
• Calculation: AED 20 + (AED 0.4 × 20 cigarettes)
• Total Tax: AED 28

Ad Valorem Method

The tax is calculated as a percentage of the product's retail price. Since it depends on the product's value, this method is more dynamic.

Example (Energy Drink):

• Retail Price: AED 10
• Excise Rate: 100% of retail price
• Calculation: AED 10 + (100% × AED 10)
• Total Tax: AED 20

Example (Carbonated Drink):

• Retail Price: AED 5
• Excise Rate: 50% of retail price
• Calculation: AED 5 + (50% × AED 5)
• Total Tax: AED 7.5

Excise Tax Exemption in the UAE

The UAE Excise Tax regime provides specific exemptions and reliefs under Federal Decree-Law No. (7) of 2017 and related guidelines. Key exemptions include:

Purpose of Excise Tax in UAE

There are multiple reasons behind the implementation of the UAE excise tax. These reasons are listed below: 

• Public Health: To impose excise on hazardous products like tobacco, energy drinks, and sweetened beverages to reduce consumption.
• Environmental Protection: To reduce the consumption of products that contribute to environmental degradation, such as some electronic smoking devices.
• Diversification of Revenues: To contribute to the economic growth of the UAE through non-oil revenues.
• Regulatory Compliance: To establish a framework for monitoring and levying duty on harmful goods through registration and return of excise taxes.

• Consumer Awareness: To enable better choices to be made by demonstrating the effect of taxation on excise goods.

Responsibilities and Powers of the FTA

The Federal Tax Authority (FTA) is required to implement and oversee the Excise Tax in UAE. It is committed to providing thorough support and guidance, including facilitating registration and return filing.

The FTA also has the authority to:

• Conduct Audits: Audit businesses to ensure compliance with tax regulations and impose penalties for non-compliance.
• Verify Product Classification: Determine the procedures needed to classify a product as an excise good. If classification is unclear, this may involve requesting documents, laboratory tests, or other evidence to verify the product’s ingredients.
• Update Price Lists: Set procedures for adding products to the published price list.

Penalties Under Excise Tax

Non-compliance with excise tax regulations in the UAE can lead to significant penalties. These penalties are imposed for late registration, failure to deregister on time, delayed filing of tax returns, or late payment of taxes. The severity of the penalties escalates based on the nature and duration of the non-compliance.

Comparison of Excise Tax vs VAT in the UAE

Excise Tax and VAT in the UAE differ in their purpose, application, and rates. The table below highlights the key differences between the two tax systems.

Conclusion

Excise tax in the UAE is among the important regulatory steps to decrease the level of consumption of hazardous products for public health and environmental sustainability. From the rates applied on specific goods like tobacco, energy drinks, and carbonated beverages to calculation methodologies and compliance requirements, excise tax plays a crucial role in regulatory requirements. 

Businesses dealing in excise goods are responsible for mandatory registration, timely returns, and payment against set deadlines. Understanding the concept of exemption, eligibility criteria, and penalties will help a business remain compliant and avoid incurring significant penalties.