The UAE has imposed an excise tax on a variety of commodities since October 2017. This tax is indirectly imposed on specific items throughout production, importation, and sale. The launch of this tax has two primary objectives: to generate revenue for the government and to discourage customers from smoking cigarettes and other harmful products like fizzy drinks and energy drinks. Now let’s see the various approaches to calculating excise costs and the particular tax rates used in the UAE in this article.
To ensure compliance with excise tax regulations in the UAE, registered businesses must regularly file excise tax returns and pay the applicable tax on their excise goods. It is crucial to know how to calculate the excise tax to determine the company's liability accurately. Failure to register for excise tax or neglecting to pay the tax due can lead to penalties and fines imposed by the FTA.
Excise Tax Rates in UAE
On several products and services, including tobacco, energy drinks, and sugary beverages, the UAE has enacted an excise tax. The UAE imposes excise taxes at the following rates:
- Tobacco Products: The excise tax on tobacco products in the United Arab Emirates is 100% of the retail price of the item.
- Energy Drinks: Alcoholic beverages advertised as a stimulant to the body and mind are called energy drinks. Stimulants like caffeine, taurine, ginseng, and guarana are typically present in these drinks.
The definition of energy drinks also includes any compounds that display effects similar to those of the aforementioned substances. Energy drinks are additionally thought of as products that can be converted into energetic beverages, such as concentrated versions, powders, gels, or extracts. Energy drinks come at double the retail price in UAE because the excise tax for energy drinks is 100% in the UAE.
- Carbonated Drinks: All aerated drinks, excluding aerated water, are classified as carbonated drinks.All granules, powders, gels, and extracts that are meant to be turned into carbonated beverages are included in this category. Carbonated beverages are subject to a 50% excise duty, which indicates that the tax is equal to 50% of the beverage's suggested retail price.
The United Arab Emirates has imposed some of the world’s highest tax rates to lower the consumption of harmful products like Tobacco and carbonated drinks.
What are the Methods of Calculating Excise in the UAE
The indirect Excise Tax in UAE on alcohol, tobacco, and soft drink supplies at rates of 50% to 100%, calculated using the Specific and Ad Valorem Method. The Specific Method and the Ad Valorem method are both used in the UAE to determine excise prices.
- Specific Method: The Application of a fixed tax rate per unit of a certain product is the specific approach used. For instance, the tax on energy drinks might be AED 0.1/milliliter whereas the excise price on cigarettes might be AED 0.4/cigarette. The specific method is simple to use and offers clarity for both businesses and customers as they are aware of the precise amount of tax that applies to each unit.
- Ad Valorem Method: This approach bases the excise duty calculation on a part of the product's value.
As an example, based on the retail price high-end automobiles may be subject to a 50% excise tax, whereas jewelry may be subject to a 5% excise tax based on its retail value. The value of the goods must be established to determine the taxable amount using the Ad Valorem Method.
Excise Tax Calculation Example in UAE
- Let's say a pack of cigarettes costs AED 20 in an outlet. The excise price for the pack of cigarettes in the Specified tax method would be AED 20 plus AED 8, making a total of AED 28.
- The excise cost of an energy drink, using the Ad Valorem tax system, would be AED 10 + 100% x AED 10, or AED 20, if the energy drink costs AED 10 in a retail store.
- Applying the ad valorem tax method, the excise cost of a carbonated drink with a suggested retail price of AED 5 would be AED 5 + 50% x AED 5, or AED 7.5.
Challenges in Implementing the Excise Tax in UAE
The greatest challenge in implementing excise tax in the UAE is the enforcement of the tax, specifically in cross-border transactions. This shows that it can be challenging to ensure compliance and obtain the required amount of tax in such situations.
In addition, businesses, especially SMEs may visibly be affected by the adoption of excise tax. The excise tax may be difficult to deal with for SMEs, which might cause one of two outcomes: either higher pricing for customers to make up the rising costs, or less profit for the businesses themselves. As a result, SMEs are negatively impacted, and striking a balance that doesn't hamper or overburden the business becomes a difficult task.
Excise Tax Advisory in UAE
It is essential that those who are liable to taxation obtain advice from qualified tax advisors in the UAE. These consultants can contribute to the smooth execution of tax legislation and standards. Significant fines may be assessed for breaking these rules.
As an Excise Tax Consultant in Dubai, BMS Auditing can be a great help in understanding, calculating and filing excise taxes. Our team of experts is committed to giving advice that is specifically catered to your needs. Contact our team for more information if you have any questions or need assistance with excise tax or other tax-related issues. We are available to guide you through the complexities of taxation and verify that you are following all relevant rules.