In October 2017, the United Arab Emirates imposed an excise tax on a variety of commodities throughout their production, importation, and sale. This tax was introduced with two primary objectives – revenue generation for the government and minimizing the consumption of harmful products like tobacco, cigarettes, fizzy drinks, and energy drinks. However, businesses need to be well-informed of particular tax rates levied on different products and various approaches to how to calculate excise tax in UAE.

To ensure compliance with the regulations, registered businesses are required to file excise tax returns regularly and pay appropriate taxes on the pertinent goods. To determine their liability accurately, businesses must learn excise tax calculation, as any errors or failures can lead to legal actions imposed by the FTA (Federal Tax Authority).

Excise Tax in the UAE

Public health and welfare have always been the top priorities of the UAE government. Hence, to enhance the physical well-being of the general public, the UAE government initiated the Excise Tax across the UAE. It is a form of indirect tax on specific goods, especially those harmful to human health or the environment such as Tobacco, Sweetened drinks, Carbonated drinks, Electronic smoking devices, and more.

Excise tax rates

The UAE has implemented an excise tax on several products and services, including tobacco, energy drinks, and sweetened beverages. The approved tax rates are:-

• Tobacco products – 100% tax on the retail price of the item
• Energy drinks – 100% tax on all alcoholic beverages advertised as a stimulant to the body and mind
• Carbonated drinks – 50% tax on all aerated drinks, excluding aerated water
• Electronic smoking devices – 100% tax on electronic smoking devices and tools, including the liquids used in these devices

The UAE government came up with such highest tax rates in order to lower the consumption of harmful products like Tobacco and carbonated drinks.

Excise Tax Registration in the UAE

According toFederal Decree-Law No. 7 of 2017 on Excise Tax, businesses involved in any of the below activities in the UAE are required to register for Excise Tax with the FTA –

• Importing of excise goods
• Production of excise goods
• Releasing goods from an excise tax designated zone
• Collectors or stockpilers of excise goods
• Warehouse keepers of excise goods

A stockpiler is an entity that stores excise goods for business purposes, however, cannot prove that tax has been previously collected on those goods.

The eligible entities are required to register for excise tax with the FTA through an online portal and provide the required details and documents. The list includes:-

• Passport copy and Emirates ID of the business officials
• Trade license
• Official records authorizing the business to oversee activities within the UAE
• Details of the excise goods
• Customs Authority registration details

Additionally, during excise tax registration, the applying entity needs to mention whether they are an importer, producer, or stockpile and the specific goods they import, produce, or stockpile. Once the registration application is approved by the FTA, the organization will be issued a unique TRN number which they will use for further business activities.

Filing Excise Tax Returns

Upon successful registration, businesses must file their excise tax returns monthly on or before the 15th day following the end of each Tax Period. They need to submit the required information about their business to the FTA, such as the excise goods sold, the excise tax payable, and any exemptions or refunds claimed. Once you submit your returns, the FTA will review your details and approve your application accordingly.

Businesses must also ensure to pay the excise tax payable to the FTA regularly through the online portal using a credit card or bank transfer. Following these instructions dutifully will ensure that your business is complying with the excise tax regulations and therefore, is safe from any legal consequences.

How to calculate excise tax in UAE – Methods

The excise tax on products like alcohol, tobacco, and soft drink supplies is calculated using the Specific and Ad Valorem Method.

Specific Method

The specific method is applying a fixed tax rate per unit of a product. For example, the excise tax on energy drinks might be AED 0.1/milliliter whereas on cigarettes, it might be AED 0.4/cigarette. This method offers clarity as both businesses and customers are aware of the exact amount of tax applied to each unit.

Ad Valorem Method

In this approach, the excise tax calculation is based on a part of the product’s value. For example, high-end automobiles may be subject to a 50% tax based on their retail price, whereas jewelry may be subject to a 5% tax based on its retail value. Thus, to determine the taxable amount through the Ad Valorem Method, businesses must establish the value of the goods.

How to calculate excise tax in UAE – Step-by-Step Process

The excise tax rate typically varies depending on the type of product. However, to calculate the tax payable, you can use the given formula:

Excise tax payable = Excise tax rate x Retail selling price of the excise product

First, determine the excise tax rate for the specific excise goods and calculate their retail selling price. Further, using the above formula, multiply the excise tax rate by the retail selling price and get the excise tax payable.

Examples:-

• If a pack of cigarettes costs AED 20, its excise price in the Specific Method would be AED 20+AED 8 = a total of AED 28.
• On the other hand, if an energy drink costs AED 10, its excise cost would be AED 10 + 100% x AED 10, or AED 20, using the Ad Valorem Method.
• Similarly, if the Ad Valorem Method is applied to a carbonated drink with a suggested retail price of AED 5, its excise cost would be AED 5 + 50% x AED 5, or AED 7.5.

Challenges in applying Excise Tax in the UAE

Although the excise tax serves crucial purposes in the UAE, several challenges continue to exist in its enactment:

• Cross border transactions

Ensuring compliance and collecting the required taxes in cross-border transactions can be a significant challenge. To address this issue, the country needs to implement effective border controls and collaboration with neighboring countries.

• Impact on SMEs

Excise taxes can be a top-heavy burden for Small and Medium-sized Enterprises (SMEs). They might need to increase prices to compensate for increased costs or accept reduced profits. Striking a balance while fulfilling the tax objectives can be tricky for SMEs.

• Compliance challenges

Businesses engaged in the supply or manufacture of excise goods are required to comply with the new regulations. This includes the implementation of new accounting and reporting procedures which can be a challenge for businesses.

Get the best Tax Advisory from Shuraa

The qualified tax advisors at Shuraa Tax and Accounting Consultancy can contribute to the smooth execution of tax legislation and standards within the organization. They will assist in understanding, calculating, and filing excise taxes. Their consultancy and tax services are specifically catered to your business taxation needs.

Contact Shuraa Tax Consultants at info@shuraatax.com or visit www.shuraatax.com for more information and queries on how to calculate excise tax in UAE. They will not only guide you through the complexities of taxation but also make sure that your company adheres to all relevant rules.