What is the difference between Excise tax and VAT in the UAE?

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April 16, 2024

The UAE Ministry of Finance has announced the implementation of Excise tax (also referred to as the “sin tax”) on selective items such as tobacco, energy drinks, and fizzy drinks. Such an initiative is in line with the government’s view to diversify its revenues away from hydrocarbons. It is also an easier tax for the government to administer than VAT.

Excise tax differs from VAT in that the latter is charged at every step of the supply chain from the manufacturer to the end consumer. Excise tax on the other hand is usually levied at the moment of manufacture. If the particular item were imported, on the other hand, it would be levied at the port where the product enters. Other ways in which Excise tax differs from VAT is that Excise is a duty on the individual and not necessarily a tax, Excise is charged per unit, whereas VAT is charged in the proportion of the price of the good, Excise is also usually applied to a narrow selection of products whereas VAT is charged across a wide range of products and services and finally the amount of Excise tax charged is usually a lot higher than what VAT is charged on products.

In the UAE, it was announced that Excise tax would be levied on a selection of items such as tobacco, energy drinks, and carbonated drinks. The rate of excise tax will be 100% on tobacco products and energy drinks and 50% on carbonated drinks. Note that the standard rate of VAT is 5% with many items such as education, healthcare, local transport, and basic food items being zero-rated, which means no VAT will be levied on them.

One of the goals of the Excise tax is to decrease the consumption of tobacco and high sugary products among the residents of the UAE. These products are also considered to contribute to adverse health issues such as lung cancer, obesity, and diabetes, which place a burden on healthcare services.

The administration of the excise tax for small and medium-sized businesses differs from VAT in that if the goods are manufactured within the country, then the payment of excise tax is usually straightforward by completing an online form with a declaration of the items produced which is then sent to the government along with the payment. If the goods are imported then a courier or freight forwarder can do this on behalf of the business and they would complete submissions and make payments directly to the government. Alternatively, the businesses can register to do this themselves.

This process is also more simple and easier than declaring VAT because when submitting a VAT return, the business must include all input VAT (the VAT paid on goods and services} and output VAT (VAT collected from goods and services provided) with the net paid to the government. VAT data would need to be collected in an organized way, which means that an Accounting system would need to be deployed and businesses would also need to review all products and services consumed and supplied to understand what is within and outside the scope of VAT hence making the administration more complicated than the Excise tax.

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