How is excise tax charged?

The excise tax is an indirect tax that is charged once in the supply chain. It is levied on the manufacture, import, or sale of goods, and also when they are discharged for consumption. The tax is collected from the manufacturer or importer of the excise goods. As the excise tax is charged only once in the supply chain, businesses who have paid duplicate excise on a product will be eligible for a refund. 

For example, Ali manufactures cigarettes, for which he imports raw tobacco. He will be charged excise tax for importing the tobacco as well as for the manufactured cigarettes, so he will be eligible for an excise tax refund.

What are Tax points?

The point or the place where the excise tax that is finally due is known as a Tax point. The Tax point will be different based on whether the goods are shipped into the UAE or whether they are manufactured within the UAE. They can also be affected if it’s a designated zone. 

In all the cases, the date on which excise tax is due to be accounted for determines the excise tax returns.

Let’s take a look on how the points where the excise tax is due will be affected under these scenarios: 

1. When excise goods are imported
   The importer accounts the excise tax due at the date of import.If excise goods are imported into the UAE but are then placed immediately in a designated zone, they are not treated as imports. Only when the goods leave the designated zone and are released into free circulation in the UAE, they will be considered as imports. 

2. When excise goods are stockpiled
   Excise goods are stockpiled in the UAE under these conditions, if they are not allowed for free circulation in the UAE, or if excess excise goods held in free circulation. In these cases, the stockpiled goods become subject to excise tax on the date they are received by the stockpiler or the date when the law comes into effect, whichever is later.

3. When excise goods are released for consumption
   The excise tax will be due on the goods on the date they are released for consumption in the UAE.
   The term “consumption” here means that either these goods are produced in free circulation, i.e., outside a designated zone; or they have left a designated zone and are released into free circulation into the UAE.

Excise tax calculation:

There are two ways by which excise tax can be calculated.

1. Specific Excise
2. Ad Valorem Excise

When tax is charged based on the quantity of the goods (e.g., per pack, unit or kilogram), it is said to be calculated by specific rate. With this method, the price of the goods does not play any role.

Ad valorem excise taxes, in contrast, are charged as a percentage of the value of the product.

Ad valorem tax = Number of units or other quantity measurement x Selling price as a value per unit x Ad valorem tax rate.

Excise tax will be charged in the UAE on an ad valorem basis.

The selling price for each excise product will be the value set by the manufacturer or importer. The tax authorities can also determine the appropriate retail price of the excise goods and base the tax calculation on whichever value is higher. 

For concentrates, the value of the product is based on the volume it will eventually have after it is diluted for use. We have explained, how the price of a concentrate is caluculated, later in the document

Valuation 

The excise tax will be implemented on the excise price of the goods. It is higher than the price published by the FTA in the Standard price list. The excise tax is calculated as a percentage of the tax base. The final price includes all other taxes or duties imposed on goods, other than VAT (it will be due after it is introduced in the UAE).

As a consequence, the new selling price of the goods will be the tax base plus the tax due on that value at the applicable rate (50% or 100%). Therefore, if an excise good is subject to a 50% tax rate, the value of excise tax included within the selling price after tax will be 50% of the tax base, but 33.33% of the selling price.

Identifying the designated retail sales price 

If the item is not listed in the standard price list published by the FTA, the excise price of the goods on which tax will be calculated, is the designated retail sales price of the goods without the excise tax included. 

The designated retail sales price is the higher than the:

The recommended selling price of the excise good in the course of its retail sale.

The average retail selling price of the goods in the market. 

Note: Recommended selling price of the goods, is the price when the excise good is sold for retail directly to a consumer. There are exceptions to this case, such as in hotels or restaurants where the selling price is increased as goods are being sold in an establishment, then the ‘recommended selling price’ is not included.

Calculating the average retail selling price 

In order to calculate the average retail selling price of the excise goods in the market, the taxable person should use the following method: 

1. Identify the different prices the excise goods have been sold for in the market during the last 12 months. 

2. If any excise tax was included within those selling prices identified at step 1, deduct the excise tax from the price to arrive at the tax exclusive selling price. 

3. For each different selling price in the previous 12 months, identify the total quantity of excise goods sold at that price and multiply the quantity sold by the selling price to calculate a market revenue figure for that price, for the period. Add the results of this calculation together for each price, to arrive at the total market revenue for excise goods over that 12 month period. 

4. Divide the total market revenue by the total number of excise goods sold during the period – this will give you the average tax base of the goods. 

5. Multiply the figure at step 4 by the appropriate tax rate to calculate the notional excise tax on the price. 

6. Add the figures from step 4. And step 5. Together to calculate the average market selling price of the goods.

Calculating the designated retail sales price of a concentrate

In the event that a standard price list is not published by the FTA, the methods specified above to identify the designated retail sales price of an excise good are not appropriate for identifying the designated retail sales price of a concentrate, powder, gel or extract which is to be used to produce a carbonated drink. This is because the retail price applicable to the product when it is finally sold as a drink is not normally identified by the importer or producer, and it may be difficult for the taxable person to identify what price the retailer would sell the final beverage for. 

As a result, where such products are imported, produced or released from a designated zone in the UAE, the calculation of the designated retail sales price shall be announced soon. Example The designated retail selling price of a carbonated drink before the introduction of excise tax is 2 AED – there is no tax included in this price to remove, therefore this is the tax base. Excise tax is due at a rate of 50% of the tax base i.e. 2 x 50% = 1 AED excise tax. The new selling price of the carbonated drink is therefore 2 AED + 1 AED tax = 3 AED. Excise tax is included in the new selling price, calculated as 50% of the tax base, although excise represents a smaller proportion of the selling price i.e. 1 AED / 3 AED = 33.33%.