Complex Made Simple

Excise Tax: Good for you, or good for the government’s pockets?

Even 2 years after its initial implementation in the GCC, excise tax remains elusive to grasp to some. In the grand scheme of things, there are clear-cut winners and losers, and some not so clear-cut.

The UAE defines excise tax as “a form of indirect tax levied on specific goods which are typically harmful to human health or the environment.” Governments state that excise tax benefits the consumer and provides a new source of income for state budgets Excise tax, like VAT, is helping to diversify GCC economies away from oil

Before the UAE, Saudi Arabia and Bahrain drafted Excise Tax law in 2017, the newly-implemented levy was still a foreign concept for GCC denizens. 

Even today, some two years later, the concept might still seem a bit fuzzy to the average consumer unsure why their favorite consumables are rising in price. 

After all, what purpose does excise tax serve exactly? 

The consumer’s best interests at heart…

Internationally, excise tax has been known to be placed on often-recreational consumables that harm the individual or the environment. Think cigarettes or energy drinks. Some countries, like the UK, have even placed the tax on oil products such as petrol, to encourage the use of public transportation to help reduce CO2 emissions.

The UAE defines excise tax as “a form of indirect tax levied on specific goods which are typically harmful to human health or the environment.” 

Since 2017 in the UAE and Bahrain, all tobacco products and energy drinks have been taxed at 100%, whereas carbonated drinks have been taxed at 50%. Saudi initially followed suit with this model, but this week expanded its list of taxable products to sweetened drinks (50%) and e-cigarettes and their liquids (100%).   

Officially, GCC governments have touted the benefits to the consumer that excise tax holds.

The UAE government justifies the tax on its site, saying: “The UAE Government is levying excise tax to reduce consumption of unhealthy and harmful commodities while also raising revenues for the government that can be spent on beneficial public services.”

…or more money for the government? 

The second part of this statement is crucial as it proves that excise tax falls right in line with the GCC’s economic diversification efforts, such as Saudi Arabia’s Vision 2030. In fact, excise tax and VAT laws in these countries were drafted in the wake of 2017 seeing weak oil sales – which was especially troubling as the GCC’s economy was and remains very oil-reliant. Since then, significant efforts have been taken to ease these Gulf nations’ over-reliance on oil. 

The UAE continues to demonstrate the fruits of this effort.

In fact, the Emirates News Agency (WAM) reports that the International Monetary Fund (IMF) has forecast that the UAE’s GDP will grow 4.7% to AED1.673 trillion ($460 billion) in 2019, compared to AED1.589 trillion ($432.58 billion) a year ago.

The GDP growth is reflective of the economic diversification efforts made by the country, the IMF noted. 

Indeed, excise tax and VAT played a major role in improving the country’s finances. According to Khaleej Times, “initial estimates showed that the excise tax will generate up to around Dh7 billion ($1.9 billion) in annual revenues for the UAE federal budget.” 

GCC countries like the UAE and Bahrain will see more good fortune come their way this year, as oil prices continue to rise. Coupled with the income from excise tax and VAT, and the GCC is truly on its way to enjoying a growing, diversified economy. 

The winners and losers 

If the government is the grand winner in this situation, businesses that produce these products are the true losers. Not only will the government bolster its annual earnings with tax income, it will also save annually on public medical expenses, by dissuading consumers from purchasing excise goods which harm their health and the environment. 

The customers are both winners and losers to an extent, in that they will be encouraged to avoid potentially harmful substances such as soda and cigarettes, to enjoy a healthier life. They are losers, however, in the fact that some of their possibly favorite products have become inflated. 

Many affected businesses both locally and abroad have voiced concern and disdain for these new laws. 

In 2018, the Dubai Refreshment Company, the company responsible in the UAE for world-famous soda brands such as Pepsi, saw its net profit fall 54% to AED 42.3 million ($11.52 million). This is according to a statement to shareholders posted to the Dubai Financial Market.  Revenues totaled AED 646 million ($175.87 million), a 26% decline when compared to the year before.

The company said it was “forced to pass these taxes to the consumer”.

Internationally, the European Union, Switzerland and the United States have complained at the World Trade Organisation about the excise tax imposed by several Gulf Arab states on carbonated and energy drinks, according to notes of a WTO meeting and diplomatic sources, and as reported by Reuters in 2018.

The United States called on the UAE, Saudi Arabia and Bahrain to repeal the tax and urged other Gulf states not to implement it, while Switzerland asked Gulf finance ministers to consider modifying the tax, a Geneva trade official told Reuters.