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Excise tax may hurt your wallet, but it’s good for the UAE

At a press conference in Dubai September 27, the Federal Tax Authority reaffirmed its intention to launch the Excise Tax effective October 1, 2017, following a cabinet decision September 13, 2017.

 It said a 50 per cent tax will be imposed on carbonated drinks, while tobacco products and energy drinks will set back consumers double what they pay, with a 100 per cent levy.

New milestone

Khalid Ali Al Bustani, Director-General of the Federal Tax Authority, said: “With the launch of the excise tax, we celebrate a new milestone in our journey to achieve the visions of our wise leaders for the future of the UAE, and to implement the directives of the UAE Government, which has called on all government and private institutions to develop advanced forward-looking services in order to meet the needs of all segments of society, and propel the UAE to the highest ranks on global competitiveness indicators.”

“Implementing Excise Tax in accordance with international best practices is the culmination of an extensive process, one where the FTA worked with some of the world’s leading companies to develop a tax system that suits the UAE.” Al Bustani added. “The Excise Tax has been adopted to reduce the consumption of goods that damage people’s health.”

The WHO estimated smoking costs the global economy $1 trillion (AED3.67trn) and estimates that in high-income countries, as low as a ten per cent increase on tobacco prices will result in nearly four per cent decline in tobacco use.

Tax rationale

“The project diversifies the government’s revenue streams and boosts its resources, which, in turn, will strengthen the economy and ensure its sustainability,” said Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai, UAE Minister of Finance, and Chairman of the Federal Tax Authority, when issuing the excise tax in august.

“This tax is set to discourage the consumption of products that negatively impact the environment and, more importantly, people’s health, while the revenues it generates will go towards supporting advanced services for all members of society,” Sheikh Hamdan added.

A 2016 UAE-US business Council Report, Preparing for VAT and Excise Taxes in the U.A.E, stated that GCC states are looking at tax levies and treaties “as ways of diversifying their revenue streams, (but) stubbornly low oil prices have given increased urgency to these discussions.”

So, plugging budgetary holes for GCC states is also a driver, and January 2019 will see a five per cent Value-Added Tax (VAT) also make its way into the UAE and Saudi, while other Gulf states are pushing their deadlines to 2019 or beyond.

Consumers pay the price

Deloitte is of the opinion that broad-based VATs at a low rate (in this case, five per cent) generally have a “relatively small negative impact on GDP growth and unemployment.”

“After all, the majority of a VAT usually falls on consumers rather than businesses, and a VAT is thus less likely to distort investment decisions by businesses than any form of direct tax,” it says in a 2016 report .

The Excise tax is primarily payable by the individual end consumer. However, businesses pay it as well and file returns to recoup what was paid by individuals.  They submit a return for all transactions within the tax period (one month) within 15 days after the tax period.

What’s the damage?

While safeguarding one’s health is a worthy and noble endeavour, the damage on purchasing power is something else.

The 50 per cent taxable soft drinks category includes all carbonated/aerated beverages, with the exception of non-flavoured carbonated water, as well as any concentrates, gels or extracts that can be processed into soft drinks.

Soft drinks that cost AED1.5 on average will rise to AED2.25 with the new tax.

The 100 per cent energy drink list includes beverages that may contain stimulants or substances that induce mental or physical stimulation, including but not limited to: caffeine, taurine, ginseng and guarana, as well as any substances with similar effects.

A six pack of Red Bull costs roughly AED30. With the tax, it will now be directly double AED 60.

The same case for tobacco: the average price of a pack of cigarettes is AED10, which will double.

But an August 2017 report by Euromonitor Internatinoal, a research organization, reveals that tobacco sales in the UAE continued to increase in 2016, even though people knew taxes were coming.

“Although consumers were aware of impending tax changes, these had little impact on consumption. Cigars and cigarillos posted the strongest growth in retail volume terms, as these products enjoyed a rise in popularity, particularly among younger adults,” the report read.

The list doesn’t stop here.

“The FTA plans to release lists of new prices for products eligible for Excise Tax, which is calculated based on the retail market price,” FTA said.