Excise tax and sweetened drinks: A little storm in a teacup

Our last week’s tax conversation discussed the potential excise tax implications on tea, other drinks and its concentrates. We received an overwhelming response from the readers. Excise laws and its scope, just like VAT and corporate tax, could have a potential impact on you. This week’s article addresses certain follow-up queries from the readers.

Excise tax on concentrates vs on drinks

Many readers wondered as to why should tea prepared at various shops be excisable. The article only explored the taxability conditions and how a tea and other drinks containing sugar could be covered under the scope of excisable goods.

Businesses seem to be already paying excise tax on the premix powders of tea, coffee, hot chocolate etc. However, if a ready-to-drink tea or coffee is not taxable, a question arises if its concentrate should be taxable or not. Any concentrate/powder/gel etc. is taxable if it can be converted into an excisable drink. If the resultant drink such as tea is not otherwise taxable or intended to be taxed, should it concentrate or premix powder be taxed.

Alternatively, if the concentrates are being taxed then should the drinks also be taxable and the producers of such drinks be covered under the excise laws.

A clarification by the tax authorities would help businesses understand the scope of excise tax and any exceptions applicable to the fresh drink producers. Countries such as the UK has expressed exemptions on specific drinks.

Excise tax is on production of excisable goods

An interesting point was made that the freshly prepared tea etc. are not packaged goods and cannot be resold further.

Interestingly, in the growing food-delivery based industry, even tea and other sweetened drinks are easily packed and sold to the consumers. Be that as it may be, unlike VAT, excise tax is a tax on the production of goods.

Excisable goods are treated as produced when the goods are ready to be held out for retail sale or are fit for consumption/sale where the goods are not intended for retail sale.

Even if the goods are not intended for retail sale, excise tax is still applicable if the goods are fit for consumption. To illustrate from the practical experience of having worked with the leading soft-drinks manufacturer, excise tax is payable on the in-house consumption of the excisable goods within the production premises itself.

Excise tax on coffee

Many readers also asked why coffee chains are not charging excise tax in the UAE. The two categories of excisable goods relevant for coffee are (a) Energy Drinks; and (b) Sweetened Drinks

For category (a), the necessary condition to charge excise tax is that the product should be marketed or sold as 'energy drink' in addition to containing caffeine. Just because a drink may contain caffeine does not itself make it excisable. As coffee is not sold or marketed as 'energy drink', excise tax is generally not applicable on coffee.

For category (b), if a beverage containing sugar also contains 75% milk or milk substitutes, it is excluded from the category of excisable goods. If a coffee drink contains at least 75% milk, it is not excisable. However, if it contains sugar but less than 75% milk, the definition of sweetened drink could apply to such coffee drinks also.

Incidentally, in 2016, a woman in Chicago, Illinois had sued the world’s largest coffee chain in the federal court for $5 million, claiming that they put too much ice in its drinks. One wonders if the excess ice could impact the 75% threshold for milk to keep it out of excisable goods.

Tax policy discussions

Taxes have been introduced in the UAE for the first time since Oct 2017/Jan2018. For a subject as complex and nuanced as taxation, the period of 5 years is relatively short for the business environment to adapt to the new tax regime. Businesses are in the process to understand the subtle tax interpretations and its implications on their operations. Tax advisors play a crucial role to research and assist businesses to understand the tax implications and the tax risks.

OECD, countries and their tax authorities are aiming for ‘tax certainty’ as a policy objective. Tax certainty calls for clear and simple rules and regulations that minimise disputes. It helps governments and businesses to effectively budget and plan for their future operations.

‘Tax Conversations’ is an endeavour to share the insights on the tax laws, tax risks and the international tax jurisprudence with all its readers. The depth of the tax research and discussions will also assist the tax authorities to direct the tax policies in the right direction and avoid business disruptions.

(The writer is the managing director of AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.)

• Dubai