Karak, Zafran Tea and mocktails: Brewing tax penalties?

Excise tax is inter-alia applicable on specific goods produced within the UAE

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Reuters file photo
Reuters file photo

By Pankaj S. Jain

Published: Sat 13 Aug 2022, 7:25 PM

Last updated: Sat 13 Aug 2022, 7:43 PM

Excise Tax in the UAE was introduced three months before the Value Added Tax (VAT) as it is applicable on limited items and companies often miss out to understand its implications.

“Tell me, is excise tax applicable on this cup of tea?”, I asked a newest team member as we enjoyed Karak Tea in the evening. “I don’t think so”, he replied hesitantly.

“Guessing does not help in tax. Read well and determine the answer”, I remarked.

Sweetened drinks

Excise tax is inter-alia applicable on specific goods produced within the UAE.

One such category of excise goods is ‘Sweetened Drinks’. Sweetened Drinks means a product to which a source of sugar or other sweetener is added that is produced as (a) a ready-to-drink beverage intended to be used as a drink, or (b) concentrates, powders, gel, extracts or any form that can be converted into a sweetened drink.

Whenever Karak, Zafran tea, mocktails, lemonades or any similar items is freshly prepared, it is ready-to-drink at the point of sale. If the sugar is pre-added, in whatever proportions, the products could be covered under the scope of ‘Sweetened Drinks’.

Only if a drink contains alcohol or 75 per cent milk/milk substitutes, it is excluded from the category of sweetened drinks. Unlike coffee, most forms of tea would contain less than 75 per cent milk. Similarly, mocktails and other cool drinks which does not contain alcohol or milk could be treated as excisable goods.

‘Ready-to-drink’ and the famous McDonald’s case

The expression ‘ready-to-drink’ is often incorrectly visualised as a sealed, canned or bottled drink having a reasonable shelf life. It is also assumed that the place of production and place of consumption should be separate and distinct.

Just like ‘ready-to-eat’, ‘ready-to-drink’ means something which can be consumed in the same form in which it presented without further dilution or preparation.

Shelf-life or a distinct place of consumption are generally not pre-conditions for classifying excisable goods for tax purposes.

In India, the tax authorities imposed excise tax on the production of ‘soft-serve’ given to the customers at the outlets of a global fast food chain. The Apex court upheld the imposition of excise tax. The very short shelf life of a ‘soft-serve’ or the consumption within the premises was not a deterrent to uphold the imposition of excise tax.

The hear-says and the industry practice

Companies and advisors often rely on general hear-says and industry practices, whether correct or not, to determine the applicability of VAT or Excise Tax.

As taxation is fairly new to the United Arab Emirates (UAE), the tax jurisprudence, correct industry practice and policy analysis will take its natural time to develop.

In one of our Tax Conversations over a year back on 12/04/2021, we discussed the VAT implications on Salik recovery by vehicle leasing companies even though the apparent industry practice was otherwise. The tax applicability on such recoveries was upheld by the Federal Tax Authority (FTA) in one of their subsequent guidance.

Taxation is a specialised field. A comprehensive tax research and international jurisprudence knowledge would be critical for determining the correct tax implications.

No one has ever heard of any tea shop or a restaurant in the United Kingdom (U.K.) or in India being registered for excise tax. Thus, it would have been fair to assume that UAE excise duty could not be applicable on ready-to-drink teas or mocktails produced in the UAE. However, the UAE excise provisions compared to other countries stand differently.

International jurisprudence

The United Kingdom (UK) introduced a similar excise tax on drinks, famously known as the ‘Sugar Tax’, from 06 April 2018. However, a small producer is specifically excluded from the ‘sugar tax’. A small producer covers such producers which produced less than one million litres of taxable drinks over a period of 12 rolling months.

In India, tea, lemonades, food etc. produced in a shop or a restaurant were specifically excluded from the excise tax by way of government notifications.

No such exclusions exist under the UAE Excise laws.

How tax on concentrates could adversely impact freshly prepared drinks

Excise tax is also applicable on concentrates, powders, gel, extracts or any form that can be converted into a sweetened drink. To illustrate, premix tea powders which can be mixed with hot water to prepare a beverage.

Beverage produced by combining such concentrates with other products at the selling point for consumption are specifically excluded from excise tax to avoid double taxation. In absence of such specific exclusion, the beverage so prepared would have been subject to excise tax.

One would assume that if a concentrate is subject to excise tax and a beverage prepared from such concentrate is specifically excluded, the freshly prepared beverage would be covered under the scope of excise tax.

On the other hand, if a freshly prepared beverage is not taxable, the taxation on its concentrates or powders could lead to distortion of competition in the industry between the concentrate manufacturers and the fresh drink preparers.

Penalties and policy representation

Excise tax on ‘sweetened drinks’ is 50 per cent of the retail sale price. As excise was introduced with effect from Oct 1, 2017, the potential penalties could range from up to 40 per cent of the excise tax. Such penalties and accrued tax amounts could potentially wipe away companies’ existence itself.

A clarification or guidance by the Federal Tax Authority (FTA) on the taxability of concentrates and freshly prepared beverages will be immensely helpful.

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.

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