Why the UAE Has Two Different Indirect Taxes
The UAE introduced two indirect taxes within a year of each other — excise tax in October 2017 and VAT on 1 January 2018 — and businesses that encounter both for the first time often assume they work the same way. They don’t. They were designed for different purposes, apply to different goods, charge at fundamentally different rates, and impose different obligations on businesses in the supply chain. Understanding where they differ is not just useful context; it directly affects how a business calculates its prices, manages its compliance calendar, and determines whether it even needs to register for each one in the first place.
Both are governed by separate legislation — excise tax under Federal Decree-Law No. 7 of 2017 and VAT under Federal Decree-Law No. 8 of 2017 — and both are administered by the Federal Tax Authority, but the similarity largely ends there.
What Excise Tax Is and Why It Exists
Excise tax is a selective indirect tax imposed on a specific, defined set of goods considered harmful to human health or the environment. It is not intended to be a broad revenue instrument in the way VAT is. Its primary purpose is behavioural: to raise the price of goods the government wants people to consume less of, by enough that the price signal meaningfully discourages purchase. The revenue generated is a secondary benefit that funds public health and welfare initiatives, rather than the primary goal.
The goods subject to excise tax in the UAE are:
- Tobacco products — taxed at 100%
- Energy drinks — taxed at 100%
- Electronic smoking devices (e-cigarettes and similar products) — taxed at 100%
- Liquids used in electronic smoking devices — taxed at 100%
- Carbonated drinks — taxed at 50%
- Products with added sugar or other sweeteners — taxed at 50%
Excise tax is charged at a single, defined point in the supply chain — typically at the point of import into the UAE, at the point of production (when goods are released for consumption), or when goods are released from a designated zone. It is not charged repeatedly at every stage of the supply chain the way VAT is, and it is not recoverable by businesses further down that chain. Once excise tax has been paid on a product, it does not get paid again on the same unit as it moves from importer to distributor to retailer.
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What VAT Is and Why It Exists
Value Added Tax is a general consumption tax applied broadly across most goods and services in the UAE at a standard rate of 5%. Its purpose is primarily fiscal — a stable, broad-based source of government revenue that supports public infrastructure and services without distorting specific markets or targeting particular consumer behaviours.
Unlike excise tax, VAT is applied incrementally at every stage of the supply chain, from production through distribution to the final point of sale. At each stage, a VAT-registered business charges VAT on its sales (output tax) and pays VAT on its purchases (input tax), then remits the difference to the FTA. The net effect is that the total VAT burden falls on the final consumer, while each business in the chain is largely neutral — it collects VAT on behalf of the government and recovers what it paid on its own purchases.
VAT applies to most goods and services, with two important exceptions:
- Zero-rated supplies (0% VAT) — taxable in principle, but at a 0% rate, meaning businesses making zero-rated supplies can still recover input VAT on their costs. Exports of goods and services, international transportation, and the first supply of residential real estate are among the main zero-rated categories
- Exempt supplies — outside the VAT system entirely, meaning no VAT is charged and input VAT on related costs cannot be recovered. Financial services, the subsequent supply (resale) of residential real estate, and bare land are the primary exempt categories
How the Two Taxes Differ — A Structured Comparison
| Feature | Excise Tax | VAT |
|---|---|---|
| Introduction date | October 2017 | 1 January 2018 |
| Primary purpose | Reduce consumption of harmful goods; public health | Broad revenue generation; fiscal sustainability |
| Governing law | Federal Decree-Law No. 7 of 2017 | Federal Decree-Law No. 8 of 2017 |
| Scope | Specific defined goods only (tobacco, energy drinks, etc.) | Most goods and services (broad base) |
| Rate | 50% or 100%, depending on the product | 5% standard; 0% zero-rated; exempt |
| Point of charge | Once — at import, production, or release from designated zone | At every stage of the supply chain |
| Registration threshold | None — any business in scope must register | Mandatory at AED 375,000; voluntary at AED 187,500 |
| Input tax recovery | Not available — excise tax paid is a final cost | Available — businesses recover input VAT on purchases |
| Refund availability | Very limited; generally not refundable once paid | Available where input tax exceeds output tax |
| Who bears the cost | Whoever pays at the point of first entry (typically importer or producer) | Final consumer bears the economic burden |
| Filing frequency | Monthly, due 15 days after tax period end | Quarterly or monthly, due 28 days after period end |
Who Needs to Register for Each Tax
Excise Tax Registration
Excise tax registration carries no minimum threshold. Any business that imports excise goods into the UAE, produces excise goods for consumption in the UAE, stockpiles excise goods in specific circumstances, or manages a warehouse or designated zone for excise goods must register before beginning that activity. The breadth of “any business” here matters — unlike VAT, there is no AED figure a business needs to reach before the registration obligation kicks in.
VAT Registration
VAT registration becomes mandatory when a business’s taxable supplies and imports exceed AED 375,000 in the preceding 12 months, or are expected to exceed that threshold in the next 30 days. Voluntary registration is available to businesses whose taxable activity exceeds AED 187,500 — useful for businesses with significant input costs that would benefit from recovering input VAT before they pass the mandatory threshold.
A business whose turnover sits below AED 187,500 has no VAT registration option available at all. For excise tax, the business is either in scope by the nature of its activity, or it isn’t — revenue plays no part in that determination.
How the Recovery Mechanism Differs
One of the most practically significant differences between the two taxes is what happens to the tax paid by a business further along the supply chain.
Under VAT, a registered business that pays VAT on its purchases can recover that amount against the VAT it collects on its own sales. The tax is effectively passed along the chain and ultimately borne by the final consumer. No individual business in the chain ends up permanently poorer from paying VAT on its own costs, provided it remains VAT-registered and manages its returns correctly.
Excise tax works differently. Once excise tax has been paid on a product — by the importer or producer at the point of entry into the UAE market — it is not recovered or passed along in the same credit-mechanism way. A wholesaler who buys tobacco from an importer has effectively already absorbed the excise tax burden in the price they paid; they don’t pay excise tax again on their sale to a retailer, but they also can’t claim back what the importer paid. The tax stays embedded in the product’s price throughout the chain, visible to the consumer in the final retail price without being charged again at each stage.
What Happens When Both Taxes Apply to the Same Product
Some products attract both excise tax and VAT simultaneously — tobacco and energy drinks being the clearest examples. When this happens, the VAT and excise tax calculations interact in a specific way: VAT is calculated on the total price of the goods, which already includes the excise tax embedded in it. So a product whose manufacturer’s price is AED 10, with 100% excise tax charged, becomes AED 20 before VAT. VAT at 5% is then calculated on that AED 20, making the total price AED 21 — the consumer bears both taxes, with VAT calculated on the excise-tax-inclusive price rather than on the original pre-excise value.
Practical Implications for Businesses
A business that only deals in goods outside the defined excise categories — office supplies, professional services, general retail goods — has one tax framework to worry about (VAT) and can manage registration, returns, and invoicing under that single regime. A business that imports tobacco or energy drinks, by contrast, has two parallel compliance obligations, two separate registration requirements on the FTA portal, two separate return filing processes, and potentially the interaction between the two taxes on dual-applicable products to manage correctly.
Getting this wrong in either direction — failing to register for excise tax because a business misread the scope, or incorrectly calculating VAT on excise-tax-inclusive prices — tends to surface during an FTA audit rather than proactively, by which point penalties have accumulated and the exposure is considerably harder to resolve than it would have been at the point of initial setup.
Frequently Asked Questions (FAQs)
What is the main difference between excise tax and VAT in the UAE?
VAT is a broad consumption tax applied at 5% across most goods and services at every stage of the supply chain, with the final consumer bearing the economic burden. Excise tax is a selective tax at 50% or 100% charged once on specific goods — tobacco, energy drinks, and similar products — at the point of import or production, aimed primarily at discouraging consumption rather than generating general revenue.
What goods are subject to excise tax in the UAE?
Excise tax applies to tobacco products and electronic smoking devices and their liquids (all at 100%), energy drinks (100%), carbonated drinks (50%), and products containing added sugar or sweeteners (50%).
Is there a registration threshold for excise tax like there is for VAT?
No. Excise tax registration carries no minimum revenue threshold. Any business engaged in importing, producing, stockpiling, or warehousing excise goods must register regardless of transaction volume or turnover.
Can businesses claim back excise tax the way they can claim input VAT?
No. Unlike VAT, where registered businesses recover input tax on their purchases against output tax on their sales, excise tax is a final cost once paid. Businesses that buy goods on which excise tax has already been paid cannot recover that amount through a credit mechanism.
How are VAT and excise tax calculated when both apply to the same product?
Where both taxes apply — on tobacco or energy drinks, for example — VAT is calculated on the total price of the product inclusive of excise tax, not on the pre-excise price. A product priced at AED 10 plus 100% excise becomes AED 20; VAT at 5% is then charged on AED 20, giving a total consumer price of AED 21.
How often must excise tax and VAT returns be filed in the UAE?
Excise tax returns are filed monthly, due within 15 days of the end of the tax period. VAT returns are filed quarterly or monthly depending on the FTA’s allocation for a given business, with the return and payment due within 28 days of the end of the tax period.
Can a tourist claim a refund of excise tax paid in the UAE?
No. The UAE’s tourist VAT refund scheme — which allows eligible foreign visitors to reclaim VAT on qualifying purchases made in the UAE — applies to VAT only. Excise tax is not refundable through this or any equivalent tourist scheme.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Managing VAT and excise tax as parallel obligations, particularly where both apply to the same products, requires careful setup across two separate FTA registration profiles, two return filing cycles, and an accurate understanding of how the taxes interact in practice. Farahat & Co. supports businesses across the UAE with VAT and excise tax registration, compliance, and advisory services.
Contact Farahat & Co. today to discuss your VAT or excise tax compliance requirements.
