What Is Excise Tax in the UAE and What Are the Latest Rate Changes?

What Is Excise Tax in the UAE?

Excise tax is an indirect tax imposed on specific goods considered harmful to public health or the environment. It was introduced under Federal Decree-Law No. 7 of 2017 on Excise Tax and took effect on 1 October 2017. Unlike VAT, which applies broadly across most goods and services, excise tax targets a defined list of products, and the rate applied to each category can reach up to 200% of the good’s excise price under the law.

The tax serves two purposes. It discourages consumption of products linked to health or environmental harm by raising their price, and it generates government revenue that supports public services. Because excise tax is calculated on the excise price rather than the final retail price, and applies before customs duty and VAT in the case of imports, it can materially affect landed cost for businesses that import, produce, or store these goods.

Which Goods Are Subject to Excise Tax in the UAE?

UAE excise tax applies to five categories of goods, defined by Cabinet Decision on the recommendation of the Minister of Finance:

• Tobacco and tobacco products
• Electronic smoking devices and tools
• Liquids used in electronic smoking devices
• Energy drinks
• Sweetened drinks, which since 1 January 2026 also includes carbonated drinks with added sugar or sweeteners

Plain carbonated or sparkling water with no added sugar or sweeteners falls outside the scope of excise tax entirely. Carbonated drinks are no longer treated as their own separate excise category, since sugar-sweetened carbonated beverages are now taxed under the sweetened drinks framework described below.

UAE Excise Tax Rates

Excise tax rates depend on the category of goods. The rates currently in force are:

This sugar-tiered model for sweetened and carbonated drinks replaced the previous flat 50% rate under Cabinet Decision No. 197 of 2025, effective 1 January 2026. The change was designed to encourage manufacturers to reduce sugar content, since the tax is now calculated on total sugar per 100ml, including both added and naturally occurring sugar, rather than applied as a flat percentage regardless of formulation. Tobacco, electronic smoking devices and liquids, and energy drinks were not affected by this change and remain taxed at 100%.

How to Calculate Excise Tax in the UAE

Excise tax on tobacco, e-smoking products, and energy drinks is calculated using a percentage-based method, while sweetened and carbonated drinks now use a volumetric method based on litres and sugar content. There are two general calculation approaches recognized under UAE excise tax rules:

• Ad valorem method: excise tax is calculated as a percentage of the product’s excise price. For a 100%-rated good, the excise price is generally taken as half of the designated retail sales price; for goods rated at other percentages, the calculation adjusts accordingly.
• Specific or volumetric method: excise tax is calculated as a fixed amount per unit or per litre, as now applies to sweetened and carbonated drinks under the tiered sugar model.

Example: A 100%-rated product such as a pack of cigarettes with an excise price of AED 20 before tax carries excise tax of AED 20 (Excise Price x 100%). A sweetened carbonated drink with 8g of sugar per 100ml sold in a 1-litre bottle carries excise tax of AED 1.09, regardless of its retail price, since the volumetric method applies to sugar content rather than value.

Who Must Register for Excise Tax in the UAE?

Businesses must register for excise tax with the Federal Tax Authority (FTA) if they import, produce, stockpile, or release excise goods in the UAE, or operate as a warehouse keeper responsible for a designated zone. Unlike VAT, excise tax registration has no minimum turnover threshold. A business becomes liable to register as soon as it engages in an activity involving excise goods, even for a single import or production run.

Example: An importer bringing a single shipment of vaping liquids into the UAE must register for excise tax before that shipment is cleared, even if it does not plan to import excise goods again in the near term.

Excise Tax on Imports: Order of Calculation

When excise goods are imported into the UAE, taxes are applied in a specific sequence rather than all at once on the same base value. Excise tax is calculated first, on the excise price of the goods. Customs duty is applied next, typically at 5% of the CIF (cost, insurance, and freight) value, depending on the product. VAT is calculated last, at 5% of the combined CIF value, customs duty, and excise tax already applied. This means excise tax increases the base on which both customs duty and VAT are ultimately calculated, which can significantly raise the landed cost of imported excise goods compared to non-excise products.

Excise Tax in Designated Zones

A Designated Zone is a fenced and FTA-supervised area treated as outside the UAE for excise tax purposes until goods stored there are released for consumption. Excise goods held in a licensed Designated Zone under the control of a registered Warehouse Keeper remain in tax suspension, meaning excise tax is not due until the goods leave the zone and enter the UAE market. Direct export of excise goods from a Designated Zone out of the UAE remains exempt from excise tax, provided the required export documentation is maintained.

Key Recent Amendments to UAE Excise Tax

Beyond the 2026 sugar-tiered rate change, several other amendments have reshaped excise tax compliance in recent periods:

• Harmonized penalty regime: under Cabinet Decision No. 129 of 2025, excise tax penalties were restructured to align with the penalty framework already applied to VAT and Corporate Tax, including reduced penalties where a business voluntarily corrects an error before the FTA identifies it during an audit.
• Compulsory deregistration authority: the FTA has the authority to compel deregistration of an excise taxable person that stops carrying out excise-liable activities for a continuous period of six months, unless the business can demonstrate an intention to resume those activities within the following six months.
• Stricter export exemption documentation: supporting documentation requirements for exempting exported excise goods from tax were expanded, with Customs authorities now required to cross-verify the type and quantity of exported goods against the documentation submitted.
• Designated Zone compliance standard: a Designated Zone that fails to meet the required conditions and standards can be treated as part of mainland UAE for excise tax purposes, removing its tax suspension benefit.

Businesses handling excise goods should treat these changes as an ongoing compliance requirement rather than a one-time update, since further Cabinet Decisions can adjust rates, categories, or procedural requirements with limited notice.

Excise Tax vs VAT: Key Differences

Businesses new to UAE indirect tax sometimes assume excise tax and VAT work the same way. They do not:

• Scope: VAT applies broadly to most goods and services at a standard 5% rate. Excise tax applies only to a defined list of goods considered harmful to health or the environment, at rates that can reach 100% or more.
• Registration threshold: VAT registration is triggered once taxable supplies exceed AED 375,000 (mandatory) or AED 187,500 (voluntary). Excise tax has no threshold at all; a single qualifying transaction can create a registration obligation.
• Calculation base: VAT is calculated on the final sale value at each stage of the supply chain. Excise tax is calculated on the excise price, and for sweetened and carbonated drinks, on sugar content per litre rather than sale value.
• Order of application on imports: excise tax is applied first, followed by customs duty, with VAT calculated last on the combined value, meaning excise tax indirectly increases the VAT and customs duty a business pays on the same import.

A business dealing in excise goods is almost always also VAT-registered, which means the two taxes need to be reconciled together rather than managed as entirely separate compliance streams.

Excise Tax Return Filing and Record-Keeping

Registered businesses must file excise tax returns through the EmaraTax portal and maintain records of all excise goods movements. Excise tax returns are generally due monthly, with the return and any tax due submitted by a fixed date the following month. Businesses are required to maintain excise tax records, including stockpile and audited reports of excise goods, for a minimum retention period, and failure to produce an audited stockpile report on request during an FTA review can result in the entire inventory being treated as taxable.

Penalties for Excise Tax Non-Compliance

Excise tax penalties now follow the same structured approach applied to VAT and Corporate Tax under Cabinet Decision No. 129 of 2025. Late registration, late filing, and late payment each carry separate administrative penalties, and inadequate record-keeping, particularly the failure to maintain audited stockpile reports, can result in the FTA treating undocumented inventory as fully taxable. Voluntary disclosure of an error before the FTA identifies it during an audit generally results in a reduced penalty compared to an error found during an FTA review, which makes proactive correction worthwhile whenever a compliance gap is discovered internally.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co. supports UAE businesses with excise tax registration, return filing, record-keeping, and compliance reviews for companies importing, producing, or stockpiling excise goods.

Contact Farahat & Co. today to discuss your excise tax compliance requirements.