Karak, Zafran tea and mocktails: tax penalties for brewing? – New
The excise tax applies among others to specific goods produced in the UAE
Reuters file photo
Excise tax in the UAE was introduced three months before Value Added Tax (VAT), as it applies to limited items and businesses often fail to understand its implications.
“Tell me, is excise tax applicable on this cup of tea?” I asked a new team member as we enjoyed Karak tea in the evening. “I don’t think so,” he answered hesitantly.
“Guessing doesn’t help with taxes. Read carefully and figure out the answer,” I remarked.
The excise duty applies to, among other things, specific goods produced in the UAE.
One such category of excise goods is ‘sweetened beverages’. Sugar-sweetened beverages means a product to which a source of sugar or other sweetener is added which is produced as (a) a ready-to-drink beverage intended for use as a beverage, or (b) concentrates, powders, gels, extracts or any form that can be made into a sweet drink.
Whenever Karak tea, Zafran, mocktails, lemonades or any other similar item is freshly made, it is ready to drink at the point of sale. If the sugar is pre-added, in any proportion, the products could fall under the scope of “sweetened beverages”.
Only if a drink contains alcohol or 75% milk/milk substitutes is it excluded from the category of sugar-sweetened drinks. Unlike coffee, most forms of tea are said to contain less than 75% milk. Similarly, mocktails and other cold drinks that do not contain alcohol or milk could be treated as excise goods.
The ‘Prêt-à-boire’ and the famous McDonald’s briefcase
The term “ready-to-drink” is often misunderstood as a sealed, canned or bottled beverage with a reasonable shelf life. It is also assumed that the place of production and the place of consumption must be separate and distinct.
Just like “ready-to-eat”, “ready-to-drink” means something that can be consumed in the same form it came in without further dilution or preparation.
Shelf life or a separate place of consumption are generally not prerequisites for classifying excise goods for tax purposes.
In India, the tax authorities imposed an excise tax on the production of “soft-serve” offered to customers at the points of sale of a global chain of fast food restaurants. The Apex Court upheld the imposition of the excise tax. The very short shelf life of a “soft-serve” or consumption on the premises was not a deterrent to maintaining the imposition of the excise tax.
Hearsay and industry practice
Businesses and advisers often rely on general hearsay and industry practice, whether correct or not, to determine the applicability of VAT or excise tax.
As taxation is relatively new in the United Arab Emirates (UAE), tax jurisprudence, industry best practices and policy analysis will take their natural time to develop.
In one of our tax conversations over a year ago on 4/12/2021, we discussed the implications of VAT on the recapture of Salik by vehicle leasing companies, even though the apparent practice industry was different. The tax applicability on these recoveries has been confirmed by the Federal Revenue Authority (FCA) in one of its subsequent guidelines.
Taxation is a specialized field. Thorough tax research and knowledge of international case law would be essential in determining the correct tax implications.
No one has ever heard of a teahouse or restaurant in the United Kingdom (UK) or India being registered for excise tax. Thus, it would have been fair to assume that the UAE excise duty could not apply to ready-to-drink teas or mocktails produced in the UAE. However, the excise provisions of the UAE compared to other countries are different.
International case law
The United Kingdom (UK) introduced a similar excise tax on beverages, known as ‘sugar tax’, from 6 April 2018. However, a small producer is specifically excluded from the ‘tax on sugar’. on sugar. A small producer covers producers who produced less than one million liters of taxable beverages over a rolling 12 month period.
In India, tea, lemonades, food, etc. products in a store or restaurant were specifically excluded from excise duty through government notifications.
No such exclusion exists under the UAE excise laws.
How the Concentrate Tax Could Negatively Impact Freshly Brewed Drinks
Excise tax is also applicable on concentrates, powders, gels, extracts or any form that can be made into a sugary drink. To illustrate, premix tea powders that can be mixed with hot water to make a drink.
Beverages produced by combining these concentrates with other products at the point of sale for consumption are specifically excluded from excise duty to avoid double taxation. In the absence of such a specific exclusion, the beverage so prepared would have been subject to excise tax.
One might assume that if a concentrate is subject to excise duty and a drink prepared from that concentrate is specifically excluded, the freshly prepared drink would fall within the scope of the excise duty.
On the other hand, if a freshly prepared drink is not taxable, the taxation of its concentrates or powders could lead to a distortion of competition in the sector between the manufacturers of concentrates and the preparers of cold drinks.
Sanctions and political representation
The excise duty on “sweetened beverages” is 50 percent of the retail selling price. As excise was introduced with effect from 1 October 2017, potential penalties could be up to 40% of the excise tax. These penalties and accumulated tax amounts could potentially destroy the very existence of businesses.
Clarification or advice from the Federal Tax Authority (FTA) on the taxation of concentrates and freshly prepared drinks will be extremely helpful.
The author is the Managing Director of AskPankaj Tax Advisors. For comments and questions, you can write to [email protected] The opinions expressed are his own and do not reflect the policy of the newspaper.