Excise Tax on Carbonated Drinks in UAE: What Consumers & Businesses Should Know

Carbonated drinks have long been a popular choice among consumers in the UAE. However, due to growing concerns about health risks linked to excessive sugar consumption, the UAE government introduced excise tax on carbonated beverages. This tax is designed to reduce the consumption of sugary drinks while also generating revenue to support public health initiatives.

For businesses involved in importing, manufacturing, distributing, or selling carbonated drinks, excise tax has significantly changed pricing, tax compliance, and profit margins. Consumers, on the other hand, have noticed higher retail prices, leading many to rethink their purchasing habits.

Understanding how excise tax applies to carbonated drinks, who is responsible for paying it, and how it affects pricing and sales is crucial for both businesses and consumers.

Why the UAE Imposes Excise Tax on Carbonated Drinks

The UAE introduced excise tax on carbonated drinks in 2017 as part of a broader effort to reduce the consumption of unhealthy products. These beverages often contain high levels of sugar and artificial additives, which have been linked to obesity, diabetes, and other lifestyle diseases.

By imposing a 50% excise tax on carbonated drinks, the government aims to:

1. Encourage healthier choices by making sugary drinks more expensive.
2. Reduce the burden on the healthcare system caused by diet-related diseases.
3. Generate tax revenue to fund public health programs.

This tax applies to all carbonated beverages, including soft drinks, flavored sodas, and sparkling drinks with added sugar or sweeteners. However, it does not apply to sparkling water that contains no added sugar or flavoring.

How Excise Tax Is Calculated on Carbonated Drinks

Excise tax is not calculated like VAT, which is charged at the point of sale. Instead, excise tax is applied before the product reaches consumers, meaning businesses must factor in tax costs when setting retail prices.

The tax is calculated based on the higher value between:

1. The CIF price (Cost, Insurance, and Freight), which includes the cost of the drink before entering the UAE.
2. The retail selling price (RSP), which is the price the consumer pays.

For example, if a soft drink has a CIF value of AED 2 per can but is sold in stores for AED 5 per can, excise tax is based on AED 5 (the higher value). The 50% excise tax would then add AED 2.50 to the price, making the total cost before VAT AED 7.50.

This pricing structure has made carbonated drinks more expensive compared to before the tax was introduced.

Who Is Responsible for Paying Excise Tax on Carbonated Drinks?

Excise tax is not collected from consumers at the point of purchase. Instead, it is paid by businesses involved in the supply chain before the products reach the market. The main businesses responsible for excise tax payments include:

Importers of Carbonated Drinks

Businesses that bring carbonated drinks into the UAE from other countries must declare the excise tax and pay it before the goods are cleared by customs. Without proof of excise tax payment, imports will not be allowed to enter the UAE market.

Manufacturers Producing Carbonated Drinks in the UAE

Local manufacturers must calculate excise tax on their production costs and submit tax payments before distributing their products. This applies to both multinational beverage companies and smaller local producers.

Distributors and Wholesalers Handling Excise Goods

Businesses that store and distribute carbonated drinks must ensure that excise tax has already been paid before selling them to retailers. If a distributor buys excise goods without proof of tax payment, they may be held responsible for the unpaid tax.

Retailers Selling Carbonated Drinks

Retailers do not have to pay excise tax directly, but they must ensure that suppliers have already settled the tax. If they are found to be selling untaxed carbonated drinks, they could face financial penalties and trading restrictions.

How Excise Tax Affects Pricing and Consumer Demand

The 50% excise tax on carbonated drinks in the UAE has created a significant shift in pricing strategies, consumer purchasing behavior, and overall market trends. Businesses must carefully balance tax compliance, pricing adjustments, and customer expectations to maintain profitability and demand.

Higher prices have naturally forced consumers to rethink their beverage choices, while businesses must develop new pricing models, promotional strategies, and product positioning to remain competitive. To navigate these challenges, companies need a structured approach to pricing and demand management.

1. Analyze Consumer Price Sensitivity and Adjust Pricing Accordingly

When excise tax was introduced, many businesses simply increased retail prices by 50%, assuming customers would continue buying as usual. However, this approach led to reduced sales volume for some retailers, as consumers began seeking cheaper alternatives.

Instead of applying a blanket price increase, businesses should study how different customer segments respond to higher prices. Conducting market research and sales data analysis can help determine:

1. Whether customers are willing to pay more for their favorite carbonated drinks.
2. If they are switching to smaller package sizes to save money.
3. Whether they are reducing consumption or choosing alternative beverages.

Businesses can then create a tiered pricing model, where premium brands retain a higher price point, while lower-cost options use price bundling or promotions to maintain demand.

2. Offer Value Bundles to Offset Higher Prices

Excise tax increases the base price of carbonated drinks, making them less attractive as standalone purchases. To prevent a decline in sales, businesses can introduce value bundles, which reduce the per-unit cost for customers while still covering excise tax expenses.

For example, instead of selling a single can for AED 7.50, retailers can offer:

1. A pack of six at a slightly discounted price, encouraging bulk purchases.
2. A meal combo deal, where a carbonated drink is paired with food at a lower bundled rate.
3. A limited-time offer on multi-pack purchases, ensuring customers feel they are getting better value.

Bundling strategies help maintain sales volume while keeping per-unit profitability intact, making it easier to absorb excise tax costs.

3. Introduce Tax-Efficient Product Sizes and Packaging

Businesses can optimize packaging and portion sizes to maintain customer affordability. Many brands have reduced can sizes from 355ml to 250ml while keeping prices relatively stable, allowing consumers to continue purchasing carbonated drinks without feeling the full tax impact.

A well-planned product size strategy should involve:

1. Launching smaller packaging options at a more affordable price point.
2. Encouraging bulk purchases of family-sized bottles, where cost per liter is lower.
3. Testing limited-edition pack sizes to see how consumers respond to different pricing structures.

By strategically adjusting packaging sizes, businesses can offer more choices to different customer segments while maintaining overall revenue.

4. Promote Low-Sugar and Sugar-Free Alternatives to Retain Health-Conscious Consumers

Since excise tax targets sugar-heavy carbonated drinks, businesses should focus on expanding their product lineup to include low-sugar, diet, or sugar-free versions. Many consumers are now more health-conscious and actively looking for better alternatives to regular sodas.

Retailers and distributors can:

1. Stock a wider range of sugar-free soft drinks and promote them aggressively.
2. Highlight the lower calorie benefits of diet sodas in marketing campaigns.
3. Offer free tastings or sample promotions to encourage customers to switch.

This approach ensures that businesses do not lose customers to competing beverage categories, while also aligning with shifting health trends in the market.

5. Adjust Pricing Strategies for Different Sales Channels

Consumer demand varies based on where the purchase takes place. Carbonated drinks sold in supermarkets, convenience stores, online platforms, and restaurants may require different pricing strategies to remain competitive.

1. Supermarkets can offer promotional discounts on multi-pack purchases.
2. Convenience stores should focus on impulse buys with attractive point-of-sale displays.
3. Online platforms should provide subscription-based discounts to encourage repeat purchases.
4. Restaurants and cafes can absorb part of the tax to keep prices stable and maintain drink sales with meals.

Optimizing prices for different sales channels helps retain customer demand across multiple touchpoints while ensuring profitability.

6. Monitor Sales Trends and Adjust Marketing Strategies Regularly

The impact of excise tax on pricing and demand is not static—it changes as consumers adapt to new price levels and alternatives. Businesses must continuously monitor market trends and be ready to adjust pricing, promotions, and marketing strategies based on real-time sales data.

Regular analysis should focus on:

1. Changes in sales volume and revenue per unit.
2. Customer feedback on pricing, taste preferences, and affordability.
3. Competitive pricing shifts in both carbonated and non-carbonated beverages.

A flexible pricing approach ensures that businesses stay competitive despite excise tax regulations while keeping customers engaged.

Compliance Requirements for Businesses Selling Carbonated Drinks

To legally sell carbonated drinks in the UAE, businesses must follow strict compliance rules set by the FTA. These rules ensure that all excise tax obligations are met and that businesses do not face penalties for tax violations.

Excise Tax Registration

Businesses that import, manufacture, or distribute carbonated drinks must register for excise tax with the FTA before engaging in any taxable activities. Companies that fail to register face a fine of AED 10,000.

Excise Tax Filing and Payments

Excise tax returns must be filed monthly, detailing all sales, imports, and inventory movements. Businesses must ensure that tax payments are made on time to avoid penalties and interest charges.

Stock Monitoring and Record-Keeping

The FTA requires businesses to keep excise tax records for at least five years, including purchase invoices, tax payments, and customs clearance documents. During audits, businesses must provide accurate records to verify tax compliance.

How Businesses Can Manage Excise Tax More Efficiently

Handling excise tax correctly can be challenging, but businesses can take steps to minimize compliance risks and maintain profitability.

Using Tax-Compliant Accounting Software

Businesses should invest in FTA-approved accounting software that can automate excise tax calculations, track tax payments, and generate compliance reports. This reduces manual errors and simplifies tax filing.

Conducting Regular Internal Audits

Regular internal tax audits help businesses identify filing mistakes, missing tax payments, or stock discrepancies before they become a problem during FTA audits.

Consulting Professional Tax Advisors

Since excise tax regulations frequently change, working with experienced tax consultants ensures that businesses remain fully compliant while optimizing their tax strategies.

Final Thoughts: Understanding and Managing Excise Tax on Carbonated Drinks

Excise tax on carbonated drinks has had a major impact on both businesses and consumers in the UAE. While the tax aims to encourage healthier choices, it has also increased costs for businesses and changed consumer buying habits.

To successfully manage excise tax obligations, businesses must:

1. Register for excise tax and pay tax on time before selling taxable products.
2. Adjust pricing strategies to balance compliance and profitability.
3. Maintain proper tax records and ensure full transparency in transactions.

For businesses seeking expert guidance on excise tax registration, filing, and compliance, Protax Advisors provides professional tax solutions.

Book a free consultation today and let Protax Advisors help you stay compliant, reduce tax risks, and optimize your excise tax strategy in the UAE.