Excise Tax vs VAT in UAE: Key Differences Every Business Must Know

Taxes are a crucial part of running a business in the UAE. Two of the most important taxes that companies must deal with are Excise Tax and Value-Added Tax (VAT). While both are indirect taxes imposed by the government, they serve different purposes and apply to different types of goods and services.

Many businesses in the UAE misunderstand how excise tax and VAT work, leading to incorrect tax filings, compliance issues, and financial penalties. Whether you are a manufacturer, importer, retailer, or service provider, it is essential to understand the differences between these two taxes and how they affect your business.

This guide explains everything you need to know about excise tax and VAT, helping you stay compliant, avoid unnecessary fines, and manage tax obligations efficiently.

What is Excise Tax in the UAE?

Excise tax is a selective tax imposed on specific goods that are harmful to health or the environment. The UAE government introduced excise tax to reduce consumption of unhealthy products while generating additional revenue.

Excise tax applies to products that are:

1. Harmful to human health, such as tobacco and vaping products.
2. High in sugar or stimulants, such as soft drinks and energy drinks.

Excise tax is calculated as a percentage of the retail price or import cost, whichever is higher. Businesses must pay excise tax upfront, before the products enter the market.

Unlike VAT, excise tax is included in the product price and is not collected separately at the point of sale. This means that consumers do not see a separate excise tax charge on their receipts, but they pay a higher price due to excise tax being built into the cost.

What is VAT in the UAE?

Value-Added Tax (VAT) is a broad-based consumption tax that applies to most goods and services in the UAE. Introduced in 2018, VAT is designed to generate government revenue without relying on oil income.

VAT is charged at a standard rate of 5% on most goods and services, although some categories are zero-rated or exempt. Unlike excise tax, which applies only to specific products, VAT applies to nearly all business transactions.

Unlike excise tax, which is already included in product prices, VAT is added at the point of sale and must be separately stated on invoices. Businesses act as tax collectors on behalf of the government, charging VAT to customers and remitting it to the Federal Tax Authority (FTA).

Key Differences Between Excise Tax and VAT

Scope of Taxation

Excise tax applies only to specific products that are considered harmful or unhealthy, such as tobacco, vape products, energy drinks, and soft drinks. VAT, on the other hand, applies to most goods and services across all industries, except for exempt categories.

Businesses dealing with everyday products, professional services, retail goods, and digital products must register for VAT, while only businesses handling excise goods must comply with excise tax regulations.

Who Pays the Tax?

Excise tax is a business liability that must be paid before goods enter the market. This means that importers, manufacturers, and warehouse operators must pay excise tax to the FTA before selling the goods to retailers or consumers.

VAT, however, is a consumer tax collected at the point of sale. Businesses charge VAT to customers and then submit the collected tax to the government. VAT is not an additional business cost because companies can recover input VAT paid on expenses, reducing the overall tax burden.

Tax Rates

Excise tax rates are much higher than VAT rates, designed to discourage the consumption of harmful products. The UAE excise tax rates are:

1. 100% on tobacco products, electronic smoking devices, and energy drinks.
2. 50% on soft drinks and sweetened beverages.

VAT is charged at a flat rate of 5%, which is significantly lower than excise tax. Certain goods and services, such as exports, healthcare, and education, may qualify for a 0% VAT rate or exemption.

How the Tax is Collected

Excise tax is included in the price of the product and paid before the goods enter the market. The cost of excise tax is already built into the retail price, and businesses handling excise goods must calculate and pay the tax in advance.

VAT is charged separately at the point of sale and collected from the end consumer. Businesses must track VAT collected on sales and VAT paid on expenses, then file a VAT return to remit the balance to the FTA.

Tax Filing and Compliance Requirements

Businesses registered for excise tax must file monthly tax returns and pay excise tax upfront before goods are imported, manufactured, or stored.

VAT-registered businesses file quarterly or monthly VAT returns, depending on their revenue. Unlike excise tax, VAT returns involve both output VAT (collected from customers) and input VAT (paid on business expenses), allowing businesses to claim VAT refunds where applicable.

Impact on Pricing and Profit Margins

Excise tax increases the base cost of goods, forcing businesses to adjust their pricing strategies to absorb the additional tax. Since excise tax is fixed before sales occur, businesses must ensure that they have enough capital to cover excise tax payments.

VAT has a lesser impact on pricing, as businesses simply add 5% VAT on top of the selling price. Since VAT can be recovered on business expenses, companies can reduce their tax liability and manage cash flow more effectively.

Who Needs to Register for Excise Tax and VAT?

Businesses operating in the UAE must understand when and how to register for excise tax and VAT to avoid non-compliance penalties. Registration is not optional for businesses that meet the criteria, and failure to register on time can result in hefty fines, trading restrictions, and compliance audits.

Excise tax and VAT have different registration requirements based on the type of goods or services a business deals with. Understanding which category your business falls under and the correct steps to register will ensure compliance and prevent unnecessary financial burdens.

1. Determine If Your Business is Liable for Excise Tax Registration

Excise tax applies only to specific goods that are considered harmful to human health or the environment. If a business is involved in the production, import, storage, or distribution of excise goods, it must register with the Federal Tax Authority (FTA) before starting operations.

The excise tax registration process is mandatory even if a business is not directly selling excise goods. For example, a company that stores excise goods in a warehouse or transports them to retailers must still register, even if it does not manufacture or sell the products.

Businesses must determine whether they handle tobacco products, vape devices, e-liquids, soft drinks, or energy drinks. If the answer is yes, registration is required before goods enter the market, and tax must be paid in advance.

2. Assess If Your Business Needs VAT Registration Based on Revenue

VAT applies to most goods and services in the UAE, but not every business is required to register. The decision depends on annual revenue, and businesses fall into three categories:

1. Mandatory VAT Registration: If a company’s annual taxable revenue exceeds AED 375,000, it must register for VAT and charge 5% VAT on taxable sales.
2. Voluntary VAT Registration: If a company’s revenue is between AED 187,500 and AED 375,000, it has the option to register voluntarily. Voluntary registration allows businesses to reclaim VAT paid on expenses, improving cash flow.
3. Exempt from VAT Registration: If a business earns less than AED 187,500 annually, it is not required to register. However, if revenue grows, the business must monitor its earnings and register once it crosses the threshold.

Startups and small businesses must regularly track their revenue to determine if they need to register for VAT. Delaying VAT registration beyond the required threshold can result in fines of AED 10,000, so businesses should be proactive about compliance.

3. Submit an Excise Tax or VAT Registration Application to the FTA

Once a business determines that registration is required, the next step is to apply through the FTA e-Services portal. The registration process requires businesses to provide:

1. A valid trade license that matches the business activity.
2. Owner or shareholder identification documents, such as Emirates ID and passport copies.
3. A detailed business description, including the nature of taxable transactions.
4. Financial records or projected revenue, especially for VAT registration.
5. Customs registration details for businesses importing excise goods.

For excise tax, businesses must also declare the types of excise goods they handle and be prepared to pay tax before distributing these products.

Once the FTA processes the application, the business will receive a Tax Registration Number (TRN), which must be used on invoices, tax returns, and all official business transactions.

4. Register for Excise Tax and VAT Before Importing or Selling Goods

Many businesses mistakenly assume they can import goods first and register for tax later, but this is a major compliance violation.

For excise tax, registration must be completed before importing, manufacturing, or distributing excise goods. If excise goods arrive at UAE customs without a valid TRN, they cannot be cleared, leading to delays and additional costs.

For VAT, businesses must register before crossing the revenue threshold of AED 375,000. Some companies delay registration to avoid charging VAT on sales, but this leads to retroactive tax assessments and fines from the FTA.

To ensure compliance, businesses should:

1. Register early to avoid last-minute delays or penalties.
2. Monitor revenue growth and prepare for VAT registration before reaching the threshold.
3. Confirm excise tax registration before importing taxable goods.

A proactive approach ensures that businesses can operate smoothly without tax-related disruptions.

5. Stay Compliant with Ongoing Tax Filing and Reporting

After registering for excise tax or VAT, businesses must file tax returns on time and keep proper financial records. Registration alone does not fulfill tax obligations—companies must ensure they file accurate returns, pay taxes on time, and maintain tax records for at least five years.

For excise tax, businesses must:

1. File monthly excise tax returns detailing all taxable goods handled.
2. Pay excise tax before goods are sold or distributed, as tax is applied at the production or import stage.
3. Keep detailed records of excise tax invoices, import documents, and warehouse stock reports in case of an FTA audit.

For VAT, businesses must:

1. File VAT returns quarterly or monthly, depending on their tax period.
2. Charge 5% VAT on all taxable sales and claim input VAT on eligible business expenses.
3. Ensure all invoices comply with VAT laws, displaying the correct TRN and VAT amounts.

Late or incorrect tax filings lead to penalties starting from AED 1,000, which increase for repeat violations. Businesses must establish a structured tax compliance process to avoid fines and legal issues.

6. Seek Professional Tax Guidance for Complex Tax Situations

Some businesses have complex tax structures, especially those dealing with multiple types of excise goods or cross-border VAT transactions. Misunderstanding tax laws can lead to unexpected tax liabilities and compliance risks.

Businesses should consult tax professionals or accounting firms when:

1. They handle both VAT and excise tax and need proper tax planning.
2. They import or manufacture multiple excise products with different tax rates.
3. They have international sales and need guidance on VAT treatment for exports.

A professional tax advisor can help businesses optimize their tax structure, file accurate returns, and reduce tax liabilities while ensuring full compliance with UAE tax laws.

How Businesses Can Stay Compliant with UAE Tax Laws

Many businesses struggle with excise tax and VAT compliance, leading to financial penalties and tax audits. To avoid tax risks, companies should:

1. Ensure correct tax registration based on their business activities.
2. Accurately calculate and file tax returns on time to prevent penalties.
3. Use FTA-approved tax software to automate VAT and excise tax calculations.
4. Maintain proper tax records for at least five years to comply with FTA regulations.
5. Seek professional tax advice to manage tax liabilities and optimize compliance.

Final Thoughts: Understanding Excise Tax vs VAT is Essential for Business Success

While both excise tax and VAT are important components of the UAE tax system, they have distinct purposes, different rates, and separate compliance requirements.

Businesses dealing with tobacco, vaping products, energy drinks, and soft drinks must register for excise tax and pay tax upfront before goods enter the market. Meanwhile, companies involved in retail, professional services, hospitality, and most other industries must charge VAT to customers and file VAT returns regularly.

By understanding the key differences between excise tax and VAT, businesses can ensure compliance, avoid penalties, and manage their tax obligations effectively.

For expert assistance with excise tax registration, VAT compliance, or tax filing strategies, Protax Advisors provides professional tax solutions.

Book a free consultation today and let Protax Advisors help you stay compliant while optimizing your tax strategy for business growth.