Recent Updates to UAE Excise Tax Laws: What’s New for 2025?
February 26, 2025
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Excise tax in the UAE was introduced to reduce the consumption of harmful products such as tobacco, vaping products, carbonated drinks, energy drinks, and sweetened beverages. While this tax is meant to encourage healthier choices and generate government revenue, it has also created new challenges for small businesses and local retailers who sell these products.
For small business owners, excise tax means higher costs, tighter profit margins, and increased compliance responsibilities. Unlike large corporations that have strong financial backing and dedicated tax teams, small retailers must carefully manage pricing, inventory, and cash flow to stay profitable while remaining compliant with Federal Tax Authority (FTA) regulations.
Understanding how excise tax impacts small businesses, what challenges it creates, and how retailers can adapt is essential for long-term success in the UAE market.
Excise tax applies equally to all businesses, but its effects are not the same for everyone. Large retailers and multinational brands can absorb tax costs more easily because they have higher sales volumes, better supplier deals, and advanced pricing strategies. However, small businesses often lack these advantages, making excise tax a more serious financial burden.
For many small retailers, the tax reduces customer demand by making products significantly more expensive. Since excise tax is applied before VAT, the final price increase is much higher than just the tax percentage itself. This means that small businesses must either raise prices and risk losing customers or absorb some of the cost and reduce their profit margins.
The financial pressure is even greater for businesses that rely heavily on excise goods for their sales. Tobacco shops, small supermarkets, convenience stores, and beverage retailers face the most challenges, as a significant portion of their revenue comes from products directly affected by excise tax.
Excise tax is not just another expense—it changes the way small businesses handle purchasing, pricing, and inventory management. Since the tax is applied at the import or production stage, businesses must pay the tax upfront before they even sell a single unit.
For a small business with limited cash flow, this can be a major challenge. Unlike larger companies that buy in bulk and negotiate better payment terms, small retailers often have to purchase stock in smaller quantities, meaning they pay tax more frequently and have less room to adjust pricing.
This upfront tax payment ties up working capital, making it harder for small businesses to invest in other areas, such as marketing, staff, or expansion. Some businesses may even struggle to purchase enough stock because they cannot afford to pay the excise tax in advance, limiting their ability to meet customer demand.
Excise tax significantly increases the cost of taxable goods, forcing small businesses and retailers to rethink their pricing strategies to remain competitive. Unlike VAT, which is applied at the point of sale, excise tax is added before the product reaches the shelves, meaning businesses must pay the tax before they even sell a single item. This has a direct impact on pricing, profit margins, and customer buying behavior.
Small businesses cannot afford to simply raise prices and hope customers continue buying. Higher costs often drive customers toward lower-cost alternatives, forcing retailers to adopt strategic pricing tactics that maintain profitability while keeping products attractive to consumers. Here’s how businesses can navigate pricing challenges under excise tax.
Customers in the UAE are highly price-conscious, especially when it comes to products with high excise tax rates, such as tobacco, energy drinks, and vaping products. Before adjusting prices, businesses must analyze how much their customers are willing to pay.
One way to assess price sensitivity is by tracking sales trends before and after excise tax increases. If a previous price hike resulted in a sharp drop in sales, it may indicate that customers are reaching their spending limits.
Retailers can also conduct small-scale price adjustments on selected products to test how customers respond before making full pricing changes across their entire inventory. This allows businesses to find the right balance between covering tax costs and maintaining customer loyalty.
Many retailers make the mistake of directly adding the excise tax amount to the final price, making products appear significantly more expensive to customers. Instead of a simple price increase, businesses can use psychological pricing tactics to make products seem more affordable.
One effective strategy is charm pricing, where prices are adjusted just below a round number. For example, instead of selling an energy drink for AED 12, pricing it at AED 11.90 can subtly reduce perceived cost while maintaining profit margins.
Another approach is price bundling, where excise goods are paired with non-taxed products or sold in bulk deals to encourage customers to spend more while feeling like they are getting a better deal. A convenience store could offer a “Buy 2, Get 1 Free” promotion on energy drinks rather than simply increasing the price per can.
If excise-taxed products become too expensive, customers will start looking for cheaper alternatives. Instead of losing these customers, businesses should proactively offer alternative products at different price points.
For example, a tobacco retailer could introduce nicotine pouches or herbal smoking alternatives for customers looking for a cheaper substitute to taxed cigarettes. A small grocery store could stock locally produced carbonated beverages, which may have lower excise tax costs than imported brands.
Retailers should also highlight smaller packaging options, such as single-stick cigarette sales or smaller energy drink cans, which allow customers to buy in smaller quantities without feeling the full impact of tax increases.
Instead of absorbing the full excise tax impact on a single category, small businesses can distribute price adjustments across their entire product range. If an increase in tobacco prices lowers customer footfall, retailers can compensate by adjusting margins on non-taxed products that customers frequently purchase.
For example, a small supermarket could raise prices slightly on snacks, bottled water, or convenience items while keeping excise-taxed products competitively priced. This way, the business balances overall profitability without making excise goods too expensive for customers.
Since excise tax makes excise goods less affordable, small businesses can retain customers by offering loyalty rewards that create a perception of value.
A tobacco shop, for example, could introduce a loyalty program where customers earn points on every purchase, redeemable for discounts on future transactions. A convenience store selling energy drinks could offer exclusive member-only discounts to encourage repeat purchases.
By creating long-term incentives for customers, businesses can reduce the impact of price increases and strengthen customer retention despite higher costs.
Excise tax applies to all businesses selling taxable goods, but pricing strategies differ between large supermarkets, small retailers, and online sellers. Small businesses must monitor competitor pricing regularly to ensure they are not pricing themselves out of the market.
If large retailers are offering the same excise-taxed products at lower prices, small businesses can differentiate themselves by focusing on better customer service, convenient locations, and personalized product recommendations.
For example, if a major supermarket is selling soft drinks cheaper than a local grocery store, the smaller retailer could offer cold, ready-to-drink options or bundle snacks with the purchase to create additional value that big competitors may not provide.
Customers are often frustrated by price increases, especially for everyday products like carbonated drinks, tobacco, and energy drinks. Instead of just raising prices, small businesses should train staff to explain price changes in a way that customers understand.
For instance, a cashier could say:
“Yes, the price has increased slightly due to government excise tax, but we’re offering a special deal for our loyal customers this month!”
By educating staff on how to communicate excise tax impacts, businesses can help customers accept price increases more easily and reduce negative reactions at the point of sale.
Small businesses not only face financial challenges but also additional administrative responsibilities due to excise tax. Unlike larger corporations that have specialized tax departments, small retailers must handle tax compliance on their own, often without the expertise or resources to do so efficiently.
Excise tax compliance requires detailed record-keeping, monthly tax filings, and proper invoicing. Businesses must:
For a small business owner who is already managing daily operations, dealing with suppliers, and serving customers, these tax requirements add extra pressure. Errors in tax filings can lead to penalties, fines, and potential business disruptions, making compliance a major concern for retailers with limited resources.
Despite the challenges, small businesses can still succeed in a market affected by excise tax. By adopting smart strategies and efficient tax management practices, retailers can maintain profitability while staying compliant.
Raising prices too much can drive away customers, while absorbing tax costs hurts profit margins. Instead of applying a flat price increase, businesses should use tiered pricing—offering discounts on bulk purchases, creating bundle deals, or providing promotional pricing for high-demand items to balance tax costs.
If a business relies heavily on excise goods, it should consider expanding its product range to include non-taxable alternatives. For example, convenience stores that sell carbonated and energy drinks could introduce healthier, lower-tax beverage options. Tobacco shops could explore nicotine-free or herbal smoking products that are not subject to excise tax.
Since excise tax requires upfront payment, small businesses should improve inventory planning to avoid overstocking taxed products. Buying in smaller, more frequent orders can help manage cash flow while ensuring products remain in demand. Working with wholesalers that offer flexible payment terms can also ease tax-related financial strain.
Using FTA-approved tax software can help small businesses automate tax calculations, track excise goods, and file returns on time. This reduces human errors, saves time, and ensures compliance, preventing costly penalties.
Excise tax rules may change over time, and businesses must stay informed about updates, exemptions, and compliance requirements. Attending FTA workshops, consulting tax experts, and using online tax resources can help small businesses stay ahead of regulatory changes.
Excise tax has reshaped the retail landscape in the UAE, creating both financial and operational challenges for small businesses. While the tax increases costs and affects sales, smart pricing, inventory management, and compliance strategies can help small retailers stay profitable and competitive.
By adapting product offerings, improving cash flow planning, and investing in tax automation, small businesses can turn tax challenges into opportunities and continue growing in a highly regulated market.
For expert guidance on excise tax compliance, pricing strategies, and business planning, Protax Advisors provides professional tax consulting services for small businesses and retailers in the UAE.
Book a free consultation today and let Protax Advisors help you optimize your tax strategy, improve compliance, and maintain a strong financial position despite excise tax challenges.
Schedule a consultation call and learn how our expertise in accounting and tax services can benefit your business.