UAE Excise Tax on Soft Drinks & Energy Drinks: What Retailers Must Know

The UAE government introduced excise tax on soft drinks and energy drinks as part of its efforts to reduce the consumption of sugary and high-caffeine beverages. These products are linked to obesity, diabetes, and other health concerns, leading authorities to impose higher taxes to discourage excessive consumption.

For retailers, excise tax brings several financial and operational challenges, from pricing adjustments to stock management and compliance with Federal Tax Authority (FTA) regulations. Failing to apply excise tax correctly can result in penalties, supply chain disruptions, and potential tax audits.

Understanding how excise tax applies to soft drinks and energy drinks, how to calculate it, and what retailers must do to stay compliant is essential for running a smooth and profitable business.

What is Excise Tax on Soft Drinks & Energy Drinks?

Excise tax is a selective tax that applies to products considered harmful to health or the environment. In the UAE, this tax is imposed at 50% on soft drinks and 100% on energy drinks. Unlike VAT, which is added at the point of sale, excise tax is applied earlier in the supply chain, meaning businesses must pay the tax before the products are sold to consumers.

For retailers, this means higher purchasing costs, requiring adjustments in pricing strategies to maintain profitability. Misapplying excise tax can result in financial losses or legal consequences.

Which Beverages Are Subject to Excise Tax?

The UAE excise tax applies to two main categories of beverages: soft drinks and energy drinks. Retailers must understand the difference to apply the correct tax rates and avoid incorrect pricing.

Soft Drinks – 50% Excise Tax

Soft drinks include any carbonated beverages with added sugar or sweeteners. This covers:

1. Regular sodas, flavored soft drinks, and sparkling juices with added sugar.
2. Powdered drink mixes that create a sweetened beverage when mixed with water.
3. Any non-alcoholic drinks containing added sugar, artificial sweeteners, or other sweetening agents.

Energy Drinks – 100% Excise Tax

Energy drinks include any beverage that contains stimulants such as caffeine, taurine, ginseng, or other ingredients marketed as boosting energy levels. This includes:

1. Popular energy drink brands with caffeine or stimulants.
2. Energy shots and concentrated formulas meant to increase alertness.

If a beverage is marketed as an energy-boosting drink, it is taxed at 100%, even if it does not contain traditional stimulants.

Some beverages do not fall under excise tax, such as plain bottled water, unsweetened juices, fresh fruit juices, and milk-based drinks. Retailers must check FTA classifications to ensure they apply the correct tax rates.

How Excise Tax Affects Retailers

Excise tax impacts retailers in several ways, from product pricing and inventory management to customer demand and profitability. Businesses must adjust their pricing strategies and ensure compliance with tax regulations to avoid financial losses.

Higher Purchase Costs for Retailers

Since excise tax is applied before the products reach the retailer, it increases the cost of purchasing soft drinks and energy drinks. For example:

1. If a soft drink costs AED 5 before tax, a 50% excise tax adds AED 2.50, bringing the total cost to AED 7.50.
2. If an energy drink costs AED 10 before tax, a 100% excise tax doubles the price to AED 20.

Retailers must decide whether to absorb some of the tax cost or pass it on fully to customers. Setting prices too high could reduce sales, while absorbing too much of the tax could cut into profits.

Changes in Consumer Demand

Higher prices on soft drinks and energy drinks may cause a shift in customer buying habits. Many consumers switch to:

1. Cheaper alternatives such as bottled water or natural fruit juices.
2. Buying in bulk from wholesalers to reduce per-unit costs.
3. Less frequent purchases of soft drinks and energy drinks due to higher retail prices.

Retailers must monitor sales trends and adjust stock levels accordingly to avoid overstocking taxed beverages that may not sell as quickly.

Stock Management and Expiry Risks

With higher excise tax, retailers may stock fewer quantities of taxed beverages to reduce financial risk. However, this can also lead to:

1. Stock shortages during peak demand periods, affecting sales.
2. Increased risk of expired stock if high-tax beverages do not sell quickly.

Retailers must find the right balance between demand and stock levels to avoid wastage and lost profits. Using inventory tracking systems can help retailers manage stock more efficiently.

How Retailers Should Apply Excise Tax

Retailers play a crucial role in ensuring that excise tax on soft drinks and energy drinks is correctly applied. Although excise tax is usually paid at the import or manufacturing stage, retailers must ensure proper pricing, record-keeping, and compliance with Federal Tax Authority (FTA) regulations. Failing to apply excise tax correctly can lead to pricing errors, customer disputes, and financial penalties.

To maintain compliance and profitability, retailers must follow a structured approach to excise tax application. This ensures that all taxable beverages are priced correctly, invoices are properly recorded, and the business avoids tax-related risks.

1. Verify That Suppliers Have Paid Excise Tax Before Stocking Products

Excise tax is applied before products reach retailers, meaning suppliers should have already included tax in the purchase price. However, retailers must confirm this with suppliers before placing products on shelves.

To ensure compliance, retailers should:

1. Request detailed invoices from suppliers showing that excise tax has been applied.
2. Check whether the total cost per unit includes the correct tax rate (50% for soft drinks, 100% for energy drinks).
3. Keep a record of supplier tax registration numbers and excise tax receipts for verification.

If a supplier fails to apply excise tax, the retailer may be held responsible for unpaid taxes. It is important to only work with compliant suppliers who provide accurate tax documentation.

2. Set the Right Retail Prices to Account for Excise Tax

Excise tax increases the cost of soft drinks and energy drinks, and retailers must adjust pricing accordingly. However, simply adding excise tax on top of the old price may not always work. Businesses must carefully balance profitability, competitive pricing, and customer demand.

To price excise-taxed beverages correctly:

1. Review pre-tax vs. post-tax costs to determine the minimum selling price that maintains profitability.
2. Compare competitor pricing strategies to ensure prices remain competitive.
3. Consider using tiered pricing, offering bulk discounts or promotional offers to encourage sales despite higher prices.

Retailers should avoid absorbing too much of the excise tax, as this can lead to profit margin reductions. Instead, they should implement dynamic pricing strategies that allow them to recover costs while keeping products attractive to customers.

3. Clearly Display Tax-Inclusive Prices to Avoid Customer Confusion

Retailers must ensure that customers fully understand the final price of excise-taxed beverages. Since excise tax significantly increases the cost of soft drinks and energy drinks, unclear pricing can lead to customer frustration, pricing disputes, and lost sales.

To ensure transparency:

1. Update shelf labels, menu boards, and online listings to reflect tax-inclusive prices.
2. Train cashiers and sales staff to explain price changes due to excise tax when asked by customers.
3. Use in-store signage to educate customers on why excise tax applies to certain beverages.

By making pricing clear and transparent, retailers can prevent negative customer reactions and ensure a smooth shopping experience.

4. Keep Accurate Records of Excise Taxed Products

The FTA requires retailers to keep excise tax records for at least five years, meaning businesses must track all excise-taxed beverages separately from non-taxable products. Poor record-keeping can lead to FTA audits, compliance risks, and potential penalties.

To maintain proper tax records:

1. Use a POS system that tracks excise-taxed sales separately from other items.
2. Store purchase invoices and supplier tax receipts for future verification.
3. Conduct regular inventory checks to ensure stock records match tax reports.

Retailers should implement digital accounting solutions to automate record-keeping, reduce human error, and streamline compliance reporting.

5. Adjust Inventory Planning to Manage Excise Tax Impact

Retailers may notice that sales of soft drinks and energy drinks slow down due to higher prices after excise tax is applied. To avoid excess stock or expired inventory, retailers must adjust how they order and store excise-taxed beverages.

To optimize inventory:

1. Analyze sales trends before and after excise tax to adjust stock orders accordingly.
2. Reduce bulk stocking of slow-moving excise-taxed products to prevent waste.
3. Prioritize high-demand brands and packaging sizes that customers still prefer despite higher prices.

By managing inventory effectively, retailers can minimize storage costs, prevent losses from unsold stock, and ensure better cash flow.

6. Train Staff on Excise Tax Compliance and Customer Handling

Excise tax is a complex topic, and many customers may not understand why certain beverages cost more than before. Retailers should train their staff to handle excise tax inquiries professionally to maintain customer trust and prevent complaints.

Training should include:

1. Educating staff on which products are subject to excise tax and why.
2. Teaching how to explain price increases to customers clearly and politely.
3. Ensuring staff can verify excise tax on supplier invoices when receiving stock.

A well-trained team ensures that customers get the right information, and the business remains fully compliant with excise tax rules.

7. Stay Updated on Excise Tax Law Changes

The UAE government periodically reviews and updates tax policies, meaning excise tax rates, exemptions, or reporting requirements may change. Retailers must stay informed about any modifications to excise tax laws to avoid non-compliance.

To remain updated:

1. Follow FTA announcements and tax updates.
2. Attend excise tax compliance training sessions or industry workshops.
3. Work with a tax consultant to review excise tax compliance regularly.

By staying proactive, retailers can avoid last-minute changes that disrupt business operations.

Common Mistakes Retailers Must Avoid

Many retailers make critical mistakes when handling excise tax, leading to penalties and compliance issues. The most common errors include:

Selling Taxed Beverages Without Excise Tax Applied

If a retailer accidentally sells soft drinks or energy drinks at pre-tax prices, they may be held responsible for underpaid taxes. This can result in FTA penalties and financial losses.

Incorrectly Classifying Beverages

Some retailers mistakenly classify sweetened beverages as exempt when they should be taxed. If the FTA conducts an audit and finds incorrect classifications, the business may have to pay back taxes and fines.

Not Keeping Proper Records

Failure to keep detailed invoices, tax receipts, and stock records can lead to FTA investigations and compliance risks. The FTA requires retailers to prove that excise tax was applied correctly on all taxable beverages.

How Protax Advisors Can Help Retailers Stay Compliant

Handling excise tax on soft drinks and energy drinks can be complex, and non-compliance can result in significant financial penalties. Many retailers struggle with tax calculations, pricing strategies, and compliance audits.

At Protax Advisors, we help retailers:

1. Ensure excise tax compliance by reviewing supplier invoices and pricing structures.
2. Maintain accurate tax records to prevent FTA audits and penalties.
3. Optimize pricing strategies to balance profitability and customer demand.
4. Stay updated on excise tax regulations to avoid compliance risks.

If your business sells soft drinks, energy drinks, or other excise-taxed beverages, you must ensure that you are fully compliant with UAE excise tax laws.

Book a free consultation today with Protax Advisors and let our tax experts help you navigate excise tax challenges while maximizing your business profitability.