Karak, Zafran Tea and mocktails: Brewing tax penalties?

Excise Tax in the UAE was introduced three months before the Value Added Tax (VAT) as it is applicable on limited items and companies often miss out to understand its implications.

“Tell me, is excise tax applicable on this cup of tea?”, I asked a newest team member as we enjoyed Karak Tea in the evening. “I don’t think so”, he replied hesitantly.

“Guessing does not help in tax. Read well and determine the answer”, I remarked.

Sweetened drinks

Excise tax is inter-alia applicable on specific goods produced within the UAE.

One such category of excise goods is ‘Sweetened Drinks’. Sweetened Drinks means a product to which a source of sugar or other sweetener is added that is produced as (a) a ready-to-drink beverage intended to be used as a drink, or (b) concentrates, powders, gel, extracts or any form that can be converted into a sweetened drink.

Whenever Karak, Zafran tea, mocktails, lemonades or any similar items is freshly prepared, it is ready-to-drink at the point of sale. If the sugar is pre-added, in whatever proportions, the products could be covered under the scope of ‘Sweetened Drinks’.

Only if a drink contains alcohol or 75 per cent milk/milk substitutes, it is excluded from the category of sweetened drinks. Unlike coffee, most forms of tea would contain less than 75 per cent milk. Similarly, mocktails and other cool drinks which does not contain alcohol or milk could be treated as excisable goods.

‘Ready-to-drink’ and the famous McDonald’s case

The expression ‘ready-to-drink’ is often incorrectly visualised as a sealed, canned or bottled drink having a reasonable shelf life. It is also assumed that the place of production and place of consumption should be separate and distinct.

Just like ‘ready-to-eat’, ‘ready-to-drink’ means something which can be consumed in the same form in which it presented without further dilution or preparation.

Shelf-life or a distinct place of consumption are generally not pre-conditions for classifying excisable goods for tax purposes.

In India, the tax authorities imposed excise tax on the production of ‘soft-serve’ given to the customers at the outlets of a global fast food chain. The Apex court upheld the imposition of excise tax. The very short shelf life of a ‘soft-serve’ or the consumption within the premises was not a deterrent to uphold the imposition of excise tax.

The hear-says and the industry practice

Companies and advisors often rely on general hear-says and industry practices, whether correct or not, to determine the applicability of VAT or Excise Tax.

As taxation is fairly new to the United Arab Emirates (UAE), the tax jurisprudence, correct industry practice and policy analysis will take its natural time to develop.

In one of our Tax Conversations over a year back on 12/04/2021, we discussed the VAT implications on Salik recovery by vehicle leasing companies even though the apparent industry practice was otherwise. The tax applicability on such recoveries was upheld by the Federal Tax Authority (FTA) in one of their subsequent guidance.

Taxation is a specialised field. A comprehensive tax research and international jurisprudence knowledge would be critical for determining the correct tax implications.

No one has ever heard of any tea shop or a restaurant in the United Kingdom (U.K.) or in India being registered for excise tax. Thus, it would have been fair to assume that UAE excise duty could not be applicable on ready-to-drink teas or mocktails produced in the UAE. However, the UAE excise provisions compared to other countries stand differently.

International jurisprudence