Excise tax: its definition, the goods it includes, and its percentage

What is Excise Tax?

In 2017, Saudi Arabia implemented the excise tax for the first time, as part of a GCC tax reform program. This tax aims to reduce the consumption of some products that are harmful to health or the environment, such as tobacco and its derivatives, as well as limit the consumption of luxury goods, and direct the economy towards more useful products.

The excise tax is not imposed directly on the manufacturer, but is borne entirely by the consumer upon purchase. This means that the cost of this tax is added to the price of the final product, which may lead to a decrease in demand for these goods as a result of their higher prices.

This type of tax is imposed on both locally manufactured and imported products, as long as they fall within the categories specified in the list of products subject to excise tax.

Subject to excise tax?

Categories subject to excise tax include:

1. Producers : Companies or individuals who produce taxable goods .

2. Importer : The person who imports selective goods into the country.

3. Holder of excise goods in a tax suspension situation : The person or entity that holds excise goods for which tax has not yet been paid.

4. Holder of excise goods in the transitional phase : The person or entity that holds excise goods during the period of change in the tax system.

Producer Requirements:

• Tax Reports : Producers must file a tax return every two months, divided into six tax periods during the fiscal year.

• Tax calculation : The tax return is based on the quantity of goods offered for consumption since the date of production.

• Payment of Tax : The tax due must be paid within 15 days of filing the tax return.

Importers requirements:

• Payment of tax upon import : Importers must pay the excise tax upon submitting each customs declaration to the Customs Authority.

• Tax review : The Authority reviews the accuracy of the tax calculation for each tax period (every two months).

• Tax differences : If there are differences in the tax calculation, the Authority requires importers to pay the differences.

You can now request the service: Preparing tax returns submitted to you by me

What are the goods covered by the selective tax and its percentage?

1. Tobacco and its derivatives:

• Description: Includes cigarettes, hookah, and tobacco.

• Tax rate: 100%

• Note: The Kingdom imports tobacco worth an estimated 3.5 billion riyals annually, and tobacco is among the 50 most imported commodities in the Kingdom.

Electronic smoking devices and similar tools:

• Description: Electronic hookah, electronic cigarette, and other electronic smoking devices.

• Tax rate: 100%.

Liquids used in electronic smoking devices and similar tools:

• Description: Liquids containing nicotine, flavors, and harmful chemicals used in e-cigarettes.

• Tax rate: 100%.

Energy drinks:

• Description: Drinks containing stimulants such as caffeine and guarana, in addition to large amounts of sugars and flavours.

• Tax rate: 100%.

Soft drinks:

• Description: Beverages containing gas, preservatives and flavourings, excluding carbonated water.

• Tax rate: 50%.

Sweetened drinks:

• Description: Beverages containing any source of sugar, whether ready to drink or requiring preparation such as powders and extracts.

• Tax rate: 50%.

• Note: Taxes on these drinks began in 2019, unlike other goods .

How to calculate excise tax:

The equation for calculating the excise tax is simple and can be explained as follows : Excise tax value = product price × tax rate

After calculating the excise tax value, it is added to the original product price to obtain the final price : Final price = product price + excise tax value.

For example: Let's assume that we have a product (such as a soft drink) whose original price is 10 riyals and the excise tax imposed on it is 100%, in addition to the value-added tax of 15%.

1. Calculating the value of the excise tax: Excise tax value = 10 x (100/100) = 10 riyals

2. Calculating the final price after adding tax: Final price = 10 + 10 = 20 riyals

Goods exempt from excise tax:

Originally, excise tax was only imposed on a limited number of harmful or luxury goods as mentioned earlier. However, there are some goods that may be suspected of falling under the excise tax categories, but are exempted due to their nature or components. These goods include :

1. Milk, dairy products and beverages containing other ingredients but containing 75% or more milk.

2. Infant formula as an alternative to breastfeeding.

3. Types of milk extracted from plants, such as soy milk.

4. Processed milk used as animal feed.

5. Juices made entirely from natural fruits without any artificial additives.

6. Juices made from dried fruits.

7. Drinks served in restaurants in open cups and not packaged or manufactured.

8. Drinks used for medical and therapeutic purposes.

9. Drinks such as fruit juices that contain the natural sugar found in fruit.

Also learn about: The difference between VAT, sales tax and other taxes in the Kingdom of Saudi Arabia

Penalties for non-compliance with excise tax:

1. Penalty for late payment:

A fine of 5% of the total tax value is imposed, and this fine is imposed for each month of delay in paying the tax.

2. Tax evasion penalty:

In the event of tax evasion, a fine shall be imposed equal to the value of the tax due and not exceeding three times the value of the goods subject to tax.

3. Late registration for tax:

A fine will be imposed on those who are late in registering for excise tax , or on those who publish incorrect information about the tax.

4. Reporting Tax Evasion:

The person who reports cases of tax evasion will be granted a reward of up to 2.5% of the total amount of excise tax .