Tobacco Duties and Excise Tax in Saudi Arabia

Taxes and duties on tobacco products are effective tools used by governments around the world to achieve multiple goals, ranging from promoting public health and reducing the consumption of harmful substances, to providing the public treasury with the revenues needed to support development projects and basic services. In this context, tobacco duties and excise tax are emerging as key pillars in the financial and economic policies of many countries, including Saudi Arabia, as these measures aim to regulate the tobacco market and reduce its negative effects on the individual and society.

Tobacco fees: concept, calculation mechanisms and scope of application

Tobacco fees are defined as amounts of money imposed by government agencies, represented by the Ministry of Municipal and Rural Affairs and Housing in the context of the Kingdom of Saudi Arabia, on commercial activities that obtain a license to sell tobacco products. These fees are not part of the general sales tax or VAT in its traditional form, but rather regulatory fees aimed at controlling the circulation of these products and determining who is authorized to sell them. These fees are applied based on the price of the product, and later added VAT, increasing the final cost to the consumer.

Commercial activities covered by tobacco duty:

Tobacco duties primarily target businesses that fall into categories that provide tobacco products as an integral part of their services or products. These categories include but are not limited to:

  • Shisha shops: These are places specialized in serving shisha and other tobacco derivatives.

  • Restaurants and cafes: that offer tobacco products to their customers upon request, whether shisha, cigarettes or others.

  • Hotels: which provide tobacco products within their services to guests.

It is important to note that these fees do not apply to all outlets selling tobacco products. For example, these fees do not include tobacco products sold in groceries and supermarkets. The reason for this distinction is that groceries and supermarkets are not classified in the list of categories associated primarily with the activity of providing tobacco products and its derivatives, but are public outlets that offer a wide range of goods, and tobacco products are a small part of these goods. This distinction reflects the government's tendency to regulate activities that focus on offering tobacco as a service or a main product, rather than simply selling it as a regular consumer good.

How tobacco fees are calculated per unit sold:

Tobacco fees are calculated in a specific way to ensure fairness in application and achievement of their intended objectives. The calculation mechanism is as follows:

  • Basic tobacco fees: Tobacco charges are charged at 100% of the price of the tobacco product. A minimum fee of SAR 25 per tobacco unit has been established. This means that even if the price of the product is low, the minimum fee applicable to it will not be less than 25 riyals. This minimum applies to each tobacco unit, regardless of how it is sold, whether sold per grain, gram, kilo or any other unit of measurement.

  • Value Added Tax (VAT): After calculating the tobacco fee and adding it to the original product's price, 15% VAT is applied to the new total product price (original price + tobacco fee). This means that VAT is calculated on the final price of the product after the fee is added, increasing the tax burden on the final consumer.

Excise tax: concept, scope, and substantial differences from tobacco duties

Excise tax is another financial tool used by governments to control the consumption of certain goods and services, but it differs from tobacco duties in their scope and objectives. Excise tax is a type of indirect tax imposed on specific goods and services that are considered harmful to public health or the environment, or those that are considered luxury goods. The main objective of this tax is to reduce the consumption of these goods by increasing their prices, thus achieving health, environmental and social goals, in addition to generating additional revenues for the state.

Key differences between tobacco duty and excise tax: 
Although both aim to increase the cost of tobacco products, there are substantial differences between tobacco duty and excise tax:

  • Scope of application: Tobacco duties apply specifically to businesses licensed by municipalities to sell tobacco products, such as restaurants, cafes and shisha shops. These fees are paid as part of the cost of the license to practice this activity. Excise tax, in contrast, is levied on the goods themselves, regardless of where they are sold. They include groceries and other shops that offer products harmful to health, including tobacco products and other excise goods.

  • Objective: Tobacco fees focus on regulating businesses that offer tobacco, and are part of municipal fees. Excise tax, which is broader and aims to reduce the consumption of harmful goods in general, is part of the country's tax policy.

  • Applicable body: Tobacco fees are levied by the Ministry of Municipal and Rural Affairs and Housing, while Excise Tax is imposed by the Zakat, Tax and Customs Authority.

Excise Tax Goods: A 
wide range of goods are classified as excise due to their potential negative impacts. These goods include:

  • Tobacco products: of all types and forms.

  • Soft drinks: due to their high sugar content and health effects.

  • Energy drinks: due to their ingredients that may be harmful when consumed excessively.

  • Sweetened drinks: those with high levels of added sugar.

  • Electronic smoking devices and tools and the like: such as electronic cigarettes and vape devices.

  • Liquids used in electronic smoking devices and tools and the like: such as nicotine liquids and flavors.

Excise Tax Application Rates: 
Excise Tax application rates vary according to the type of commodity, to reflect the extent of damage or accessibility associated with it. The most prominent of these percentages are as follows:

  • 100% on tobacco products: It is the highest percentage imposed on these products to significantly increase their cost.

  • 50% on soft drinks.

  • 100% on energy drinks.

  • 50% on sweetened beverages.

  • 100% on electronic smoking devices and tools and the like.

  • 100% on liquids used in electronic smoking devices and tools and the like.

The mechanism of calculating excise tax when overlapping goods:

In some cases, more than one type of Excise Tax may apply to a single commodity. In this case, the highest excise tax is adopted among the taxes that apply to the commodity. For example, if there is a soft and sweetened energy drink at the same time, three types of excise tax apply to it (soft drink, energy drink, sweetened drink). However, the 100% energy drink tax will be adopted, as it is the highest rate among these types. This principle ensures that maximum tax is applied to goods that combine several harmful characteristics, which reinforces the objective of excise tax in reducing the consumption of these goods.

Internal municipal requirements for the provision of tobacco products: regulation and awareness

In addition to duties and taxes on tobacco products, municipalities set a set of internal regulatory requirements that licensed shops must comply with. These requirements aim to regulate the tobacco delivery environment, protect groups under the age of 18, and raise awareness of the health risks associated with smoking. Compliance with these regulations is not just a legal procedure, it is part of the social responsibility of commercial establishments towards public health.

The most prominent municipal requirements: 
The municipal requirements include a set of procedures that must be applied clearly and visually inside the shops, the most important of which are:

  • Banner: A  clear sign must be installed on the façade at the entrance, measuring 30 cm × 20 cm, clearly inscripting: "Entry is prohibited for those under the age of 18." This sign is the first line of defense to protect juveniles from exposure to the smoking environment and prevent them from buying tobacco products.

  • Guidance board for contact numbers of the relevant authorities: An  indicative board must be placed in a prominent place inside the shop that includes the contact numbers of the relevant government and regulatory authorities. This panel aims to enable customers and the public to report any violations or violations, and to provide channels of communication with the authorities responsible for implementing the regulations.

  • Health warning board: This plate is one of the most important requirements, and must be placed in front of customers according to the forms approved by the National Anti-Smoking Committee. This panel includes several basic elements aimed at educating smokers and non-smokers about the dangers of tobacco.

The Role of Technology in Facilitating Tobacco Duty and Excise Tax Compliance:

The process of calculating tobacco duties and excise tax, and complying with municipal requirements, can seem complex and cumbersome for many businesses, especially those that handle high sales or have product diversity. This is where innovative technical solutions come into play in streamlining these processes and ensuring strict compliance with laws and regulations. Offering integrated business management platforms, such as the integrated Digital Pro accounting system Effective solutions that enable merchants to manage their business efficiently, while ensuring full compliance with tax and regulatory requirements.

How does  the integrated Digital Pro accounting system facilitate the application of tobacco duties?

The team based on the integrated Digital Pro accounting system understands the challenges faced by traders in implementing tobacco duties and excise tax, so it has developed features that greatly facilitate this process:

  • Automatic activation of tobacco fees: The  platform provides an option to activate tobacco fees automatically. Once this option is activated, the system automatically calculates tobacco charges per unit of tobacco products sold, without the need for manual intervention by the merchant. This reduces human errors and saves time and effort.

  • Integrated calculation with VAT: The function of the system is not limited  to calculating tobacco duties only, but extends to accurately calculating VAT after adding tobacco duties to the price of the product. This ensures that invoices issued are fully compliant with tax requirements, and avoids merchants from any potential irregularities.

  • Accurate accounting software: The system provides integrated accounting solutions that manage the calculation of fees and taxes with high accuracy. This software records all financial transactions related to tobacco products, and provides detailed reports that help traders easily track their tax and financial obligations.

  • Compatible Electronic Invoicing Program: Electronic invoicing is an essential part of modern tax requirements.  Through its Digital Pro accounting system, Aamalsoft ensures that all invoices issued by the establishment are 100% compliant with the requirements of the Zakat, Tax and Customs Authority. This includes displaying tobacco duties and VAT separately and clearly on the invoice, facilitating the review and audit process.

  • Inventory and POS Management: The system offers integrated inventory and POS management solutions, enabling merchants to track the movement of tobacco products, manage inventory efficiently, and record sales accurately. This integration simplifies operational processes and provides accurate data used in calculating duties and taxes.

Using such accounting systems enables traders to focus on growing and developing their business, rather than being preoccupied with the complex details of tax and regulatory compliance. It provides peace of mind, reduces the risk of errors and irregularities, and enhances transparency in financial transactions. Thus, technology becomes a strategic partner for businesses in a changing regulatory environment, helping them to thrive and grow while fully adhering to regulations and laws. Tobacco duties and excise tax are an integral part of the regulatory and financial framework aimed at regulating the market for tobacco products and other harmful goods, limiting their consumption, and protecting public health. Understanding and complying with these regulations is vital for businesses, while modern technology solutions provide the support needed to streamline these processes and ensure accurate compliance. The ultimate goal of these policies goes beyond mere revenue collection to build a healthier and more conscious society that contributes to sustainable development and well-being for all.