ITC Accounting and Tax Consultancy

Excisable Goods Within A Designated Zone Is Excise Tax Free, How About Deficient Or Missing Goods?

Excise Goods stored, preserved or processed in a Designated Zone or transferred between Designated Zones will be Excise tax-free as per the Cabinet decision 37 of 2017 on the Executive Regulation of the Federal Decree-Law No (7) of 2017 on Excise tax. However, FTA requires the taxpayer to report all kinds of Excisable transactions within the designated zone through the FTA portal. 

FTA have recently released a public clarification (EXTP007) on the Excise goods which are deficient or missing and the process for the destruction of Excise goods within the Designated Zone. From January 2021 based on the opening stock declaration (EX204 & EX204A), FTA has been tracking the goods that came and left the Designated zone for each Designated zone holder. Hence the logic remains as the quantity entered into the DZ should be the quantity that left the DZ. There should not be any difference between the qty entered and released. If any differences are found it should be treated as a release for consumption and the necessary, tax amount should be paid to FTA. 

However, in the case of producers within the DZ especially the tobacco industry there are differences happened due to the production process and natural causes this including unknown losses and moisture waste. Even though Cabinet decision 37 of 2017 mentioned how this should be treated, there were a lot of questions and misunderstandings on this specific area as the FTA declared user guide never mentioned anything on the reporting of deficiency generated within DZ till August 2019.  

The second user guide released in August 2019 stated in general about the deficiency, which led most taxpayers to understand the deficiency stated referred to the physical waste generated within the DZ. The recent public clarification issued by FTA clearly states the process procedures and the documents to be maintained related to the physical waste, non-physical waste, and the process for the destruction of goods.


Non-Physical Excise Wastage Generated Within The DZ

Any non-physical Excise waste generated within the DZ will be treated by the FTA as having been released for consumption and therefore will be subject to Excise tax. However, as an exception the Executive regulation allows for relief in certain cases which are;

  • Where the FTA is notified by the warehouse keeper within 30 days of discovering the deficiency in the stock or shortage in the quantity.
  • Where FTA accept the shortage or deficiency in excise goods is due to legitimate cause.

Legitimate cause includes shortage or deficiency caused by storage conditions or shortage of goods caused by moisture loss, theft, flood, fire or any unknown loss identified during the production process within the allowable threshold. However, FTA hasn’t mentioned the allowable threshold level for the goods wastage but made it clear that the non-physical wastage generated in each stage of production must be reported to FTA.

The Process of Obtaining The Relief:

The Taxable person responsible for the designated zone must submit the declaration form EX203B within the 30 days of discovering the Non-physical waste after the approval of the warehouse keeper. It should be noted that the submission by the taxable person and approval by the warehouse keeper should be completed within the 30-day time frame.

The Declaration Submitted To FTA Must Contain:

  • TRN, Warehouse keeper registration number, Designated zone number, date of discovery of the non-physical waste, reason & supporting documentation
  • Supporting documentation- Letter explaining the reason for the non-physical deficiency generated, calculation, standard moisture percentage letter obtained from the seller/distributor.

Destruction Of Physical Waste

Any physical waste such as excisable goods waste generated during the production, Expired goods or goods that cannot be sold within the DZ, these goods should only be destroyed after approval from the FTA.

The approval can be gained using the declaration form EX203B Lost and damaged declaration. However, prior to the declaring EX203B, it needs to be ensured that you have all the other approvals related to the goods to   be destroyed E. g: Customs, Municipality.

FTA to be able to grant relief from accounting for the excise tax or provide permission for goods to be destroyed where FTA accepts that the deficiency or shortage in the excise goods is due to a legitimate cause.

The FTA will accept a declaration/application as a legitimate cause if the reason is under one of the following categories.

  • Force majeure- This includes circumstances beyond the warehouse keeper or taxable person’s control that led to the goods being damaged or destroyed e.g. flood, fire or theft. Documents to prove should include a Police report or other rescue services report (e.g., civil defence) relating to the issues, an insurance claim reporting the issue and arising damage, and Photographic evidence of the damage.
  • Natural wastage- Unintentional spoilage, shortage, contamination or otherwise unfit for consumption for any natural reason for example shortage or deficiency caused by storage conditions or the shortage of goods caused by loss of moisture. The following can be some of the documentary evidence; Photographic evidence, records of product expiry dates, Inventory reports & reports or other records indicating that there was insufficient time or insufficient demand to sell the products prior to expiry.
  • Wastage or shortage during production- Excise goods which become unusable, or a shortage occurred as a result of the manufacturing process to produce other excise goods. Valid supporting documents can include detailed production reports including the consumption, production, physical & non-physical wastage.

Key Takeaway

The public clarification explains the process and documentation to be maintained related to the deficiency within the Designate zone which includes both types of physical or non-physical wastage. However certain areas remain grey such as, FTA should be notified of the deficiency from 30 days of the discovery, many of the producers within the were not aware of the fact that the deficiency should’ve been declared to FTA since the implementation of Excise tax (Oct 2017) and once aware most of the companies reported the same to FTA after accumulating the necessary reports and calculations leading to the discovery of the deficiency (non-physical wastage). 

Hence the discovery date mentioned in the clarification remains unclear as it is referred to the actual date the taxpayer of the warehouse keeper discovered it or on the fact that the discovery should’ve been done post the implementation of excise tax every month.

It is also stated that there is a minimum tolerance level for goods wastage (non-physical), however, the minimum tolerance level remains unclear as it is not stated by FTA in the clarification.

The declarations regarding the Non-physical wastage applied for a waiver by different companies remain ‘pending’ status and no update have received by the taxpayer or warehouse keeper.

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