Dubai: The UAE on Sunday begins taxing soft drinks and cigarettes as it seeks to curb the consumption of harmful products and attempts to introduce new sources of state income.
Following over two years of consultations with the private sector, the tax taking effect on Sunday, called the Excise Tax, is the first of two planned for the UAE. It places a 50 per cent tax on carbonated, sugary drinks, and a tax on energy drinks and tobacco products of 100 per cent.
The second tax, called the value-added tax or VAT, is set to be introduced on January 1, 2018, at a rate of 5 per cent.
Video: What you need to know about excise tax in UAE
What you need to know about #excise_tax #UAE pic.twitter.com/PT4vmPj0qe— Ministry of Finance (@MOFUAE) September 30, 2017
The purpose of the tax on unhealthy goods, widely considered to be the largest ever implemented anywhere, is twofold: To both halt the rise of lifestyle diseases such as diabetes and obesity, and at the same time boost state revenue following the collapse of oil prices three years ago.
The price of sodas is expected to increase from Dh2 a can to Dh3. Cigarettes will now cost around Dh20, depending on which brand you buy, and energy drinks will cost around Dh16. The tax will be implemented in shops, supermarkets, restaurants and hotels, or anywhere else you might buy these products in the UAE.
List of VAT items
“The excise tax forms an integral part of a fiscal direction being implemented in the Gulf Cooperation Council (GCC), alongside VAT and a possible corporate tax in the future,” James George, senior research analyst at Euromonitor International, told Gulf News in June.
Health is wealth: Why the government is introducing a tax targeting harmful products
Amidst an ongoing health crisis in the Gulf region that has seen cases of diabetes, obesity, and heart disease soar, the government has sought to reduce the consumption of harmful products through this excise tax on sugary drinks and tobacco.
In a recent report by Gulf News, health and tax experts told the paper that tobacco demand in the UAE is expected to slump by 40 per cent following the introduction of the 100 per cent excise tax.
An effective doubling of prices for a single pack of cigarettes will not only help boost national health tax revenues to fund public health services, it will also jump-start a healthier population by reducing cancer-causing products and the long-term rise in diseases across the country.
The World Health Organisation (WHO) is lauding countries such as the UAE for imposing heavy excise taxes to curtail tobacco demand and boost healthy behaviour.
In 2013, Dr Frank Hu, Professor of Nutrition and Epidemiology at Harvard School of Public Health, made the case that there is now sufficient scientific evidence that decreasing sugar-sweetened beverage consumption will reduce the prevalence of obesity and obesity-related diseases.
Another study in 2010, published in Diabetes Care, found that people who consume sugary drinks regularly — one to two cans a day or more — have a 26 per cent greater risk of developing Type 2 diabetes than people who rarely have such drinks.
In the face of overwhelming evidence that sugary drinks cause a number of diseases, the UAE has decided to act.
There is, of course, a financial element to the introduction of this tax.
When oil prices began to fall sharply in mid-2014, driven by weak demand in developing countries due to slow economic growth and strong output from US producers, countries throughout the GCC were forced to reassess how state projects would be funded, with their income now cut by nearly half.
In a historic pan-Gulf decision, the six countries of the GCC decided to introduce taxes, in order to bolster state revenues and continue along the path of rapid development and modernisation.
According to UAE government estimates, the tax is forecast to generate around Dh7 billion in annual revenues for the Federal Budget.
Other countries, such as the United Kingdom, are planning to implement similar taxes on sugary drinks.
In the UK, the yearly tax collection on such drinks was estimated to be £520 million (Dh2.45 billion).
Beyond the fact that these taxes will raise money for the government to spend on public services such as roads and other types of infrastructure, improving peoples’ health may actually save the UAE billions in the long term.
In 2005, it was estimated by the Centre for Diseases Control and Prevention (CDC) that the medical costs attributable to obesity in the US were an estimated $190.2 billion (Dh698.6 billion), or 20.6 per cent of all medical expenditures.
With obesity rising at an “alarming” rate in the emirates, according to a UAE University study conducted on children last year, the economic impact of improving citizens’ health and reducing the burden on the public health system could benefit the country for many years to come.
What are companies saying about the tax?
Companies, predictably, remain wary of the incoming taxes.
They say that prices will increase too fast, and that taxes should instead by introduced bit by bit to avoid overly disrupting their sales.
For tobacco companies and energy drinks manufacturers, who will be hardest hit by the 100 per cent increase, many businesses expect to see sales dip.
Mandeep Singh Khurana, managing director of Fabcraft General Trading, who distributes the Superman energy drink in the UAE, described the tax as expensive.
“This will obviously have an impact on our sales, and it’ll make it more difficult to sell the product,” Khurana said.
Hans-Kristian Hoejsgaard, CEO and president of Oettinger Davidoff AG, a cigar maker, told Gulf News that his company was “obviously not a great supporter of this so-called sin tax.”
The chief executive was referring to the excise tax by its colloquial name of the ‘sin’ tax.
It will be impossible to avoid passing this additional cost on to the consumer, Hoejsgaard confirmed.
“The price is going to be higher, but there’s no way around that. We have to pass the cost on. We’ll see what the impact will be,” he said.
Lack of phased-in approach
Senior executives from British American Tobacco (BAT), which owns cigarettes brands such as Dunhill, Lucky Strike, and Kent, have complained about the lack of a phased-in approach, telling Gulf News that the overnight implementation of the tax will be harmful to their business.
Tarek F. Najjar, head of Legal & External Affairs in the Middle East at BAT, told Gulf News that he was very concerned about people smuggling cigarettes into the GCC and selling them on the black market, pointing to examples in countries such as the UK and the US, where similar tax hikes had created an illicit trade in tobacco.
Aujan Coca-Cola, Dubai Refreshments (Pepsi Co), Al Fakher (the makers of the UAE’s most popular shisha tobacco), Red Bull and a number of other manufacturers and distributors declined to comment for this story.
Gulf News, however, has been told that many of the largest companies impacted by this tax have employed global consultancies to advise on how best to price their products following today’s introduction of the tax, meaning that some goods may not increase as much as expected.
This kind of strategy depends on what the level of demand is for a company’s product, and whether or not they can withstand a reduction in their margins in such a competitive environment.