Dubai: On July 20, 2016, the International Monetary Fund (IMF) released its latest country report on the UAE, recommending a new fiscal direction following the dramatic collapse in oil prices.
Entitled Article IV Consultation with the United Arab Emirates, the IMF welcomed the GCC’s plans to introduce value-added tax (VAT), and to increase excise taxes.
Fast forward eleven months, and the first member of the council has set a date for implementation of this selective tax, or sin tax as it’s otherwise known: Saudi Arabia.
The kingdom will introduce the tax on carbonated drinks (50 per cent), energy drinks (100 per cent) and tobacco products (also 100 per cent) on June 10, 2017.
When the residents of Saudi Arabia wake up on the morning of June 11, the price of a pack of cigarettes, which might cost Dh12 now, will double to Dh24. The cost of a Red Bull energy drink, which currently costs around Dh8, will cost Dh16. And the cost of a carbonated drink, such as a Coca-Cola, will double to Dh3.
The impact of these taxes will be far-reaching: they will impact people’s health, generate tax revenue, and have a yet unquantified impact on the industries involved.
Whilst Saudi Arabia will be there first to introduce this tax, all GCC states are expected to follow suit over the next six months. The UAE is expected to implement the tax in the fourth quarter of 2017.
“The selective tax forms an integral part of a fiscal direction being implemented in the GCC, alongside VAT and a possible corporate tax in the future,” James George, senior research analyst at Euromonitor International, said.
It was previously thought that the presence of VAT would lessen the need to introduce more excises.
However, according to George, the selective tax on sugary drinks, energy drinks and tobacco has the added directive to counter the health risk posed by perceivably unhealthy products.
This added directive of improving health is in addition to the financial rewards governments across the region will reap.
Government revenues in excess of Dh2 billion
The UAE’s Ministry of Finance declined to provide Gulf News with a similar figure for their projected revenue generation. Euromonitor expects the duty on tobacco to bring in Dh2 billion in added annual revenues.
When the United Kingdom’s government announced in 2016 that it would be introducing a sugary drink tax from 2018, the yearly tax collection was estimated to be £520 million (Dh2.45 billion).
More about health than wealth?
The financial benefits are more subtle than just revenue generation, however.
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 UAE, according to a UAE University study conducted on children last year, the economic impact of improving citizen’s health could benefit the country for many years to come.
Perhaps unsurprisingly, companies are concerned. British American Tobacco executives 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.
One UAE-based distributor handling the energy drink Superman described the tax as expensive, saying that it would impact sales, and make the product more difficult to sell.
Hans-Kristian Hoejsgaard, CEO and president of Oettinger Davidoff AG, a cigar maker, told this paper that his company was “obviously not a big fan of the tax.”
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.
A game of margins?
The impact on individual manufacturers will be based on their individual portfolios, covering various price bands, and more importantly the exact product sub-categories that these taxes cover.
What is for sure, however, is that when fully rolled out, the tax burden will be passed on to consumers in the long term.
While it is unclear whether there will be adjustments for some absorption in the short term by manufacturers, companies have been invited to attend awareness sessions here in the UAE to fully understand the cost to business, in addition to being given time to implement strategies.
According to George, margins will depend on consumption patterns and the degree of diversification of the product portfolios of specific manufacturers or distributors.
Will this really work?
The jury is still out on how effective such a health tax, however.
According to James George, senior research analyst at Euromonitor International, several studies have indicated that tobacco products have shown a price elasticity of demand in the range of minus 0.25 to minus 0.50.
This means that for every 10 per cent increase in the price of cigarettes, there is an overall reduction between 2.5 per cent to 5 per cent in consumption.
However, the counterargument is that because cigarettes are addictive, people will forgo other purchases in order to afford the habit, and in many cases will simply look for a cheaper alternative to their current choice of brand.
Tarek F. Najjar, head of Legal & External Affairs in the Middle East at British American Tobacco, told Gulf News that he expected people to down-trade, in other words move to cheaper cigarette brands rather than quit.
“My real concern, however, is what the people at the bottom do when they can’t downtrade any further. We have seen black markets spring up in the US and the UK after tax hikes. There is a real danger of that happening in the GCC,” Najjar said.
As for carbonated drinks, Hassan Bayrakdar, founder and managing director at RAQAM Consultancy, an expert on food and beverage regulation in the Middle East, suggested that the relatively small increase in price would only discourage a percentage of the lowest income segment of society.
Bayrakdar also questioned why energy drinks had been singled out from other carbonated drinks to be in the same tax category as tobacco products.
“It is unclear why the authorities have taken such a harsh stance on energy drinks. Perhaps because of the caffeine content, but then again coffee drinks, including those available on supermarket shelves, have far higher caffeine content than energy drinks,” he said.
Even within the carbonated drinks category, there is some confusion.
It is presently unclear on the demarcation of the taxes when it comes to what constitutes ‘unhealthy products’ under carbonates and juice drinks.
“While definitions of what constitutes tobacco are more or less clear, the thresholds within ‘sugary drinks’ remain undefined. The sub-category definitions on the application of taxes on for example, low-calorie options in carbonates, low sugar variants in juices and energy drinks are yet to be confirmed. A confirmation on levels of sugars that will be taxable is expected soon,” said George.
Until then, it will be hard to quantify the impact of the tax on consumer behaviour, as demand price elasticity varies heavily from product to product.