A family shops at a Hypermarket in Sharjah. Image Credit: Atiq ur Rehman/Gulf News

The appliances sector, especially consumer electronics, will be hardest hit by the introduction of value-added tax (VAT), according to Euromonitor International.

As for other segments of the retail sector, the UAE’s first major tax will have varying degrees of impact, says Nikola Kosutic, Research Manager for Euromonitor International Middle East.

“Broadly speaking, the grocery segment will be least affected as most of it will be exempted,” Kosutic said, adding: “But the hardest hit will be the appliances segment due to the elasticity of demand for such products.”

This elasticity of demand, meaning the relationship between price and demand (a product type is considered elastic if demand drops when prices increase, and inelastic when demand isn’t changed by price increases), will impact how much retailers are able to absorb the cost of VAT.

Pricing strategies such as this will help retailers avoiding passing the entirety of the cost increase on to their customers.

According to Deloitte, however, products such as appliances, which have a high elasticity of demand, are not able to pass as much cost on to their customers if they are to remain competitive.

“When demand is perfectly inelastic (i.e. an increase in price has no effect on demand) retailers should be able to pass on the full burden of VAT to the customer. This is, however, seldom … the case,” said Deloitte in a research report on the impact of VAT on the retail industry across the Gulf.

Luxury products tend to be very inelastic, according to Kosutic, meaning that despite the price increases, demand will not change too heavily.

“A couple of hundred dirhams as a result of VAT on top of Dh10,000 handbag is not too bad. Luxury is not so affected by VAT,” Kosutic said.

Despite this reduced impact, tax will change consumer behaviour across the entire retail industry, Kosutic says.

“Tax has a major psychological impact. Zero per cent to one per cent has a much bigger impact than 10 per cent to 20 per cent.”

The UAE has long been famous for its zero tax status. That will change with the introduction of VAT, however at 5 per cent, the impact on consumer psychology is expected to be minimal.

It’s not all bad news. According to Kosutic, the margins in this region are so great that retailers will have some cushion for the introduction of tax.

“A consequence of the UAE’s zero tax policy has been that retailers have been able to introduce such huge mark ups — some of the highest in the world. That’s why retailers love it here. They couldn’t dream of such mark ups at home,” he said.

External factors are impacting these mark ups, but they’re so high that there’s a cushion — across all segments from groceries to apparel, Kosutic added.

“It’s going to take a lot more than tax to change Dubai’s popularity as a shopping destination,” he concluded.

Multiple retailers, including Majid Al Futtaim and Al Tayer, declined to comment on this story or did not respond to requests for comment.

The UAE and Saudi Arabia are among the first countries in the Gulf to implement the tax, that is expected to provide a new source of revenue for governments to spend on infrastructure and other public services.

A spokesperson for Lulu Group International said they are fully prepared to be compliant with the VAT system. “We shall wait for more clarification on data retention and filing formats. We have the required experience as the similar adoption in Far East countries and the recent GST roll-out in India. We have already started a trial run in our system for the smooth implementation of VAT,” the spokesperson said.

When asked whether there would be any impact on business, he said many of the residents in the UAE are from countries which have VAT in place, and as a result he does not see any negative impact on business.

“There might be some teething problems in the initial days but we don’t expect any negative impact on the business.”

Imran Khalid, chief financial officer of Brands General Trading said that they are upgrading their IT infrastructure to meet the new requirements.

“We expect the new tax will benefit the UAE economy in the long run as the money earned through VAT will be reinvested in the development of new projects, which will in turn lead to creation of new jobs and strengthening of the economy,” said Khalid.

“As the tax is just five per cent, it will not have much impact on the cost of goods. We are very positive about the development,” he added.

KBBO group, which owns Fathima Supermarket, said it is going to be difficult to predict whether spending would increase in the run up to VAT.

“The next four months are going to be high-spending period and the trend is not expected to be different,” a spokesperson said.

“Will it impact the business? Usually consumers are adapted quickly to these kind of changes. If we see in tourism and aviation, there is always new taxes of different types which add on and the consumers take it and live with it. In the end people would know that it till be spent on something which would improve another aspect of public life.”

The UAE is expected to issue VAT laws in the third quarter of this year and the online registration will begin in mid-September.

All businesses that meet the minimum annual income of Dh375,000 as confirmed by their financial records are required for compulsory registration with the VAT system.

Fines will be levied against the firms that failed to register with the system, the UAE’s Federal Tax Authority said earlier this month.