VAT in UAE will curb unhealthy consumption

A tax on fizzy drinks and tobacco will change the way people consume these items

Fizzy drinks will be targeted under the tax.Andrew Henderson / The National
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The price of fizzy drinks and tobacco is about to go up. The Federal National Council last week approved a draft law setting up a legal framework for taxes and duties. It is expected that fizzy drinks, energy drinks and tobacco are the goods that will be targeted by an excise duty that will be issued in the UAE before a broader value-added tax (VAT) is applied across the Gulf Cooperation Council countries. It is clear that the unhealthy aspects of life are being targeted, both for the sake of revenue and for the sake of health.

VAT and excise duties will change the behaviour of individuals, companies and countries. It is essential that the GCC apply it together, otherwise there is a risk that smuggling will increase.

Companies will need to adjust. Tax and duties will represent an increased cost to them, a cost that they will initially have to pass on to their customers. But over time, they may find different ways to source or produce their products, which may bring the price of producing the product down. There is, naturally, no guarantee that consumers will see any reductions, but they might, particularly on products that are sensitive to price: companies are always keen to keep impulse purchases low, because otherwise consumers won’t buy so many.

This will all feed into how the tax changes our behaviour. For most, it will mean adjusting what goods they buy or in what quantities. This is where this newspaper feels the greatest benefit will be felt. In terms of the tax on tobacco and fizzy drinks, there is already an obesity problem that affects children as well as adults. Fizzy drinks, while not the sole cause, are a contributor to this, and many people – too many – get their regular hit of sugar through drinking them. Increasing the price should make consumers reduce their intake – assuming that, as mentioned above, companies don’t find ways to compensate and keep prices low.

The same applies to tobacco. The dangers of smoking are well-known and the benefits of cessation well-documented. Again, higher prices should be a deterrent. The experience of other countries has been that companies have not reduced prices after a tax rise on tobacco.

The specific effects that the tax and duty changes have will be affected by market forces and psychology.