VAT likely to affect UAE retail sector

Large margins in region expected to provide retailers some cushion for the 

introduction of tax

The appliances sector, especially consumer electronics, will be hardest hit by the introduction of value-added tax (VAT), as for other segments of the retail sector; the UAE’s first major tax will have varying degrees of impact

Broadly speaking, the grocery segment will be least affected as most of it will be exempted, 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

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,

Luxury products tend to be very inelastic means 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

Despite this reduced impact, tax will change consumer behavior across the entire retail industry

%Tax has a major psychological impact. 0% to 1% has a much bigger impact than 10 % to 20 

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

It’s not all bad news. 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

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

It’s going to take a lot more than tax to change Dubai’s popularity as a shopping destination

BUT!!

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

International Groups are fully prepared to be compliant with the VAT system. They wait for more clarification on data retention and filing formats. They have the required experience as the similar adoption in Far East countries. They have already started a trial run in their system for the smooth implementation of VAT

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 they don’t expect any negative impact on the business

They are upgrading their IT infrastructure to meet the new requirements