Like Saudi Arabia, the UAE is expected to implement a 5% VAT rate from January 1, albeit with 150 food items exempted. In addition, carbonated drinks will be hit with a sin tax of 50%, and energy drinks will be put in line with tobacco through a further levy of 100%.
In the first year, the UAE is expected to generate AED12bn (US$3.3bn) from tax revenue, according to local forecasts. It would be the first time the region has introduced direct taxation, in an attempt to boost regional coffers following a sharp drop in the oil price.
But despite the obvious ripple effect VAT will likely have on food supply and technology businesses, it has been rare for companies to go on the record to offer their views.
Speaking privately, though, the gist among multinationals has been that end-consumers will bear higher costs from the tax, in addition to paying more at the point of sale. Its implementation will incur expenses across the supply chain, as companies pay for IT retuning, and changes to their reporting and accounting systems. In response to this companies will try to transfer their costs to the consumer.
They also worry that these additional price rises will result in a decline in market growth, which will in turn have an impact on orders for their ingredients and technology.
This sentiment is backed up by market analyst Euromonitor International. According to its industry forecast model, dairy, confectionery and baked goods are expected to be the most affected packaged food categories in the UAE and Saudi Arabia after VAT is introduced.
Euromonitor forecasts that confectionary sales in UAE, for example, will decline by US$100m between 2018 and 2023—representing the loss of more than 17% of the segment’s market size, which is estimated to reach US$580m in 2018.
In the drinks industry, sales of bottled water, juice and carbonates are expected to be hit the most with the introduction of VAT. For instance, carbonates in Saudi Arabia are forecast to decline by US$376m over the same period, resulting in a loss of 13% in a market that will be worth almost US$3bn next year.
Euromonitor believes these because these categories are the most income and/or price elastic, they will therefore be hurt more by lower consumer incomes and higher retail prices resulting from the introduction of VAT.