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In Focus: Sin Tax

In Focus: Sin Tax

Earlier this year, the UAE’s Ministry of Finance announced the introduction of an excise tax on products such as energy drinks, carbonated drinks and tobacco. The excise tax, also dubbed the “sin tax” came into effect on October 1, 2017. In light of this, Panaly takes a quick look at what the so-called “sin tax” entails along with some of its potential wider implications.

Following the collapse of oil prices in the region, the UAE has made more pressing moves to adopt different streams of fiscal revenues. In line with recommendations from the IMF, this has included an increase in excise taxes along with the introduction of VAT tax, the latter being effective from January 1, 2018 (more details about the introduction of VAT to be covered shortly in a Panaly article).

The “sin tax” entails a 50% increase on carbonated drinks and a 100% increase on energy drinks as well as tobacco products. This tax is primarily designed to serve two main purposes: increase government revenues and decrease social and health costs arising from unhealthy products.

The UAE is not alone in raising excise fees. In June of this year, KSA introduced similar measures in a bid to increase revenue and combat growing rates of obesity. Similarly, countries across the world such as the UK or the US also levy heavier taxes on items that are deemed to be unhealthy.

Given the considerably high levels of disposable income seen within the GCC region, it is reasonable to assume that individuals belonging to the lower to mid-income tiers will be more strongly impacted by the tax- although this is not to say that the tax will not have a wider impact across society. One area of concern however, relates to the potential development of black markets similar to those seen in the UK or the US following comparable tax increases due to the addictive nature of products such as tobacco and hence their relatively inelastic demand.

Although time will best determine the economic and social benefits of the excise tax, it is anticipated that the total revenues for the UAE resulting from it will stand at around AED 7 billion (with AED 2 billion worth of revenues coming from taxes on tobacco products). However, perhaps more importantly than a rise in government revenues, this will hopefully be complemented with a reduction in social and health costs.

Over the course of the next few months, the GCC countries will likely be paying close attention to the UAE and KSA with the aim of determining the demonstrated social and economic costs and benefits of the “sin tax”.  The outcome of this assessment will likely influence future taxation policies in the neighboring regions in the years to come, with high chances that similar measures will increasingly be adopted across the region.