VAT and its influence on Consumer Spending

Posted on Nov 21, 2017

VAT and its influence on Consumer Spending

Majority of the UAE residents are acutely aware of VAT and they have been closely following every new update relating to the new tax regime as its implications are far more down rooted in their day to day lives. With the announcement of VAT to be implemented in the UAE from 1 January 2018, many small businesses would be worried about the impact this has on their customers. As many Small businesses are running with low margins, increasing prices through VAT may have a detrimental effect on their customers

According to analysts the impact of a value-added tax (VAT) system on consumers in the UAE may vary depending on household incomes and spending behavior, and how much will be levied on goods and services. Taking the purchasing power of residents in the country into consideration, a 3% to 5% VAT may generally be hardly noticeable, especially if the essential food items are exempted, but a tax rate of 10 per cent or higher is clearly seen to have a negative impact on consumer spending.

Consumers are at the lowermost end of the pyramid of the sales and supply chain for both service providers and manufacturers and retailers alike, hence their behavioral change directly impacts the economy in the longer run. Ministry of finance, UAE has officially announced the rolling out of new tax reform termed Value Added Tax (VAT) to be imposed on goods and services. The impact of it on the consumption and spending would be dependent on many factors including the fact that who will eventually bear the burden of price hike in the certain category of products and services.

Considering the purchasing power of residents in the country, a 3 per cent to 5 per cent VAT may generally be hardly noticeable, especially if the essential food items are exempted, but a tax rate of 10 per cent or higher is clearly seen to have a negative impact on consumer spending.Those who love to shop for big-ticket items or upgrade their gadgets and cars more often than others will mainly bear the brunt of tax collection. As long as the VAT rate does not exceed 5 percent and food essentials remain untaxed, low-income families have nothing to worry much about, according to the experts.

Since VAT is an indirect tax and it will impact ultimately the end consumers, specifically low-income group, and tourists. After the introduction of VAT in UAE will automatically enhance the price of goods and services. Several businesses, industries or companies such as real estate sector, tourists, hospitality will be affected with the introduction of VAT in UAE. Due to the implementation of VAT in UAE from 1st January 2018 will increases the prices of goods or can lead to inflation.

VAT will not be payable on nursery school, pre-school, elementary school and government-funded university fees as these will be zero-rated. Similarly, preventative and basic healthcare services and related goods and services will not attract a VAT charge – though it is important to note that cosmetic surgery and services are not considered preventative or basic, and will thus be subject to VAT. Certain financial services will be exempt from VAT, such as loans, mortgages and life insurance products, and Islamic banking will be treated in the same way as standard banking. With education, healthcare, residential real estate, local transport and international travel making up a UAE resident’s biggest monthly expenses, the exemption or zero-rating of most components in these sectors radically reduces the impact of VAT on the consumer’s pocket.

There are mainly four types of factors can influence the customer shopping behavior: social, cultural, personal and psychological factor. Cultural factor include social calls which do not only depend on the income but also the wealth and occupation. Age plays an import role in personal factors. With the change of age, people may have different opinions about consumption which also includes the marital status. It is essential to consider the economic situation in personal factor. If the customers get high income or salary they would buy more products and less consider about the price, however, if the people get low income or salary, they may buy cheaper products and consider much about the price.

At last, there are a lot of uncertainties around the new law which has bewildered the businesses and consumers alike. In order to make this law effective, productive and successful the execution has to be of utmost importance and educating consumers about everything related to VAT should be the top priority of the government.


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