Understanding UAE's Sin Tax vs. VAT and Its Impact on Small Businesses

The UAE will be introducing a new “Sin tax” on Tobacco products and energy drinks, which follows the trends of other, developed countries such as the UK which will be implementing similar taxes from 2018. For Business owners, this may be a confusing time because with the UAE introducing VAT in 2018, one question they may have would be around as how would this be administered. Also, would VAT be charged on top of the “Sin tax”?

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The “Sin tax” is an excise tax that is levied on certain goods deemed harmful to society, for example, alcohol and tobacco, soft drinks, fast foods, coffee, sugar, and gambling. The concept of the Sin tax is to increase the price of the product to reduce its use and also to increase government revenues to fund the projects and government institutions such as hospitals and social care which these products adversely contribute to. For example, high sugar content food and drinks are known to be linked to obesity and a higher risk of diabetes, which places a strain on healthcare services. Governments find that imposing a sin tax is more popular and easier as a way of increasing state revenues. The sin tax is therefore an excise tax on certain products levied on the consumer but is slightly different from VAT.

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The sin tax came into effect in Saudi Arabia on June 10 and the UAE is expected to implement this later this year along with other GCC states. Energy drinks and Tobacco products will effectively be doubled and fizzy drinks such as Coca-Cola and Pepsi will increase by 50%. It is expected that the sin tax will increase government revenue by Dh 2 billion annually.

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The following is a review of the positives and negatives of the sin tax

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Pros

The name “Sin tax” itself indicates the nature of the tax. The concept is to help prevent individuals from consuming excess sugary and tobacco products by increasing prices. Mayo Clinic anesthesiologists, Dr. Michael Joyner and Dr. David Warner support increasing taxes on tobacco and sugary products to help individuals to change their behaviors and improve health

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Tobacco and excess sugar consumption has been linked to a variety of medical problems. If the consumption of tobacco and sugary products can be controlled or minimized, it is expected that the additional costs relating to healthcare support for diseases and disorders which are linked to the excess use of these substances can then be controlled.

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Consumers of tobacco and sugary products cause a greater financial burden on society by forcing others to pay for medical treatment on conditions linked to such consumption. This is true for countries with government-funded healthcare or in a Healthcare insurance system where premiums increase with increased healthcare spending.

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Cons

The imposition of a Sin tax could pave the way to smuggling such products illegally and then selling them on the black markets as low-income individuals will look at alternative ways to evade the tax.

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Critics of sin tax argue that it is a regressive tax in nature and discriminates against the lower classes since taxation of a product such as sugary products or cigarettes does not account for the ability to pay therefore poor people pay a greater amount of their income as tax.

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Sin taxes fail to affect consumers' behaviors in the way that tax proponents suggest. For example, increasing smokers' propensity to smoke high-tar, high-nicotine cigarettes when the per-pack price is raised may have limited success.

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Difference between VAT and Sin tax

VAT and Sin tax is indirect taxes borne by the ultimate consumer. Both the taxes are implemented by the government to diversify and increase state revenue sources. However, there are some notable differences between them which can be outlined as follows:

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• VAT is a consumption tax that is charged by the business on the supply of goods and services during the furtherance of business whereas Sin tax is selective i.e. it is charged on selected items such as tobacco products, carbon, used, and energy drinks. A sin tax is also implemented to control the sinful behavior of consuming tobacco products.
• VAT will be charged at a flat rate of 5% except where a 0% exemption applies. Sin tax on the other hand can vary from 100 % to 50% depending upon the nature of the product.
• The administration of the Sin tax is different from VAT in that VAT requires a quarterly return from a VAT registered firm and there are usually deductions on VAT paid by the business. The sin tax is an excise tax with no deductions made.

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Since both of the taxes are new to the GCC region, the impact of such taxes can only be ascertained after it is being implemented. The small businesses affected by such tax will mainly be retail and hospitality businesses.

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