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.

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.

According to Deloitte, 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,” said Deloitte in a research report on the impact of VAT on the retail industry across the Gulf.

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.

The UAE is expected to issue VAT laws in the third quarter of this year and the online registration will begin in mid-September.

All businesses that meet the minimum annual income of Dh375,000 as confirmed by their financial records are required for compulsory registration with the VAT system.

Fines will be levied against the firms that failed to register with the system, the UAE’s Federal Tax Authority said earlier this month.

This is an excerpt from a news article published by The Gulf News. You can read the complete article by clicking here.