UAE gears up: Sin tax good for health, bad for firms

Dubai: The announcement on Tuesday of new taxes on tobacco products and carbonated drinks will have an impact on the industry, according to experts and analysts.

The first tax on carbonated, or fizzy, drinks, will see prices rise by 50 per cent. This applies to all carbonated drinks except for sparkling water.

Separately, a tax of 100 per cent will be placed on energy drinks, such as Red Bull, and tobacco products, effectively doubling their price.

“They are trying to change consumer behaviour in a way that makes people healthier,” said Colin Beaton, managing director of Limelight Creative Services, a retail strategy agency.

Beaton predicted that the impact on the sale of fizzy and energy drinks would be swift and severe.

“Sales will plummet as a result of the tax, because people have a choice. If carbonated drinks are much more expensive, then people will just opt for water,” he said.

In the coming years, there will be a dramatic decrease in the consumption of sugary drinks, with healthier options becoming preferable, he added.

For retailers, and the brands themselves, the outlook is less positive.

Mandeep Singh Khurana, managing director of Fabcraft General Trading, who distributes the Superman energy drink in the UAE, described the tax as expensive.

“This will obviously have an impact on our sales, and it’ll make it more difficult to sell the product,” Khurana said.

Internationally, the interest in such taxes has grown in recent years.

The United Kingdom announced in its 2016 budget that there would be a tax on soft drinks from 2018 onwards.

It is estimated this tax will generate an additional $673 million (Dh2.47 billion) in UK government revenue.

Intended to discourage unhealthy lifestyles, taxes like these are intended, in part, to offset the rising costs of obesity.

“It’s part of an international trend that’s happening. It makes sense,” said Tariq Al Wahedi, acting chief executive officer, Agthia, a major food and beverage conglomerate.

“As producers need to have some responsibility,” he added.

In the UAE, the selective tax is expected to be introduced in the fourth quarter.

For local manufacturers, the tax will be introduced when the product leaves the factory. For international producers, the tax will be enforced when the beverage or tobacco product leaves the port.

“The price of a can of a soft drink is just too cheap. Given how heavily these sugary drinks contribute to obesity, it’s quite sensible,” said Johannes Holtzhausen, CEO of Spinneys, a supermarket chain.

There is no chance for Holtzhausen to offset the cost of the tax for his customers, given that carbonated drinks are already virtually a zero margin product.

The impact on tobacco products will be equally as huge for producers, with as little chance for mitigating the added cost to consumers.

“We are obviously not great supporters of this so-called sin tax,” Hans-Kristian Hoejsgaard, CEO and president of Oettinger Davidoff AG, a cigar maker, said.

It is impossible to avoid passing this additional cost on to the consumer, Hoejsgaard confirmed.

“The price is going to be higher, but there’s no way around that. We have to pass the cost on. We’ll see what the impact will be,” he said.

However, for Colin Beaton, the retail strategist, the efficacy of a tobacco tax is questionable.

“It’s not the same as fizzy drinks, which are not addictive,” he said, adding: “As we’ve seen around the world, people forgo other things to buy cigarettes.”

Beaton did add that a large tax like 100 per cent “has a better chance to change behaviour” than something less significant.

Zawya